Case Study 3 - How Couple got Stuck with Property

It's not always so easy to make money, as the previous case studies suggested.

Slightly more than 10 years ago, a young couple bought something that almost ruined their lives financially.

It was the middle of 1996, a boom time for the stock market as well as the property market.

The couple - working professionals - were earning salaries that disqualify them for subsidised HDB housing.

Just married, they were yearning for a nice place to stay in.

They set their eyes on a 1,300 square foot condominium just north of Ang Mo Kio. The location is not very central, but the asking price was a crazy $1 million.

It was a stretch for the couple. Without huge savings, they could only afford the initial 20% downpayment and had to borrow the rest for the progress payments.

But given the rosy economy then, and the fact that they were holding well-paying jobs (making a combined $150k a year), they went ahead and bought the condo.

We all know what happened next.

The economy tanked. Asia went into financial crisis. Jobs were lost. Stock and property prices fell. Drastically.

Salaries were cut.

The couple also saw their income go down. Yet, they still had to make the mortgage repayments.

A big part of their earnings went to the bank.

They were slaves to the mortgage loan. (It's still the case now. So they don't save a lot.)

Worse, the condo's value went down, almost to negative equity level, i.e. owing the bank more than the property's worth.

Even now, when property prices are at peak levels (and maybe on the way down), the couple's condo is still a loss-making investment. Why? Their condo is a leasehold property.

So, this unfortunate couple is "stuck" with a still-sizable bank loan, a condo that's depreciating in value, and low savings. And they are considered high income earners...

A wrong move, and they are hit financially for a long time...

See other case studies.

http://www.salary.sg/2008/case-study...with-property/

Hi,

Other than the difference of owning and renting the land between freehold and leasehold, what other significant difference are there between the 2 in terms of money?

Why is it a leasehold property will most likely to depreciate compare to freehold?

Thanks.

A very good lesson is to never spend more than what you can afford (in fact, the lesser the better). Singaporeans have a SEVERE face problem; we are SO concerned with how the others see us. And therefore we pay top dollar for glamorous things when it takes up 90% of our take home pay.
This is so sad compared to values of people in other countries. I have a friend who's a multi-millionaire in Australia, and he's still driving a 15 yr old Volvo station-wagon all these years....

Collin, regarding difference between leasehold and freehold properties, see:
http://www.salary.sg/2007/freehold-and-leasehold-differences/

First off, I like your blog and enjoy reading every entry.

Although I agree that leasehold intrinsic value will drop over time due to decay. But I disagree that freehold is always better. There are also cases where leasehold can be a better investment. You have to remember that a freehold property can cost from 10%-40% more, so would you rather buy a leasehold property in a more central location or a freehold in an outlying area for about the same price?

For a reference, see this article:

http://www.salary.sg/2007/freehold-and-leasehold-differences/

Also, my opinion is that timing is very important. In a bear market, even freehold property prices will plunge, especially when the prices are inflated like bubbles. So don't overpay for the property. In the crash of 97, the property price index dropped 45% over 3 years.

From the way stock markets are behaving lately, it looks like we are in for a bear market.

SmartTrader, your points are valid. Still, personally I would prefer a freehold property in a central location for investment. If I can't afford it, I'd rather take my time to save up than buy a leasehold or a even a freehold elsewhere. My reason is simple: freehold properties are getting more rare, and their value is very unlikely to go down, whereas leasehold properties all have expiry dates - the older they are they cheaper they get.

This condo likely to be Seasons Park or Castle Green. Knew someone who bought 3 units, 1 mil each. But fortunately was rich and finish paying within a few years.... But still significant loss...at trough, only worth 500+ k each.

In 1998, we bought our 99yr leashold condo throgh sub-sale from a couple who sold it at S$200k+ loss.We were puzzled that so many people earlie on have paid so sky-high prices for 99-yr leasehold property.Now, it seems that the same thing is happening again.

Goh, I agree with you. Maybe it's time for you and I to buy?

The bubble will burst in 2009