Property Chilling Measures

Readers would know that I seldom blog about property (there are only five posts on this in the last four years!), as I am generally not very good in this area and am still experiencing my steep (and extended) learning curve. There are so many aspects to consider when it comes to investment property that it would take many years to really understand how things work, including the witnessing of the entire bull-bear cycle which is far more drawn out as compared to a full stock market cycle. My last post on property in June 2011 centred mainly on expectations and the so-called “Perfect Storm” (record supply of land, falling demand and rising interest rates). Note that about 6 months since then, all these have yet to come to pass, which is why I feel the Government has suddenly introduced another set of harsh (some even say draconian) measures to curb speculative demand once again; with this latest set of measures targeting mainly foreigner demand. Let’s look at the various aspects which I talked about previously to see if they may still constitute the “Perfect Storm”.

Before I go on, the reason for the title is because the phrase “cooling measures” has been rather over-used, and I was just discussing this with a friend the other day on whether the measures are designed to chill and freeze, rather than merely cool. Of course, it remains to be seen if such measures would eventually be effective, but a peek into history and also a review of what experts and analysts are saying may shed some light on what may transpire and also give some insights as to how property may behave. Crystal-ball gazing is not my strong point – therefore readers will have to understand that this commentary is typed out based on my (rather limited) understanding of the property market and perhaps may even make me sound like a “newbie”, but please bear with me as I feel that expressing my views on the subject can enhance my overall learning experience and hopefully hasten the learning curve effects.

A Fifth Round of Chilling Measures

I guess most analysts and even the newspapers would have discussed the latest measures (announced on December 7, 2011 and implemented from December 8) almost to death, but the above table provides a good summary of the effects and is taken courtesy from a DBS Vickers analyst report. To summarize, foreigners and non-individuals (i.e. companies) need to pay an additional buyer’s stamp duty (known affectionately as ABSD) of 10% for all residential property; while for PRs and Singaporeans, they need to pay an additional 3% ABSD for their second property and third property onwards, respectively. Two interesting “exceptions” are offered – citizens from five nations which include America, Switzerland, Liechtenstein (a country located in Western Europe, bordered by Switzerland and Austria), Norway and Iceland would be treated as Singaporeans and would thus be able to avoid paying the 10% ABSD, while for corporations who bought and sold fully-developed properties (including collective sale properties) within 5 years from December 8 would be exempted from paying the 10% ABSD too.

It is immediately clear that the measures are targeted at foreign buyer of residential property, as the proportion of foreigners buying high-end property here has been increasing as more “hot” money has been flowing from countries like USA and China to seek more safe havens. Property curbs in Hong Kong (which has seen property prices fall to a six-month low) and China are also driving more and more wealthy individuals to channel their wealth into properties in Singapore, thus pushing up prices of private properties (and hence HDB resale flats as well). There is, however, a growing debate on whether the latest measures would be effective in bringing prices down, and some have criticized the measures as being too harsh, as the global economy is still reeling from the effects of the Euro Zone debt crisis and economic growth in Singapore is expected to be anaemic. My personal view is that prices may not moderate much, as foreigners may have deep enough pockets to withstand the 10% ABSD, and interest rates still remain at record lows.

Previous Cooling Measures

Looking at the above table (courtesy of OCBC Research), one can trace the history of the last four sets of cooling measures implemented by the Government. The first round can be seen as being relatively mild, with the Govt removing the IAS and the IOL, effectively ensuring that buyers must pay down the principal cum interest and not just servicing the interest alone. Sep 2009 was the first indication of an increase in supply as the Govt reinstated the 1H 2010 confirmed list of GLS sites.

Round Two, implemented just six months later, saw the first sign of some clamping down of speculative fervour, with a SSD implemented for flippers who turned a unit within a year, as well as lowering the LTV ration to 80% (this meant buyers had to cough up more cash – 20%). Another six months later, when prices still went up relentlessly, the Govt introduced SSD for properties sold within three years instead of just one year, while lowering LTV to 70% from 80%. They also raised the household income level for purchase of DBSS, which I think was a wise (though long overdue) move, as it meant more people could afford “public” housing rather than go for overly expensive private condominiums. HDB supply was further ramped up to 22,000 units for 2011, compared with “just” 16,000 units for 2010. Another shrewd move was to disallow HDB owners to concurrently own private property, in order to reduce speculation and “flipping”. When it seemed that all these measures were futile, a fourth round was introduced in Jan 2011, where the LTV was further reduced to just 60% for individuals with more than 1 housing loan, and 50% for corporations. Harsher SSD rates were also introduced and tiered as shown in the above table, but apparently these still did not work well enough as many of the buyers/speculators were cash-rich and remained unruffled by these four rounds of measures.

And so the Government implemented the fifth round, which consists of the ABSD.

Latest Measures on Increasing land Supply

The Government has also released, on December 7, 2011, the 1H 2012 GLS list of sites. On the list are new land sites for 7,020 housing units in the confirmed list and another 7,120 homes, 4,857 hotel rooms and 218 sq km of commercial space on the Reserve List. Although this supply is lower than the 2H 2011 planned new inventory, it is still a relatively high figure and analysts are saying that the market will soon be flooded with ample supply. It is actually arguable whether the Government is finally releasing sufficient land to absorb the huge influx of foreigners in recent years, as well as to cater to the numerous couples aspiring to get married and “own” their first flat. Assuming market prices do fall and people hold back from transacting, this means that there may be more vacant units left over from the recent glut of new private housing released by developers, which would snowball into an even larger looming supply in say two to three years time. Another possibility is that foreigners, spooked by the draconian measures and the economic uncertainty, may leave our shores and create a vacuum in terms of demand, which I feel is unlikely to occur.

Sentiment-Driven “Perfect Storm”

The Singapore Government (like its counterparts in China and Hong Kong) exerts significant control and influence over the property market, as can be seen in the last 2.5 years where five rounds of property curbs were introduced in rapid succession. Thus, investing in property companies which develop residential property makes for a difficult proposition as the industry is continually “rocked” by changes in regulation and laws, not unlike the notoriously tightly-regulated airline industry.

The question now is, of course, whether sentiment will play a bigger role in creating the perfect storm, rather than people actually having no cash to stump up (I tend to believe foreigners and locals are a wealthy bunch of people who will not let a simple ABSD stop them in their tracks). If people feel hesitant, or are certain that prices will drop, then it becomes a self-fulfilling prophecy and the vicious cycle of falling asset prices may ensue. When Khaw Boon Wan (Minister for National Development) first mentioned about a Perfect Storm when he took office after the May 2011 Elections, I was wondering if this would really come to pass. A quick check with some older colleagues who remember the dark days of 1996-1997 has led me to the conclusion that once prices fall, they will literally plunge. Crisis can hit us so quickly that volumes almost completely dry up, and knowing how illiquid the property market is (compared to equities), the bid-ask spread may also widen considerably and this is when you read about a lot of “fire-sale” in the newspapers. In short, many people will get severely burnt.

Conclusion – Prudence Wins the Day

I guess I run the risk (again) of sounding like a stuck record when I caution all readers to be prudent and conservative in their finances, and to ensure they have sufficient cash buffer should they choose to leverage to invest in property. Though interest rates may be hovering at record lows, no one knows how the current situation in Europe will pan out and assuming something severe occurs in the global arena which somehow shocks the system, it may lead to some sudden, unexpected and very drastic changes which may leave one with precious little time to react.

If one lives their life in a frugal manner and takes up only very basic (not excessive) debt which is necessary to service their live-in residence, then you would not have much to worry about. But for those who are juggling with three or more mortgages and using one property as collateral of multiple loans, perhaps you should take a step back and ask – even though this may seem safe right now, could it be just a fragile house of cards which may collapse at any moment?

Property – Expectation Theory and The Perfect Storm

It’s been a while since I wrote something on property, since there was nothing really new or ground-breaking for me to comment on since Mr. Khaw Boon Wan (KBW) took over from the reins of Mr. Mah Bow Tan after 11 years at the helm of the Ministry of National Development. However, on June 10, 2011, Mr. KBW blogged about a possible “perfect storm” which may brew in 1-2 years time, and which may either cause the property market to cool significantly, or, in the worst-case scenario, crash resoundingly. He said that housing prices could not go up indefinitely, and cautioned many speculators and investors to do their sums carefully and to make prudent purchases to ensure they could hold in case of falling prices. The perfect storm consisted of three aspects: record-high land supply, possible drop in influx of foreigners (demand-side) and the rising of interest rates. I shall tackle each of these points separately, then offer a summary of my thoughts and comments.

Record Supply of Land

In response to runaway property prices and the frustrations of young couples yearning to purchase their first HDB BTO property, Mr. KBW has released an unprecedented number of sites for development of residential units. For 2010, there were 13,945 units for private homes but for 2011, it is planned that 17,510 units will be released to cater for the strong demand. This bumper supply is supposed to assuage the fears of Singaporeans who constantly complain that there are insufficient HDB flats for application. Their complaints are not unfounded though – some of the recent BTOs have seen over-subscriptions by up to 6 to 7 times the number of flats offered. With the injection of such a massive supply of land in such a short time, the Minister’s aim is that an equilibrium will be reached in terms of prices as demand will then be balanced by adequate supply.

However, some experts and veterans have been quick to point out that as a result of KBW’s zealousness in solving the problem of under-supply, he may have inadvertently pushed the property market into an over-supply situation. Keeping in mind that property cycles are longer than stock market cycles and that a lot of the price determination depends on Government policies (especially those relating to % loan quantum), the effects of such a significant supply of land coming onstream probably will only be felt in 1-2 years.

Falling Demand

With Greece facing problems once again and the USA’s economy stagnating after the effects of QE2 have worn off, it looks as though the world in general may face another prolonged and painful slowdown. The usual suspects embroiled in economic hell are Europe, UK and the USA; and it looks as though the problems will get much worse before they get better. If printing cheap money is the way to solve problems, then the USA would have solved their problems long ago! As it is, inflation and the falling value of the USD may precipitate another crisis in terms of lowered consumer spending; coupled with a stagnant housing market, this means the projected US recovery may falter and splutter for the next few years at least. Even China and India are not spared from economic problems, as they seek to tame runaway inflation and soaring property prices (in China and Hong Kong). China recently raised its banks’ reserve ratio to curb bank loans for property speculation, while Hong Kong has reduced the amount which can be borrowed for property from 60% to 50%, in desperate but vain attempts to rein in prices.

Assuming the troubles persist in Greece, USA and other areas of the West, this would have a spillover effect over in Asia as less foreigners will be sent over here for work attachments or seconded here for jobs. This will lead to a fall in demand for foreigners renting apartments. A sharp fall in demand may also be the result of a combination of the above-mentioned, coupled with a tighter immigration policy, especially after it was made known that the foreigner influx has been continuing unabated for the last 5 years; and which has resulted in a lot of discontent and dissatisfaction amongst Singaporeans.

Rising Interest Rates

Probably the worst whammy of them all – rising interest rates will hit property investors hard, as though they had been pummelled by Thor’s hammer. The problem, of course, is that interest rates have been hovering around historical lows for more than 2 years (since late 2008), so there is not much fear or trepidation among the masses that it may rise. This may explain the somewhat gung-ho and cavalier attitude taken by investors who are rushing to leverage and lock in the low rates for the next 2-3 years. The flood of liquidity has also further exacerbated the problem and 4 rounds of cooling measures have failed to dampen the demand for loans and property. This is because the measures have only tweaked the loan quantum % but have not affected the interest rates charged by banks, as this is by and large pegged to USA Federal Reserve rates.

Problems will most likely arise only after most of the current crop of investors’ lock-in periods have expired, which will probably be in 2012 or 2013 (assuming most loans were taken up in 2009-2011 and have a lock-in fixed period of 1-3 years). Once interest rates start to float, and with banks charging their usual 125 to 150 basis points spread, the rates charged by then could be significantly higher than what they are presently. If an investor only has to cough up say $2,000 in instalments at 1.5%, then this will more than double when interest rates hit above 3% once the world economy normalizes, and there is reversion to the mean in terms of long-term interest rates.

The Perfect Storm

Yes, I know the title sounds like a bad Hollywood movie on tornadoes, but remember that if this potent cauldron of three factors comes into play almost at the same time, it most likely will result in a crash in the property market. Though it is unlikely that all three factors will converge at the same time, what we do know is that supply will most definitely come on-stream, while demand may or may not taper off in 2012 and 2013. Interest rates in Singapore are unlikely to rise in the near future, but it is very hard to see past 2012 as the economic picture looks very murky and uncertain at the moment.

Expectation Theory

Expectation theory ties in with markets in general (not just property), and is rooted in psychology. In brief, it simply means that if market players anticipate and expect changes to the macro-economy which may impact their investments or their decision-making process, they would take immediate action to mitigate their exposure and minimize their risks. This means that technically, prices could begin to fall even way before any of the above ingredients which constitute the perfect storm actually come to pass; because people are anticipating the storm in advance and are simply reacting to it as quick as they can. Hence, pessimism and risk aversion can set in suddenly and without warning, and like a disease, can spread like wildfire within a short span of time and “infect” more and more people, resulting in either a slump or a mini-crash. We see this occur in fast motion in the equity markets, when a sudden turn of events or a change in mood can precipitate a sudden crash in stock prices. For the property market, I will liken it more to a slow-motion train wreck instead.

Another Sign of A Bubble - New players in Property Scene

In a further sign of possible exuberance in the property market, there have been a rash of new players entering the property scene, some of whom have had no prior experience. It is generally acknowledged that many new entrants flooding into property is a tell-tale sign of a possible market top, and so one should view such signs with immediacy and a sense of trepidation that things may go downhill soon. For starters, Ron Sim of OSIM has, in his personal capacity, bid for commercially zoned land in Paya Lebar and Punggol. JL Asia Resources (owner of K-Box) teamed up with Mary Chia to open Porcelain Hotel in Mosque Street; while Thakral Corp, an electronic goods distributor, has taken stakes in several property projects in Sydney and Melbourne. All these were recently reported in the news barely a month ago, and most property booms have led to companies jumping into the deep end to capture a slice of (seemingly) lucrative money-making opportunities. Whether or not this will end in pain and misery, I guess only time will tell.

Conclusion

So the perfect storm may indeed come to pass, and for those who are willing to wait till 2013, the answer may turn out to surprise everyone, as such trends are difficult if not impossible to predict accurately. With recent news that a new DBSS flat was being offered (by Sim Lian Group, no doubt) at $880,000 (Centrale 8 in Tampines), I too am beginning to wonder if the market is getting way too frothy for my own comfort!

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.

Is Property Truly Affordable?

Some of the more recent reports on property as published by our incumbent major newspaper, The Straits Times, seem to imply that property prices have softened and thus has become much more affordable for the general public. In Saturday’s newspapers (December 4, 2010), an article called “Our First Home” appeared and talked about how median COVs have fallen since the August 2010 cooling measures were introduced, and also gave examples of two young couples who managed to find their dream homes. One of them purchased a 4-room flat at Bukit Panjang (Mr. Kelvin Teo and wife Alberta), while another (Mr. Ang Tiong Wei) was featured purchasing an EC at the newly launched Esparina Residences in Sengkang last month. Overall, the news article(s) tried to portray a very rosy picture of couples finally managing to clinch their very first home, while property prices have “softened” enough for most first-time buyers to readily afford a flat of their choice. But is this really the case?

Much has been talked about measures of affordability such as Price-to-income ratio (HPI), which compares median house price to annual household income. Another often used measure is the debt-servicing-ratio, referred in short-form as DSR. DSR is the proportion of income used to pay mortgages, and it is generally recognized that this should not exceed 35% for it to be comfortable for the mortgagee. In a very comprehensive article (published in TODAY November 12, 2010) written by our Minister for National Development Mr. Mah Bow Tan on housing affordability, it was mentioned that HPI for young couples was around 4.5 for resale flats. But in the example quoted in Saturday’s news, the couple was granted a $50,000 HDB grant on a 20-year old flat in Bukit Panjang (not the most accessible of places in Singapore), and their household income was less than $3,500 a month. A simple back of the envelope computation will show that if the grant was NOT given, the HPI would have been close to 9x or 10x. There may be other similar cases floating around Singapore which have not been highlighted by the mainstream media, but which will become easy fodder for the opposition parties or alternative independent news websites and blogs. The point here is that HPI is still significantly high in Singapore for most young couples who had just started working and do not have high incomes and large savings. Even though a few luckier couples managed to find their “dream” home, they may still be over-leveraged from the point of view of HPI. Now let’s take a look at the DSR in the next section.

The international benchmark for DSR is around 30-35%, and the same Mah Bow Tan article mentions that the DSR for new HDB flats in non-mature (i.e. remote) estates averaged 23% based on a 30-year loan. Accordingly, of course, the article then categorically states that these flats are affordable, even though the ratio comes close to 29% for premium projects such as Punggol Waterway Terraces. I think we have to keep things in perspective, though. What the articles have been talking about here are 30-year loans, which basically span close to half a person’s natural lifetime! I shudder to think of what our society is becoming when taking 30 or even 35-year loans is becoming the norm rather than the exception, as the articles talking about DSR use this tenure as a benchmark. One cannot assume that he is able to “flip” the property at a higher price within 5 to 10 years, as the market, being unpredictable, may frustrate such attempts and you may have to go on servicing your debt into your twilight years. Also imagine a case where the loan tenure was shortened to 20 or 25 years instead of the current default 30 years, I think the DSR would probably soar above 35% for many cases; and many would end up being forced to dip into their cash savings instead of just using their CPF OA to fund their over-priced houses. Not to mention that a lot can happen in a span of 30 years, such as job cuts, pay cuts and retrenchments, which may greatly affect one’s ability to service the mortgage loan. Therefore, generally DSR is a number which can be manipulated by the media depending on the metrics used, and readers have to be careful to sift out information which may contradict conventional wisdom (such as how many people actually fully pay out 30-year loans, as the interest accumulated by then would probably amount to close to 50% of the original cost of the property!).

Anyhow, back to the case of Mr. Ang buying Esparina Residences (an executive condominium or “EC”) at Sengkang. It was reported that he felt lucky to have secured a flat and that he “only” paid $899,000 for his three-bedroom, 1,184 square foot flat. Please note that this is AFTER a $30,000 housing grant, or else the EC would have cost a whopping $929,000! A simple calculation will show that the unit costs $785 psf, which is a hefty price to pay indeed for a condo with HDB-like features and in a remote location like Sengkang. Let’s not even consider the fact that Mr. Ang and his wife CANNOT be earning more than $10,000 a month or else they would be disqualified from purchasing an EC. Let’s take the scenario where their combined household income is exactly $10,000 a month, or $120,000 per annum. This means that the HPI ratio would be about 7.7x for them, which is not exactly low either. The DSR cannot be computed unless we know more about their loan quantum and tenure, but I can bet it’s probably a 30-year loan and that it is “affordable” by conventional standards of having a <35% DSR.

The problems as highlighted above are due to the pervasively low interest rate environment we find ourselves in. Note that for resale flats and EC, it is clearly stated on HDB’s website that one needs to take a bank loan to finance the purchase, and that purchasers are not entitled to obtain a HDB concessionary loan (at a constant 2.6% per annum). Of course, most readers should be aware that bank loans are being offered at phenomenally low rates now of about 1% to 1.5% for a lock-in period of 2 to 3 years, which makes the one taking a HDB concessionary loan look like an idiot (incidentally, I am one of those “idiots”). However, one should also note that interest rates for the last 18 months have been artificially low, and that the long-term average interest rates for mortgage loans should hover around 3% to 4% for bank loans (i.e. higher than HDB’s concessionary loans, which is why it was termed “concessionary” in the first place). So the couples featured in these articles are literally staring at a “time bomb”, as they are fully exposed to interest rate increases in the near future after their lock-in period for their super low-rate bank loans expire. This could literally mean a mortgage installment which is either double or triple that of their current amount, as rates may rebound from a low 1% to 1.5% to as high as 3% to 3.5% which is the long-term average. Even re-financing may not help as all banks would have raised the rates for their new bank loans in tandem with the global economic recovery some time in 2013 or 2014. Therefore, I assert that the low interest rate environment is exacerbating the illusion of affordability by granting couples with cheap current loans which may turn out to be very expensive mistakes in the future.

So with the above evidence being presented, ask yourself this – is property really affordable in Singapore?

Draconian Property Rules

This is probably only my second post on property, as I am still a greenhorn who is observing the market and trying to understand the intricacies of this very interesting investment class. The reason for this (timely) post is mainly due to the recently announced new property cooling measures by Mr. Lee Hsien Loong at the National Day Rally on August 30, 2010. These measures were the direct result of the relentless increase in property prices since the middle of 2008, when the global financial crisis had hit the Singapore economy with full force. The Government had witnessed HDB resale prices moving upwards and hitting new all-time highs, even as manufacturing and output dropped off a cliff. This apparent dislocation between economic stagnation and property price rises had more than one person complaining bitterly, while speculators were eagerly loading up on properties with the hope of making a quick buck. In spite of two rounds of cooling measures implemented by the Government in the last 1.5 years, including increase the Minimum Occupation Period (“MOP”) for resale HDB flats from 1 year to 3 years, prices continued to escalate and for 2Q 2010 had hit new all-time highs. The cacophony of voices (mainly from young couples who were getting married and were buying HDB for the first time) asking for some action to be taken grew louder as the months passed; which culminated into the new measures announced close to the tail end of August 2010.

So just what are these measures? First off, those who are holding a private property have to sell it off within 6 months should they buy a non-subsidized HDB flat; and this is one of the most stringent laws which I had heard of to date. This effectively shuts people out from buying a resale HDB flat if they own a private property, as they will then be “forced” by the law to dispose of their private property. I guess this rule was intended to chase out speculators who intended to purchase resale HDB flats for investment or rental, rather than for genuine occupation purpose. However, this creates problems for people with genuine intentions to buy another flat for their parents or children to stay in, for example. Under such a rule, they thus cannot register the resale HDB under their name or they would be forced to give up their private property. Hence, the resale HDB flats have to be purchased in another person’s name. This can be onerous and troublesome even if the funds are not coming directly from the registrant’s account, and would cause headaches for those intending to buy non-subsidized HDB for their relations (assuming their income busts the S$8,000 ceiling).

There is also an extension of the 3-year minimum occupation period (“MOP”) to 5-years for non-subsidized HDB flats to dampen demand for those who are not in urgent need of housing. This in turn was an increase from the 1-year period and is the second increase in MOP in as many years. This move is pretty drastic as it means that speculators or “flippers” will need to hold for at least 5 years before they can dispose of an HDB flat, which may frustrate their attempts to “make a quick buck” from the transaction (one year is not a long period). However, this may also penalize those families who wish to upgrade to private property and are “barred” from selling their resale HDB flat which they had purchased within the five-year MOP. These may be genuine upgraders who need more space for their growing family or even to stay together with their parents. So this knife is double-edged in that it will slice through speculators’ plans as well as those of genuine home-buyers.

The seller’s stamp duty holding period has also been increased from 1 year to 3 years. Note that previously, the Government had acted to cool the property market by imposing a seller’s stamp duty if the property were to be bought and sold within 1 year. Originally, there was no such stamp duty payable and only the buyer’s side would be paying stamp duties; but the Government wants to make it more difficult for speculators to profit from such short-term transactions and so has narrowed the margin for profit with the imposition of this tax. Incidentally, there were some articles written in Straits Times (I think it was a Sunday edition) which compared the potential profits from buying/selling a property before and after the stamp duty rule kicked in. Since most property speculators use leverage to magnify their gains, a stamp duty of say 3% may significantly reduce profits and magnify losses when leverage is employed.

And the final, probably most drastic measures involve those of financing and LTV (Loan to Value) limits. If you have an existing housing loan, and intend to take up another to buy another property, the minimum cash payment you would have to cough up increases from 5% to 10% of the valuation limit; and the LTV limit goes down from 80% to 70%. What this means, in simple layman terms, is that buyers have to cough up higher cash amounts as compared to before, and they can only borrow up to 70% of the property’s value, which also implies higher cash/CPF upfront payment. To give an example, suppose a buyer would like to purchase a S$1 million condominium. Under the old rules, the buyer would be able to borrow up to S$800,000 and would have to pay S$200,000. Of the S$200,000, just S$50,000 needed to be in cash while the remainder (S$150,000) can be in CPF. Under the new rules, however, just S$700,000 be borrowed, while the other S$300,000 has to be paid up front by the buyer. Of the S$300,000, S$100,000 needs to be in cash while the other S$200,000 can be from CPF OA. So this represents an increase of S$50,000 cash and another S$50,000 in CPF OA needed under the new rules. Assuming a person is cash rich and has a good CPF balance, this should not pose a problem. However, for those who purchased and intend to flip, they may not wish to cough up the additional requirements; and it may also erode their ROI as the gains (if any) are now divided by a larger denominator!

So I would conclude that the latest set of measures do seem to be harsh on speculators, and it is likely (but not completely certain) that housing prices are poised to fall as a result. However, Singapore being Singapore, we might just witness a further rise in housing prices for whatever reasons; and the Government may need to mete out even more forceful measures to stem the relentless price increases.

Property Investing – A Discussion on the Pros and Cons

It is with some trepidation and reluctance that I venture into the topic of property investing, for Singapore is a country whereby its residents fall in love with property, and where most of the rich folk make their money from properties. Personally, I also know a few relatives who are sitting on very good rental yields on property which was purchased a few decades ago. With the steady and relentless rise in property prices, for both HDB flats and private properties, I think now has come the time for me to voice out my views on this matter. Firstly, it is to highlight the salient aspects of property investing; secondly it is also a “diary” of sorts to remind myself of my thoughts at this point in time (when property is hitting new all-time highs).

The Essence of Property Investing

Property investing generally differs from equity investing in one important aspect – it makes use of leverage and collateral to “multiply” gains. This is what I had observed in the majority of cases as Singaporeans are generally not cash-rich enough to purchase the entire property outright, therefore most will pay a downpayment of say 20% and finance the remaining 80% through the use of a bank loan. Since those who can fully pay for their properties are just a small minority, I can conclude that most people make use of leverage for their property purchases, and when it comes to property investing, most may already own 1 property (in which they live in), and are contemplating a second property purely for investment purposes.

Even with equities, one can make use of leverage (commonly known as “margin”) in which shares are used as collateral to purchase even more shares. However, this blogger has always discouraged the use of leverage in equity purchases because during good times, your gains are magnified; but during bad times, your losses are exacerbated manifold. The same scenario also plays out in property investing as leveraged is usually heavily employed. Assuming a S$1 million piece of property, the down payment will then be S$200,000, with the remaining S$800,000 financed by a bank loan.

Assuming that property prices go up amid bullish sentiments, the property is then worth S$1.2 million, and you can sell it to pocket a S$200,000 gain. Considering you only put down S$200,000 worth of cash in the first place, this translates into a gain of 100% on your initial investment! On the flip side, assuming the market tumbles and sentiment turns bearish, the property may be worth just S$800,000. Assuming you sell, you then incur a loss of S$200,000 which will wipe out your entire capital. This simple scenario did NOT take the cost of debt into account, and I shall elaborate on that in a later section.

Risks and Rewards

The risks are as mentioned above with regards to property prices, and these are similar to stock prices in that they can rise and fall. However, property is far more illiquid and there may not be a ready market out there, which means it may be hard to sell or the bid-ask spread may be large and significant. Another risk is that of the bank asking for the topping up of the loan quantum as the collateral (which is the property you purchased) has fallen in valuation. This is a risk unique to leverage as there is no such risk of topping up if you had paid up fully in the first place. So the important thing about buying properties is the ability to stomach such dips by having sufficient cash buffer, and also being able to buy and hold if things go wrong.

The rewards (positive) side of holding a property is that it is a tangible asset, unlike shares which are essentially intangible (i.e. scripless). This means there will always be value in a property, unlike shares which can crash to zero if the company goes bankrupt and needs to wind up. The value, however, is based upon independent valuations as well as last transacted prices, and can be unique to the area (location) and the tenure (whether freehold or leasehold). Another positive about properties is the ability to rent it out to earn rental yield. This is unlike shares in which the dividend yield is determined by the company and the economy at large. Of course, one can argue that tenants may be in short supply during periods of economic turmoil; and in extreme cases, rental income may also not be able to cover the monthly instalment payments assuming you had purchased close to the peak of the market cycle.

Interest Rates

Interest rates are an aspect which property investors have to keep a close eye on, and much research needs to be done to ensure you get a good loan package; otherwise you may bleed more cash than is necessary just to service the loan. For HDB, they offer concessionary loan rates of 2.6% per annum, which has been “fixed” for the last couple of years. Most banks offer 2-year fixed rates (lock-in period) and thereafter start floating the rate, using SIBOR as a guide. The idea is to get a low interest rate on your mortgage and then re-finance once the lock-in period is over. It may be useful to look for a mortgage broker who can offer their services to hunt for the best home loan package to suit your needs, rather than to do the tedious homework yourself.

The often talked about threshold for affordability is that the debt servicing ratio must NOT exceed 35% of your total income. This is defined as the monthly payment amount divided by your total gross income (per couple). An example would be a couple earning S$10,000 a month – they should not service debt which is higher than S$3,500 a month, including car loans and other loans as well. Interest rates are currently at multi-year lows which makes many loans appear “cheap”, but take note that when rates rise in the near future due to inflation the impact on instalments may be quite significant. Do factor in potential rate increases to budget and buffer against such events and to ensure one is adequately covered and that the debt servicing ratio remains below 35%.

Conclusion: The Property Cycle

To conclude, one must be able to read the property cycle very well, as I had mentioned earlier that property involves leverage; and is also illiquid. Thus, one would really look to “buy low, sell high” rather than “buy high, sell higher”, as the risks are a lot higher for property compared to equities due to the two reasons mentioned.

With housing prices hitting new all-time highs recently, for both HDB resale as well as private, to me at least, it does not seem like a good time to commit to an investment property, even if one has the cash.

I would like to hear readers’ views on the property market and property investing. Is this really the way to make “big money” in Singapore? Have there been any cases of “horror stories” that you had heard? I will be blogging more about property in the months to come, as I read more and digest the news bits.