Most Singaporeans are loathe to take this step before 50. I mean, the house is practically the retirement plan. And think of the embarrassment: What if Ah Hock the annoying cousin has a bigger flat than ours? But here’s the thing: downgrading can mean a sudden surge of liquidity. In this article, I look at why some Singaporeans downgrade early:
Where are we moving to? Dammit, I *knew* there was something I forgot before selling the flat!
What Is a Downgrade?
Most people think of it as “moving into a smaller home”. That’s not always true. Increasingly, a downgrade might mean a shift in location, not size.
For example, you can downgrade from a small district 10 apartment (say $2,200 psf) to a larger but non-central condo (say $1200 psf). Likewise, some Singaporeans downgrade from private condos to similar sized HDB resale units
When it comes to downgrading, use price as the indicator. If you’re moving from a more expensive place to a cheaper one, that’s a downgrade. It’s simpler than trying to measure it in terms of amenities (e.g. this place has a pool, but that place has a gym.)
You can enjoy scenery without an expensive condo. You’ll just appear on Stomp a lot.
But why would you downgrade? There are five good reasons:
- Re-Investment purposes
- Irrelevant amenities
- Bigger space
- Household maintenance issues
- School placement
1. Re-Investment purposes
What’s the capital appreciation of your house?
Sometimes, you’ll spot investment opportunities that outpace your home’s appreciation. When that happens, you may want to shift property assets into other investments.
I said to re-invest in CRUDE oil. Not even the graffiti on that is crude!
For example, say my house appreciates at a rate of 4% a year. If I could get $90,000 to invest in oil and gas (say I have contacts), I could grow my investment by 7% a year.
But the business has risk, and I don’t want to lose my home (no cash-out refinancing for me). So instead, I downgrade to a cheaper house; one that’s worth around $90,000 less. I then pump the $90,000 into the business, and get 7% returns.
After a few years, if my investment pans out, I’ll have enough to upgrade again. Probably to a more awesome house than the one I sold.
Local property investor Charlie Sng adds:
“Downgrading is more troublesome than cash-out refinancing, but it’s comparatively safer. If you cannot pay back the (refinancing) loan, you can lose your home. If you downgrade and your investment fails, at least you are not homeless.
Also, if you have a HDB flat, you cannot cash-out on it anyway.“
2. Irrelevant Amenities
I can’t move because I have no TV.
Your property value is influenced by amenities. If you have a train station nearby, the value goes up. If the market’s across the street, the COV is insane. If the coffee-shop is downstairs, you better reserve your parking space with barbed wire and land-mines.
All these amenities tack onto the value of your home. But if you don’t use any of them, they’re like discount vouchers you can’t spend. If you have a car and never use public transport, for example, the nearby station is only useful if you want to rent out.
Do some homework and compare cheaper places. If you had that price difference in dollars, could you spend it on something useful? If the answer is yes, it might be time to downgrade.
3. Bigger Space
We can still approve your loan, assuming you live till 800.
Settling down, having children…it changes your needs. You might want to familiarize your child with concepts like oxygen, so your cramped Somerset apartment won’t cut it any more.
If you have a central region condo, you’re paying more per square foot. Move away from the city centre, and prices drop. Rumour has it that, in far off lands like Punngol, people can stretch without kicking someone in the head. If you want that privilege, your downgrade may not truly be a downgrade.
Remember, your $2 million condo in town might get you a bigger $1.6 million condo along the beach (East Coast). As with point 2, look at the amenities; if you don’t care for them, maybe go for living space instead.
4. Household Maintenance Issues
I think I hire too much domestic help. You reckon?
This might be an issue for the elderly or the recently divorced. For whatever reason, family members fly the coop. And now, there’s just one or two people to look after the whole house.
Hiring a maid isn’t the cheapest option. And if you view house work the same way I do (i.e. dentistry without anaesthesia is preferable) then it’s time to downgrade. A smaller house means less tidying, mopping, re-painting, etc.
Common bugbears are kitchens and light fixtures. Until you’ve had to clean a massive kitchen you never use, and do it every damn day, you don’t know the meaning of hate. Mrs. Pereira, who moved from a Semi-Detached to a resale flat recently, tells me that:
“My old place was so difficult. It was three storeys, it even had a roof access. And there are all these antique lights on the ceilings. How to clean all of them in so many rooms, when only me and my grand-daughter are staying?”
Also, bigger houses tend to mean bigger utility bills, and more calls to the repairman. If you’re not up to it, just downgrade. Pocket the money and save your time.
5. School Placement Issues
We’ve found a fairer system of school balloting.
Wait, you bought the house just to improve the chances of getting your son into a certain school? Seriously? How kiasu can you get?
Not enough, if he didn’t get in anyway. But that’s over and done with. If your child gets a school placement somewhere else, and it’s a cheaper district, luck’s on your side. Rack up the COV of your flat, for the next punter who wants that school placement.
Then take the money and head somewhere more convenient. Now excuse me, I’m off to demand some schools strengthen their syllabus. For my property value.
