Some months back a reader requested for me to do a post on the above topic. I apologize for the late response, hopefully you will be able to read this and I thank you for providing me my first topic upon my return.
I have not really looked into ECs generally so I have not really bothered too much about them.
Ok so I'll provide some different views I have on investing be it EC or Condos or Equities, etc.
I buy a HDB. It is typically cheaper, I pay less monthly installment. I invest the rest of my money.
I stay in the HDB
I buy a Condo or EC, I take a bigger loan and pay more monthly installment. I have to pay maintenance and I have less money to invest.
I stay in the Condo/EC
So I view this as the same as any investment and I value any decision based on utility.
Utility = The benefit I get from whatever product it is.
Let's define this. I'll be oversimplifying this for the sake of the principle of the idea.
HDB = a place to stay
Condo/EC = HDB + Luxury + Investment
So refer to Scenario 1. I buy a HDB and have a place to stay and I invest the rest of my money.
Vs Scenario 2. I buy a Condo/EC which is equal to (HDB + Luxury + Investment) and invest the rest of my money.
Based on the formula, the Investment portion within the Condo/EC + investment with the rest of my money is the same. Money invested is money invested regardless of the asset type.
So there might be a bit of leakage due to the living in luxury. Maintenance fees, etc. Meaning that I would be spending more money just by staying in the Condo/EC as there is a cost to luxury. I.e. I stay in a better place with security guard + swimming pool etc.
This is a relatively simplistic way to look at it. But this is how I look at everything.
I can't put a price on luxury. Different people like it more or less than others. So some people might be really happy to pay SGD200 per month and enjoy the swimming pool. Or some folks may feel that that is a waste of money. To each their own.
Ok so some of you readers would say that my idea/calculation is incorrect as it does not take into account leverage. Meaning that I can take leverage to buy the Condo/EC and get better returns on the Investment portion of the Condo/EC.
Nope I didn't forget about that. My view on this is that market investments, example equities/stocks are already naturally levered. They already contain loans made by the company. REITS in Singapore have something like 30% loan. Apple, Facebook, DBS, OCBC all have loans on their balance sheets. This is the SAME leverage I will be taking if I invested in a Condo/EC. Yes it is the same.
So considering that it is the same, what is important to note?
Well, do you think that residential property will outperform other assets?
Let's look at the 2 scenarios again but this time I invest in DBS for example
I buy a HDB. It is typically cheaper, I pay less monthly installment.
I invest the rest of my money in DBS shares. More DBS shares contains more loans.
I stay in the HDB
I buy a Condo or EC, I take a bigger loan and pay more monthly installment.
I have to pay maintenance and I have less money to invest.
I buy less DBS shares. Less DBS shares means I have less leverage in my investment.
I stay in the Condo/EC
So what's the difference between the 2 now?
Do you think that
Scenario 1, more investment in DBS shares will outperform
Scenario 2, less investment in DBS shares + investment in Condo/EC
So in essence, this is just asset allocation.
Same as if you are considering buying Gold, Bonds, Watches, etc etc as investment.
The difference is that typically, Singaporeans believe that property will increase faster than other asset classes.
This may or may not be true as it is just another asset class.
Also property investments are illiquid. Meaning in times of need you are unable to sell a portion of the property to meet emergency needs.
But as I said Condo/EC has a luxury factor. Meaning there would be some additional expense which will be spent for the benefit of staying in such a place. But nonetheless, I do not think it is a good or bad idea to invest in a Condo/EC. Everything is up to the individual's preference whether the individual would want to live in a Condo/EC.
I've lived with my parents for most of my life in a Condo. It has it's benefits and negatives.
I'm now living with my wife in a HDB. It also has it's benefits and negatives.
So in closing, I will say,
1) I can't determine if property or equity is going to do better compared to each other in future. It is a asset class investment decision which we all have to make for ourselves.
2) The above method of thinking is only a method which I use for assessing things which are not easily assessed. ie, break the products down into what they are used for to determine what purposes the product is bought for.
3) Property is illiquid compared to market traded securities
4) Condo/EC has a luxury premium for maintaining
5) I am not recommending or dissuading investing in Condo/EC. The above are my own opinions and ideas and should not be used to determine if you should invest in Condo/EC. Blah blah blah.... The usual disclaimer that past performance should not be used to determine future performance, etc etc. I'm not saying you should buy Condo/EC or equities. Readers should make their own decision for investments based on their needs and future financial goals
Hope the above has been useful for readers to take an alternative view on their investments
Cheers. Have a good day.
If any readers want me to write about something, please email or comment.