Tuesday, April 26, 2011

Property Prices Continue to Defy Gravity

In this case, it is financial gravity as dictated by the median income of most Singaporeans versus the value of homes being offered in the market. Recent news articles on our ever-hot property market has literally “forced” me to write once again on this pervasive yet intriguing phenomenon. With elections around the corner on May 7 and Nomination Day being tomorrow the 27 April, this hot-button topic would surely be fiercely debated over the nine days of campaigning, with most of the salvos being fired at our Minister of National Development Mr. Mah Bow Tan (“MBT”) who heads a GRC in Tampines. Let’s look at the facts and numbers and I will draw some conclusions from there.

On April 16, 2011, it was reported that the March 2011 numbers showed that sales of new private homes was up 25% to hit 1,386 units. If we add in EC sales, the number jumps to 1,543 units. There was also reportedly sustained demand from HDB upgraders, who ostensibly have the cash and asset backing to purchase investments in private property, even though the January 2011 cooling measures have limited the mortgage loan quantum to just 60% of home value, down from 70%. Quite a significant proportion of the sales was also driven by “Mickey Mouse” units less than 500 square feet, and most analysts are either bullish or feel that this is ordinary and that no bubble is forming, despite the persistence of historically ultra-low interest rates which has seen loan demand surging for local banks.

The most recent news was April 19, 2011 when it was reported that project launches were accelerating as developers feel that HDB upgraders had the appetite and propensity to purchase even more units. This started off with Eight Courtyards in Yishun reporting that 202 units out of 656 units were sold during its weekend preview. Its tenure is 99-year leasehold and it is selling at about $795 psf, which means a decent three-bedder (equivalent to a five-room HDB flat) would set you back by about $700,000 to $1 million. Quite shocking when you consider that you are essentially getting the same space for almost double the price, plus some amenities thrown in (which you ahem, have to pay for of course) and probably a perimeter wall and security guards thrown in. Other recent launches with healthy responses include Hedge Park in Flora Drive (Changi), Skysuites 17 and Centra Heights (Sims Avenue); all of which are selling at about the same price. It’s hard for me to imagine myself shelling out $1 million for a unit which is about 1,200 square feet, while a spacious 5-room HDB flat costs around $600,000. More on HDB flats later.

The problem with the news articles on Straits Times and Business Times is that they are all in-line with MBT’s “Asset Enhancement” long-term strategy. When recently queried by the Worker’s Party on the sustainability of high HDB prices, he retorted that all HDB flats are continually undergoing asset enhancements whereby upgrading and refurbishment is done every couple of years, and so Singaporeans can enjoy an asset which will continue to appreciate in value. While I can appreciate (no pun intended) his logic in giving Singaporeans an asset which is worth something, he fails to recognize that if this enhancement carries on for the next 10 years, we may see HDB flats being priced eventually in the millions of dollars, and already some “freak” transactions have resulted in HDB prices being transacted at $800,000 to $900,000 in prime areas, COV included. Unfortunately, on the other side of the equation are the yuppies, couples who recently graduated and found a job and have been working for less than 10 years; and who earnestly plan to settle down and (hopefully) arrest the ever-declining birth rate. With median income settling at $3,500 to $4,000 level, this means that couples have to take longer loans to cover the mortgage payments on these “enhanced” assets. Taking a 30 or 35-year loan is not my idea of “affordable”, as mentioned in a previous posting of mine on property. This effectively makes all Singaporean couples indentured “servants” for the rest of their working lives as they slavishly work to pay off their huge mortgage, ostensibly in the name of having an enhanced asset for their retirement. A classic case of “Asset Rich, Cash Poor”.

With the liberalization of the CPF OA to be used for housing, this has inadvertently and unavoidably caused housing prices to edge up, as Singaporeans’ retirement savings are being sucked away to pay for (over-priced) public housing. The newspapers frequently play up the dream of owning a private apartment by referring to “HDB Upgraders” and quoting residents making statements such as “It's a gold mine which will appreciate when more amenities like the Bedok Reservoir MRT station come up” (Article Reference: Prices on the Up and Up in Bedok Reservoir, Straits Times, April 7, 2011). The problem with such thinking is that everyone tries to sell out at the high and hopefully “downgrade” to a smaller apartment, thereby keeping the difference as cold, hard cash (after deducting the amount payable back to CPF OA + interest, of course). So it seems like a game of musical chairs as everyone continues to wait for higher prices, all fuelled by the media and its exhortations. An impending vicious cycle of epic proportions, perhaps?

Over now to HDB, it seems that an April 7, 2011 report stated that the HDB Upgrader’s dream is fast fading, with the gap between mass market condominiums and HDB flats growing wider as prices for private properties begin their ascent into the stratosphere. Prices of suburban homes are at historic highs, according to the article, and are fuelled by low interest rates too. Waterfront Isle in Bedok sold at $990 psf median, H2O Residences in Sengkang at $920 psf median and Canberra Residences at Sembawang at $830 psf, levels which are quite mind-bloggling considering a simple 1,000 square foot unit would cost close to $1 million! Over at Adora Green, a new DBSS project located in Yishun, prices for 3-room flats are in the range of $310,000 to $390,000 for a 720 sq ft unit, translating to about $430 to $540 psf. The 5-room flats are even scarier, being about 1,200 sq ft priced at $520,000 to $650,000. Considering DBSS has an income ceiling of $10,000 per couple, this still means the couple has to stretch their loan tenure in order to be able to afford the mortgage payments, a situation which saddens me greatly.

Interestingly, I do have friends out there who own two properties (one HDB and one private apartment) and are paying two mortgages. These were transacted before the new property rules came into play in January 2011. Most of the time, they are trying to play a risky game whereby they pay for their HDB using CPA OA, and then rent out the entire unit at 4-5% gross yield for cash in order to pay off the mortgage for the private apartment (using a very cheap bank loan with 3-year lock-in rates). The whole equation is quite sustainable until a few things start to happen:-

1. Rental Rates start to fall – When this happens, the cash flow from renting out the HDB will be unable or insufficient to fund the mortgage payments on the condo.

2. Lack of tenants due to increased supply of HDB and private property – It may become more difficult to find a tenant in the first place once the supply of flats increases and tenants are more spoilt for choice. Should this happen, the couple would have to cough up payments on two mortgage loans using their own CPF OA and cash reserves.

3. Falling Property Values – Negative equity may result and the banks may require a top-up on existing mortgage loan.

4. Interest Rates Rise – In the event that interest rates start to rise in 2012, the interest rate on bank loan for the condo which is pegged to SIBOR may also correspondingly rise, resulting in higher monthly interest payments which are unable to be fully covered by the rental of the HDB unit.

Assuming any or all of the above events occur at the same time, it would put a major squeeze on the couple in question and their cash flows would be severely disrupted, resulting in potential financial distress.

Hence, I always advocate a measured approach to property. Buy what you can afford, pay off the mortgage loan as soon as you can using only your CPF OA (as cash can be invested to yield 4-5%) and do not over-leverage as it is a risk to your cash flows. As to whether and when property prices will experience a significant correction, your guess is as good as mine; but note that the last major crash occurred in 1997 during the Asian Financial Crisis (2008-2009 does not really count as HDB Resale prices remained high, propped up by an steady influx of foreigners). With an event occurring 14 years ago, most of the current crop of couples in their 20’s and 30’s would not have recollection of the financial distress undergone by people at the time. Leverage can act as a double-edged sword so I feel compelled to thus sound a note of caution as euphoria and exuberance sets in.


OT83 said...

Hi MW,

Nowaday the price of the HDB are getting ridiculously high as compared to the salaries of the normal couples.

Some of my friends who came out to work for 1-3 years are wondering how are they going to afford the flat? To be frank, they can "afford" if use both cash and cpf to pay and take loan for 30 years or more. What does this imply? Housing Slaves. What if one day there is sudden lost of jobs (there is no such thing as stable job nowaday)or sudden increase in liability? I dare not think.

For my friends who could afford, some are thinking that they are buying asset. The higher the price of the flat go, the more paper profits they have. But they only have one flat. If they sell the flat, where do they live? Rent flat?

All the best to everyone.

SGDividends said...

I agree with you about your statement on the conflicting goals of asset enhancement and YET trying to boost singapore's birth rate.

A high debt means people have to work harder and longer. How to give birth?????!!!!!

Musicwhiz said...

Hello OT83,

Yes, I agree. It's because things are getting ridiculous, which is why I wrote this article. It's a way to express my indignance and shock at the way things are going, and how MBT continues to assert that HDB flats are "affordable".

The term "housing slaves" will never be used by PAP, as they measure affordabiliy in a different way. Somehow tying a couple up for 30-35 years of their life is not seen as a form of slavery, though I perceive it to be just that! Who can determine what will happen in those intervening years? Loss of job, pay cut, major illness, accidents etc. All these unfortunate events will compound the heavy financial burden which couples are already facing.

The profits are all paper profits, like I said. Unless you can selll your flat and move to the car park and live out your days there, an appreciating asset makes no sense at all.

Some views I've read on the Net recommend selling the flat, collecting the proceeds and then leaving the country; hence "locking in" the profits. At the same time, you can also fully withdraw your CPF and renounce your citizenship. I guess this is why Singapore is losing more and more of its citizens and thus it has to import copious numbers of foreigners!

Sad but true indeed.


Musicwhiz said...

Hi SGDividends,

Yep precisely. The problems are related - I know of many young couples who cannot secure a flat within the next 3-4 years even if they ballot successfully; so how one even think of having a child?

And even if you secure a flat, it will cost quite a bomb and tie up thirty years of your CPF, which leaves you scant little for retirement! It's a vicious cycle - as less and less Singaporeans are born, the Government will insist on importing more foreigners to boost the population, thereby pushing property prices up even more.

I'd really hate to see the eventual outcome - a super-over crowded island and million-dollar HDB flats in 10-15 years time!


Viz said...

Hi MW,

Thanks for the research.

My wife and I got a new BTO 4-rm at $280,000 and our combined CPF OA is about $180.000. our combine income is at $8000 and our house would be ready in about 2-3 years time.

Do you suggest that we

1) Pay up maximum ($180.000) and take up a $100.000 loan?
2) Pay up minimal (say, $80.000) and take up a $200.000 loan

and for the choices above, how long should the loan period be?

If you have better suggestions, please feel free to let me know too.



Musicwhiz said...

Hi Viz,

I think it's better to take the middle ground - which is use somewhere between $80,000 and $180,000 to pay off the HDB and then borrow the remainder.

There is an argument out there that the CPF OA can be invested to reap higher returns than the 2.6% concessionary loan rate given by the HDB. In fact, the first $20,000 of your CPF OA gives a return of 3.5%, so there is a 0.9% "gain" over the interest rate charged. You may wish to consider this as well when you use the OA to offset your HDB cost. Anyhow, you would still need to leave at least 6-12 months of buffer in your OA to protect against sudden loss of job or pay cuts, so I'd suggest maybe $40,000 each for you and wife. This would imply using about $100,000 to offset the HDB cost and then borrowing $180,000.

It is better to take a slightly longer loan tenure as it can always be reduced over time as you earn more or with bonuses to do partial loan redemption, so I would recommend about 20-25 years to start off so that the installment is kept manageable. You can do the calculations using an Excel spreadsheet, but I think with your combined salaries you can service the loan entirely through just CPF with excess to boot.

So as you get pay rises and bonuses, slowly increase the installment amount and reduce the principal.

To give my own personal example, I started off with a $183,000, 21-year HDB Concessionary Loan back in 2004. After 7 years, it is now reduced to a 13-year loan (with 6 years remaining) and the principal is now about $85,000.


OT83 said...

Hi MW,

Yup. They will not use housing slaves but I feel that I am.

Anyway, vote wisely.

Haha. Sorry for the last phrase.


xantuar said...

Hi MW,

Interesting to note that we both wrote about property at the same time!

Also what ur friend did with two mortgages isn't just risky, it's illegal!

They should be living in HDB and rent out the private condo.

Drizzt said...

Viz you are in a great situation. I really like yourbhousing deal and your income power

Musicwhiz said...

Hi OT83,

Haha it's OK, I think I know what you mean. :)

And yes, I intend to vote wisely!


Musicwhiz said...

Hi Xantuar,

I think it's OK for them to do so since they bought the condo before the new rules kicked in. Some of them have passed the 5-year MOP and thus they are allowed to rent out the entire flat, so nothing illegal I feel.

I agree on the risky part. Then again, if they have very stable cash flows and it is predictable for the next 20-30 years, who are we to say anything? :P


Musicwhiz said...

Hi Drizzt,

Yep I think Viz has a good deal too, and he just manages to remain below the HDB cut-off line at $8,000 household income, much higher than the median $4,000. So this gives a lot of flexibility. Also he and his wife have a huge sum in their OA, probably through years of working before settling down.

I think it's good that couples like him and wife are choosing housing which is affordable and does not put a big dent in your finances. I can't say the same for those who are earning say $10,000 monthly and choosing to buy a $1 million+ condo!


Anonymous said...

I have said it before that my Mom who is 91 years old now told us more than 35 years ago that the "PAPAYAS" main policy to control the people is using the pricing of "HDB" flats.The "PAPAYAS" admitted also at that time till now that the people should "own"(99?) the HDB flats that will/shall go up in value from time to time, so that in case we are attacked, we can't run away but defense.
But it looks like this tool for controlling us has reach it's "limit" or usefulness. The peoples' salaries can't take it or afford anymore.
Guess who will/can run away with their $million pay in case of war or chaos?
No price will be given for the right answer.

Createwealth8888 said...

Did I really lose out in my investment's returns by fully paid up my housing loan much earlier than most home owners?

My investing result obviously said no. You may need to understand this: You are paying Compounding Interests on housing loan and you are just making Compounding Returns in your investment and the returns on your investment can turn nagative.

Too many retail investors are self-bias and over-confidence with their investing skills.

Musicwhiz said...

Hi Temperament,

Mah Bow Tan just mentioned on May Day that "It is not the length of the loan but the percentage of monthly income repayable to the housing loan that matters". So you can see what kind of philosophy he espouses - as long as you got the cash to pay every month, it is OK to be a slave to the mortgage loan for XX number of years, even if you have to die paying for it.

I guess that's how crises like sub-prime came about. The complete lack of understanding about debt and prudence in financial matters. I shudder to witness what our young generation will go through should HDB prices hit even more ridiculous levels.....


Musicwhiz said...


I do agree. Investing does not guarantee positive returns over the years, even though it looks "simple". Paying off a housing loan as quickly as possible should be a priority for any conservative individual. It is only those who need to further their agenda on debt/loans who ask you NOT to pay off your loan and to use the cash to invest. Most of them have vested interests.


JK Holdings said...

become real estate agent, and earn the fat commission from the rocket high property price!

Ken Tan said...

Cost of public housing such as HDB flats have always been a thorny issue to young Singaporeans whom are first time home buyers and may find it hard to pay off their mortgage over their perceived time period. (hey, who wants to pay over 30 years, as brought up by OT83, a housing slave. Do I want to be a rat running a race, puffing always to pay off my monthly loan??? - Hell NO WAY!)

After all, HDB flats should serve a primary purpose - a roof over your head and NOT an asset.

Unfortunately, young Singaporeans I know of are literally "compiled" to do so due to the price of their flat - sell after 5 years, hopefully to re-finance the initial loan, get a profit and move somewhere better or perhaps downgrade due to situational basis. Of course, have to take note of the transitional period.

As far as I am concerned, MBT mentions that HDB owners should not treat their flats as assets.

Aren't we than going back to the same problem? High price of HDB flats for such a small space area that causes young Singaporeans to sweat and toil, leaving them little options but to consider the above? So are we REALLY solving the problem and MBT addressing REAL housing issues on the ground?

Need we say more as the election comes nearer regarding this housing policy?

left_ray said...

Hey MW,

Here is a interesting special report on property for your reading.


The economist is arguing property is a dangerous asset class.

Our perception of home ownership has to change. I mean it's all right to rent a house.

Most properties are 99 years lease hold and one never really owns the house unless you pay off the loan.

Musicwhiz said...

Hi JK Holdings,

Haha not as easy as it sounds! During periods of property boom, a lot of people will flock to become agents, and this will thus reduce profits for everyone as a whole. When property crashes, a large number of them will exit as they are unable to survive. The cycle then continues again. More important to be consistent as an agent, then you can last very long.

(Come to think of it, it sounds rather like investing eh?) :P


Musicwhiz said...

Hi Ken,

You are absolutely right on this, and I had pointed this out to many friends too. Sad to say, most of them still maintain the same kind of mentality when it comes to property - stay for X years, sell it, then upgrade to a bigger flat or condo. Then sell the condo, pocket the profits and "downgrade" to a 3 or 4-room HDB flat.

This kind of thinking is perpetuated by our dear MBT and his "Asset Enhancement" belief. With him recently saying that "the length of your housing loan does not matter", I am afraid many more young couples will be slaves to their mortgage loan till they are 6 feet underground; and their children will have to bear the loans + their own loans!

It's a scary never-ending cycle of debt, fuelled by the notion of their property always increasing in value, and chaining our future generations to the grind.

Do I hope to see the bubble burst? Yes! But perhaps many others are fervently hoping for an emphatic "No"!