Capital Gains – The Singapore Property Wealth Trap

 Is Capital Gains the Singapore Property Wealth Trap?
We can see many dream-to-become-millionaire property investors on the streets. It’s interesting to see how dreamers of ‘The Next Singapore Property Millionaire’, behave like the hilarious first round participants of ‘The Next Singapore Idol’ contest who are thick-skinned enough to believe they have ‘it’.

My late multimillionaire grandfather said, “The Rich makes money with control, while dreamers always make money on hope… and hope is their only saviour.”

Dreamers invest on capital gains and a hope. They don’t have intelligence. You don’t need intelligence to make money in a booming market, because just anyone can make money when the market is booming. But when the crunch time really comes, many of these dreamers lose control, confused and panic like lab rats. They don’t have the necessary skills and the pre-controls to prevent a financial disaster. All they have is… Hope.

They have what I called ‘herd intelligence’. They see the immediate situation just like everyone else.  They copy and paste. They think narrowly and call it being focused. They don’t see the surround. They don’t see the consequences. That’s how dreamers often get ripped into pieces by the unforgiving market.  …… For ‘herd intelligence’.

Now he believes he can fly.

After the recent 8th cooling measure, I talked to an acquaintance whom I recently met.

He had make money selling off his first investment property for a 6-figure-profit which he bought low in 2009 and sold for high in 2011. As an ordinary employee of a local MNC, he would have felt incredible with such profits in his pockets!

Now, believing he can fly from the success of his first investment, he proceeded to buy 2 newly launched property units of large developments in 2012. His objective – To sell and make capital gains on T.O.P in the next few years.

I asked him if he really believes he can sell higher then, he haughtily said, “If I cannot sell, I rent. If I cannot rent, I stay.”

He proudly continued, “I’ve recently received many calls from potential buyers for $1.8 million for one of my properties. Initially, that’s my asking price but I flatly rejected those offers.”

“Why?” I asked. “You should have simply accepted the deal and walk away with the money now.”

“Because I wanted $2.2 million as I believe my property will fetch this price due to its location since other recent new launches in other less strategic locations are already asking around this price. I even asked my wife not to entertain those calls unless the buyers are willingly to negotiate at my price, then we talk.”

“What if the market correct in the next few years?” I asked.

“I can still sell the property at $1.4 million from the $1.6 million I bought. I can afford to lose $200,000 in such situation.”

This dreamer guy makes far too many assumptions which he cannot control:

  1. Believes prices will always go up
  2. Believe his properties have real buyers, when in reality, the potential ‘buyers’ are no more than property agent’s marketing gimmicks to entice buyers to sell.
  3. Believe he can keep his job to service his mortgage payments when a downturn comes
  4. Believes the market if a correction do happens, will only fall 12% or lose only $200,000
  5. Believing interest rates will stay low in future
  6. Believes he can rent out his unit easily when T.O.P (Huge Development)
  7. Believes he can find buyers easily when T.O.P (Huge Development)
  8. Believes property is a sure one-way-bet to riches
  9. Believes he can constantly make money on capital gains easily
  10. Believes he is a savvy investor and he can now fly…

He’s an amateur who invested with no investment control. His only control was if he can well-afford to lose $200,000. His only control was a continued booming market.

If you’re investing on assumptions and beliefs, good luck to your investments.

Capital Gain is like inherited wealth: attained without discipline.

Most kind of power requires a substantial sacrifice by whoever wants the power. There is an apprenticeship, a discipline lasting many years. Whatever kind of power you want. CEO of the company. Black belt in karate. Spiritual guru. A property millionaire. Whatever it is you seek, you have to put in the time, the practice, the effort. You must give up a lot to get it. It has to be very important to you. And once you attained it, it is your power. It can’t be given away. It resides in you. It is literally the result of your discipline.

Now, what is interesting about this process is that, by the time someone has acquired the ability to kill with his bare hands, he has also matured to the point where he won’t use it wisely. So that kind of power has a built in control. The discipline of getting the power changes so that you won’t abuse it.

Capital Gain is like inherited wealth: attained without discipline. You copy what others have done, and you take the next step. You can do it very young. You can make progress very fast. There is no discipline lasting many decades. There is no mastery: risks are ignored. There is no humility before nature. There is only a get-rich-quick, make a name for yourself fast philosophy. No one has any standards. They are all trying to do the same thing: to do something big, and do it fast.

A karate master does not kill people with his bare hands. He does not lose his temper and kill his wife. The person who kills is the person who has no discipline, no restraint, and who has purchased his power in the form of a Saturday night special.

And that’s the power that capital gains foster and permits. And that’s why you think that to build wealth like this is simple. But it is not, and something will go wrong eventually.

Ignorance has always said that it may not know everything now, but it will know eventually.

It’s an idle boast. As foolish and as misguided, as the child who jumps off a building because he believes he can fly.

In closing…

Capital Gains – It’s always a Zero Sum Game

I questioned the conventional wisdom of constantly buying and selling properties (or any other assets for the matter) for capital gains. If the taxman does not get you, the market will eventually.

You buy low, then sell high. Then what do you do with your profits at that point of time? Buy higher, sell lower? It’s always a zero-sum game.

The rich never buy and sell profitable assets. They buy and keep forever– For both income and capital value.

The dreamers always hope to buy and sell to make that quick buck. Go to the casino instead.

Like a casino, an amateur gambler makes money on the first couple of visits, only to lose even more eventually when his luck runs out. Just like a casino, we can never beat the market.

This is what happens to most amateur investors who happen by chance to make money in a boom time, only to lose it all in a downturn.

Real investors make the most money during the downturn of the market, and treat gains from a booming market as a bonus.

You want to be an investor, not a trader. You want to invest on income, not capital gains. Capital gains should be treated only as a bonus, and should never be a key priority in your property investment decision.


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About the Author

Gerald Tay Author, entrepreneur, professional investor and loving father, runs with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'

Comments (4)
  • Tricia Jul 21 2013 - 11:21 am Reply

    Hey Gerald,
    Thanks for the great article and timely too. As a real estate investor and agent, I get to see both sides of the fence. I find myself having to remind many of my clients about “assumptions they cannot control”, esp the first time investors. Just last month, I spent an hour trying to talk a client out of buying a new launch (shh…can’t tell my boss!! Haha!!). The sums don’t add up for him but like you said about the “dreamer investors” they only saw the “best case scenarios”. I feel as a professional, esp in upcoming volatile economy, it’s important for us agents to lay all the facts out for them, remind them of the “Worse case scenarios”.

    Keep up the good work!

  • ian Jul 28 2013 - 10:21 pm Reply

    Good analysis.
    Singapore is a bit different. Public housing is price inelastic- go up n down slowly. Privates on the contrary.
    Public housing will slowly creep up in my opinion. Unless there is a mass exodus of people. Land size in singapore cannot increase unless you are treating iskandar as our own. Till the day when transport is so efficient between malaysia jb n singapore, price might moderate. But still must look at the locus of economic activity.

    Privates today have already priced in future gains. So it is very expensive. Buyers are taking the bet must also know that. If they cannot hold then better don’t.
    Developers today mostly are financially strong. Most will not be in trouble if nobody buys. They can also hold. Land bank in singapore is a finite quantity, unlike jb or other countries.
    Can prices fall to levels in the 1980s? No way. Inflation, land scarcity, government controls and population growth will prevent that from happening.
    Invest in property is a safe way to hedge against inflation risks, in singapore’s context.

    As long as singapore is a centre of excellence, nothing will happen to the property prices here. It might correct but it will not crash.

    • Gerald Tay Jul 30 2013 - 12:40 pm Reply

      Agreed Ian!

      As long as Singapore remains one the world’s major financial centres, we will not see a drastic crash in property prices.

      Before the Japan, USA and European Property Bubble burst, these countries have very optimistic views of their real estate market. Just before the crash, many experts and people around the world on on the positive view that property prices will keep on rising and never fall.

      We know what happened next and who dares to say Singapore as a matured economy will not end up like these other matured economies too in the future?

      If it happens, many ordinary property buyers will see their retirement dreams disappear into thin air.

  • Alberta Joint Venture Specialist Aug 5 2013 - 6:17 pm Reply

    Appreciate for sharing this Article Thank you

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