Should People Sell Their Homes And Rent?

About two years ago, on this very blog, I began to pound the table a property market correction was imminent in Singapore. All the signs were there- frothy valuations, (Price – Rent ratio greater than 24) record low interest rates, a sputtering economy, as well as various property segments like industrial and commercial that are, by all metrics, ridiculously overvalued.

There are more listings out there, and more buyers are waiting until they make the plunge into private home ownership. The market has transformed from a seller’s market to more of a buyer’s market, but we haven’t seen much price declines yet. The latest figures show only 8% fall in the private residential market since the peak of 2013. The bottom line is the property market isn’t doing too badly.

I still stand by my prediction (I hate predictions by the way) that the private property market will correct, especially mass market properties with new ones getting hit especially hard. Record debt levels combined with increasing interest rates cannot be good news for the average homeowner.

As with any overvalued market, calling the top is incredibly difficult. Fundamentals can be out of whack for years before everybody realizes something is wrong. Often, there’s some sort of extraordinary event that serves as the catalyst for the market collapsing, like the falling of Lehman Brothers and Bear Stearns during the most recent financial crisis. Often, by the time the media gets around to reporting on a bubble, the bubble has already burst.

The Strategy

If I’m of the opinion that the property market is overvalued, then shouldn’t I advocate away from home ownership? Maybe I should take it a step further and suggest that private home owners sell their property and rent for the rest of their lives. If property prices are bound to go down, then isn’t that just good planning? Someone can diversify their property proceeds into bonds and other asset classes that provide income.

If somebody isn’t willing to sell their home, then perhaps I should be telling them to delay buying a home for as long as possible. They should wait for the inevitable decline and then pick up a cheaper home once prices decline. Oh, if only things were that simple.

The Reality

If someone lives in a house that’s paid for, there is value in that. Somebody gets to live without having the pressure of having a mortgage or rent payment. So many people work hard for a long time to pay off their mortgage because there’s value in not having a payment to worry about every month. This is extremely important to all sorts of people.

However, there are some people who buy a bigger home when they can only afford a smaller home.They buy a bigger car when they can only afford a smaller car.

Most people think real estate tends to go up. This inherent leverage in the strategy works out ONLY if you have bought in the right cycle of the market.  Those who have bought during the high of 1996/7 before the Asian Financial Crisis never saw profits even till today! And this might be the case going forward for buyers who bought during the peak of 2013 and now.

There are countless people in Singapore who are technically millionaires because they bought a reasonably priced property in the 1970s or 1980s and have held it for years, watching it appreciate into an asset worth at least seven figures. Combine that with even modest retirement accounts, and we have a whole bunch of millionaires off mostly real estate.

But are these people really millionaires? In my opinion, the answer is no. I’m not entirely sure your principle residence should count in your net worth. Sure, you can borrow against it, or even take out the dreaded REVERSE MORTGAGE or TERM EQUITY (or, as your kids call it, the inheritance killer), but all that equity doesn’t do much good unless you sell and put it to use.

Meanwhile, we have younger people who are looking to buy their first home. Depending on the people, some either love the area so much because it’s near their parents or they’ve decided they’re going to stay there for a very long time. I absolutely advocate people buying a property if they’ve decided to settle down in it long-term and buy ONLY for its emotional value -  a place to call HOME, …

and most importantly within the prudent 5 times income-price ratio. So if your gross income is $100,00 a year, your home should not cost you anymore than $500,000. Don’t feel shocked. This is the very reason why many home buyers are enslaved by their homes rather than being kings of their own castle, for no apparent reason than to try to own the biggest home possible by stretching their monthly mortgage payments to the max.

So to summarize, if someone is feeling the itch to own a home, I still think they should buy one, assuming they’re going to be in one place for longer than a few years. If someone is looking to own for the guaranteed profit, then I think they’d be better off renting or avoid buying for now.

So Who Should Sell?

There are only two groups of people I think should sell.

The first group of people are the baby boomers who are thinking of selling. Their motivation isn’t usually fully about cashing out equity, rather they’re looking at simply downsizing. They sell their big house, get a smaller one and bank the rest of their equity. They reduce the exposure to real estate in their net worth, as well as getting a place that makes more sense to them going forward. This is a good strategy and I think people should do this.

The other groups of people I think should sell are those people who loaded up on investment property during the ride up. I cannot stress how dangerous it is to borrow money at a 10:1 ratio on a property that either cash flows only a couple hundred bucks a month or negative. I beg those people to sell as quickly as they can before something inevitably happens. Leverage increases risk, plain and simple, and if you combine leverage with a crappy market, you can be in a house of pain.

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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.'

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