ST : Chasing away leasehold worries

Jan 31, 2010

small change

Chasing away leasehold worries

The key to a wise property choice lies in buying to suit your budget and preference

By Jessica Cheam

The wait lasted nearly half a year.

Since I exercised the option to buy my first new home some time last August, I had eagerly awaited the day I could move in, pop open a bottle of champagne and bask in the smell of my freshly painted walls.

That day finally arrived just in time for New Year's Day - the beginning of a whole new decade - and I was understandably excited.

But just before and after The Big Move, I was besieged by a phenomenon I had never thought about: post-purchase cognitive dissonance (PPCD).

I'm not making it up, really. Cognitive dissonance is defined as a condition of conflict or anxiety resulting from one's actions. And PPCD is when, after buying something, you feel that an alternative would have been preferable.

In fact, you go through a rationalisation process in your head, questioning all the factors that made you decide to buy the said thing, and wonder if it was all one big mistake.

You see, in my quest for a spacious, affordable home somewhere in the suburbs, I had bought a 99-year leasehold apartment.

I surprised myself because I have traditionally been on the side of freehold property in the freehold versus leasehold debate.

I know the typical arguments for both sides of the case but I never gave it much thought till I became a home buyer and the cold, hard, facts were staring me in the face.

I had started off looking at freehold properties but, when it came down to dollars and cents, I realised that the difference between a freehold and leasehold apartment of the size I wanted was more than $150,000 and it made a big difference.

I took the plunge.

Today, my 1,650 sq ft property has 85 years left on its lease. After spending every penny my other half and I had on renovations and furnishings, we were thrilled the day we moved in.

Everything was gleaming and it felt good that we owned everything we saw.

But this lasted only a few days.

Acutely aware of the new depths my bank accounts had plunged to, I was overcome by an attack of PPCD during lunch with my mother one day while shopping for cutlery.

Mum, I asked, did I make a bad move sinking all my money into a property that will take me 30 years to pay off? And at the end of 99 years, would be worth absolutely nothing?

Also, given the price I'd paid for the property, is it likely that I could even break even on costs if I wanted to sell my apartment a few years later?

I was panicking, and convinced that nobody would buy my apartment when I want to sell it. I would incur a huge loss on it - something I wouldn't be able to live down as a property reporter.

In an attempt to alleviate the symptoms of my PPCD, I spoke to some property analysts for an objective assessment of my choice to invest in a leasehold home.

This is the list of factors to consider that I eventually came up with:

1. Affordability

The major advantage of a leasehold property is that it is cheaper and offers a first-time home buyer a good opportunity to get on the property ladder without financial stress.

2. Yield

Leasehold homes also typically give you a higher yield compared to a similar freehold property as you can command the same rent but your capital outlay is lower.

3. Depreciation, and factors that will compensate for this

The main drawback is that the value of your property depreciates with age. I have now come to accept this fact, but there are some factors that can influence the rate of depreciation, such as location, quality of amenities and transport network.

For those contemplating a leasehold home, is it near an MRT station? Is your estate slated for major upgrading?

Thankfully, I thought, my new home will benefit from the upcoming Bukit Timah MRT line.

4. Collective sales

Leasehold properties typically receive less proceeds as developers have to pay the Government a fee to top up the lease, unlike for freehold properties.

I'm personally not one for collective sales. But it is comforting to know that even an old leasehold estate such as Farrer Court could command a premium of $2.15 million per home when it went en bloc.

5. Historic figures

Looking at property cycles in the last decade, analysts say the rate of appreciation of freehold homes does not always outperform that of leasehold homes.

In general, the numbers show that in an upswing, leasehold properties tend to gain more, although in a downturn, they also fall more rapidly - meaning prices are more volatile.

So if you buy a leasehold property and intend to hold on to your home for some time, you could easily choose to sell in an upswing instead of a downturn.

All in all, I felt my anxieties dissolve when I realised that my leasehold home was affordable, will give me a reasonable yield if I choose to rent it out, and would likely appreciate - or hold - in value when transport networks are improved.

Analysts say there is no conclusive evidence to show one is definitely better than the other, and that the decision you make depends mainly on budget and preference.

I now realise that my home, which I love because it has four bedrooms and is surrounded by four different nature parks, was really the best choice for me, given what I could afford.

My mum, in her infinite wisdom, said: 'If history is anything to go by, you'll be fine.'

My parents recently sold an HDB flat in Jurong after my grandmother who lived there passed away. It had aged 20 years since they bought it, yet they sold it at a price far higher than what they paid for it.

See? Why worry so much, my mum chided, HDB flats are also leasehold and their values go up every year.

It was a good point. I decided then I would just enjoy my first home, day by day.

jcheam@sph.com.sg


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Value for money

I felt my anxieties dissolve when I realised that my leasehold home was affordable, will give me a reasonable yield if I choose to rent it out, and would likely appreciate - or hold - in value when transport networks are improved.