Home loan cap insures against the unexpected

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#1
Tue, Nov 27, 2012
The Straits Times
Home loan cap insures against the unexpected

Rachel Chang

Link: http://business.asiaone.com/A1Business/P...86071.html

The restrictions on home loans are designed to making "holding" harder to prevent too many Singaporeans from being double-property owners. -ST

EYE ON SINGAPORE

THE new restrictions on the length and size of loans that homebuyers can take has put a dent in a fairly common Singaporean dream.

That is to own two (or more) properties - one to live in, the other from which to draw a passive stream of rental income.

This dream is fuelled, in the words of business manager Ho C. J., 39, by faith that the property market will continue on an upward trend, even if there are blips in between.

The father of one recently moved his family to a Marine Parade condominium, and is renting out their Simei flat to a foreign couple. In Singapore's property market, he declared, "if you can hold, you sure win".

Many agree. In 2010, the latest year for which figures are available, 38 per cent of those who took out a new home loan already had an existing home loan.

As a result of this behaviour, there are now 55,701 people with two or more home loans from banks, according to Credit Bureau Singapore (CBS). This is 12.5 per cent of all mortgage-holders, up from 9.7 per cent in 2007.

Of these 55,701 borrowers, one in five own an HDB flat.

The new restrictions on home loans, handed down by the Monetary Authority of Singapore (MAS) in October, are designed to making "holding" harder - and hence to prevent too many other Singaporeans from joining Mr Ho as a double-property owner.

This is because the regulator fears that many who aspire to the dream are simply dreaming too big.

In the current global environment of easy credit, nourished again last month by the US' latest round of quantitative easing, some may over-extend themselves and sink everything they have into a second or third property, contributing to property price inflation that will in turn give false confidence to the very same over-stretched investors.

A vicious cycle begins, and the correction, when it comes, will be brutal just like in 1997. Homebuyers who lived through that crash were underwater for a full decade until 2007. Better pre-emptively rain on the parade than risk having to prick a bubble, went the Government's reasoning.

MAS' brisk measures on Friday capped all home loans at 35 years. And if one wants to take a loan beyond 30 years, or which extends past retirement age of 65 years old, a substantial amount of cash would now be required.

If it is the first home loan, the buyer would have to put down a 40 per cent downpayment in cash, up from 20 per cent before. If it is his second or more loan, this would rise to 60 per cent, up from 40 per cent before.

To put things in perspective, if Mr Ho had bought his Marine Parade condominium now and not earlier, he can take only a 25-year loan, not a 30-year one, as this would extend past his retirement age. What this translates into is $551 more every month, said director of home loan comparisons website SmartLoans.sg Timothy Kua.

Or, he would have to stump up an extra $250,000 in cash for the downpayment to proceed with a 30-year loan. His double property dream, said Mr Ho, would have been dashed.

Little wonder, then, that there has been some grumbling among market watchers and prospective buyers that MAS has come down too hard.

Some point out that house prices are rising only at a moderate pace. In the third quarter of this year, the HDB's resale price index rose 2 per cent, while private property prices rose just 0.5 per cent. Other house-hunters like security company boss Paul Lim, 41, who has a condominium in Farrer Park and is looking out for a second property, argue that rental income from a second property is the most accessible option of financial comfort for the average Singaporean.

"We're planning for our 60s and 70s, we want to work but we don't want to slog for money. We want the passive income and property is the simplest thing for most people to understand," he said.

This is especially since there is a perceived lack of stable, alternative investment vehicles for the average Singaporean.

"People have tried other forms of investment like stocks, shares, gold, commodities," said Chesterton Suntec International research head Colin Tan.

"They probably got burnt. Or they felt that their heart cannot take the excitement."

Singapore's property market, on the other hand, is famed worldwide for its buoyancy, he noted. Those now shut out of it may feel that they have few other avenues for their cash.

Savills Singapore research head Alan Cheong pointed out that rental income from a second property is also a way for Singaporeans to profit from a sizeable foreigner contingent that has so inflamed passions elsewhere in society.

"Singaporeans benefit from renting out apartments to foreigners," he said. "To stop them from owning more than one property is to prevent them from reaping these gains."

The bigger these gains, the more politically unpopular will be any move to curtail them. But this is perhaps precisely the reason to do it.

The faith that the average Singaporean has in the property market is not necessarily misplaced, but it fails to take into account the fact that real estate has taken on a life of its own in a different direction from the real economy.

Tomorrow's flash estimates of third-quarter gross domestic product growth from the Ministry of Trade and Industry will probably show that the economy just narrowly avoided a technical recession - two consecutive quarters of contraction.

But even as growth weakens, the property market redoubles its surge - not just rising, but at a faster pace every quarter this year.

The HDB's resale price index grew at 0.6 per cent in the first three months of the year, then 1.3 per cent in the second quarter, and 2 per cent in the third.

Private property prices dipped 0.1 per cent in the first quarter, then rose 0.4 per cent in the second and 0.5 per cent in the third.

"Real estate should be derived demand from economic activity," said Mr Cheong. "But in Singapore, it seems like real estate is the demand that's powering the economy."

The cheap money sloshing around the region, left to its own devices, will only sharpen this disjointment as it inflates the value of all assets, said analysts.

How big the approaching iceberg is below the surface is best judged by the regulator with its macro view of the economy.

It may help in understanding MAS' perspective to note that any property market crash now could be several times more severe than the 1997 crisis in sheer scope.

Then, about 9,000 private properties were sold per year, with 25,000 units in the pipeline. Now, close to 20,000 properties are sold per year, with 86,000 units in the pipeline.

Seen in this light, what the regulator has done is perhaps not to take away the Singapore dream of owning more than one property, but to postpone it.

It has not made it impossible for Singaporeans to be landlords and enjoy their stream of passive rental income, but to make sure that they can financially survive any unexpected outcome of their investment.

In so doing, it also increases the likelihood that, for these dreamers that lead leveraged lives, the eventual correction will be just that - and not a crash.

rchang@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
This news is inline with what the government's thoughts at the moment. The property price is "almost a bubble".

Despite these warnings, it looks like the average Singaporean is still persistent that this time its different, and the correction will not come anytime soon.

I have spoken to some, and they believe that it will only come in 2014+. Even then, the price correction will only be minimal.
www.joetojones.com - Helping the average Joe find the winning companies to invest in.
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#3
I hope this time is different from the past crashes.

Prior years before the last property crash, man on the street also say that Singapore have limited land and property investment is a safe haven. Prices will not drop and appreciate if you are long term investor.

Signal from our government is very strong now, hope that if crash or correction in property will not be steep or else there will a lot of blood on the street and nobody will know what will be the next catalyst to have another property bull again.

The higher it climbs, the steeper it will fall. Law of gravity.
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#4
(01-12-2012, 10:35 AM)natnavi Wrote: I have spoken to some, and they believe that it will only come in 2014+. Even then, the price correction will only be minimal.
I think the crash will come when the global economy is doing well again resulting in inflation and interest rates going north. Right now its still quite a long way to go.
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#5
(01-12-2012, 10:43 PM)Bibi Wrote:
(01-12-2012, 10:35 AM)natnavi Wrote: I have spoken to some, and they believe that it will only come in 2014+. Even then, the price correction will only be minimal.
I think the crash will come when the global economy is doing well again resulting in inflation and interest rates going north. Right now its still quite a long way to go.

Agree that it would apply to those who won't be able to meet interest payments once they rise higher. I reckon another possibility is when another great recession beckons, and demand for rental housing drops, those who cannot make their monthly payments without rental income may suffer too if they can't secure/maintain rental income.
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#6
Amazingly I've spoken to some who don't believe property will ever crash. Similar to sentiments echoed here, they simply think it will be a "minor" correction, though no one an agree on the exact definition of "minor". Some reasons given:-

1) Interest rates should remain low indefinitely. Even if they rise, it will be gradual and everyone will have time to react as they had locked in their loans at fixed rates for 2-3 years.

2) The Government will NOT let the property market crash.

3) There is still ongoing healthy demand for property from expatriates and there are still a lot of foreigners who are coming into Singapore as per Government Policy.

4) Having property is a much "safer" asset as there will be long-term appreciation and a property can never go to zero, unlike investing in equities.

Recently, I was discussing this with my wife and her view is also that property is a rocket-fuel for gains, so her views echo that of the general population! My portfolio of pure equities (without investment property) does not sit well with her as she can see so many couples with kids owning an investment property, and she has the impression they will make significant gains in a few years + good rental income to boot (to rival my dividend income).

Of course, no one accounts for the leverage which acts as the rocket fuel. Or that property, once it corrects, has a much larger impact than a stock market correction simply because property is a leveraged investment and is closely tied to the banks (mortgage loans).

I would conclude sentiment is buoyant and some may even say bullish. I may even stretch it by saying some people are complacent about the risks and more and more seem to be jumping in without realizing the real risks. Cycles in property play a part, as do valuations (e.g. what is considered "cheap" in OCR region for a 99-year leasehold condo). People seem to be playing a game of "Follow the Leader".
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#7
No Government in right sense will allow property to crash. Is the crash that forced upon them. Smile

The interest rates will be crucial. In the event US up their Rates, must our banks and MAS follow ?

Just my Diary
corylogics.blogspot.com/


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#8
(02-12-2012, 09:20 AM)corydorus Wrote: No Government in right sense will allow property to crash. Is the crash that forced upon them. Smile

The interest rates will be crucial. In the event US up their Rates, must our banks and MAS follow ?

if I am not wrong, MAS does not actively print a large amount of SGD(but it does passively print a lot of SGD because of influx of USD/EURO/YEN..), as SGD can only circulate within Singapore, it causes serious inflation.

In the case of US up its interest rates, significant USD liquidity will be withdrawn from Singapore. It will cause tight SGD liquidity as SGD is sold to MAS(MAS will cancel them, they are out of monetary system) in exchange of USD. Supply and demand, tight SGD liquidity will up SGD interest rate automatically. In that case, will MAS print and print to ease SGD liquidity and let inflation shoot?

Then now the question is when US will up its interest rate. Though FED pegs its policy to unemployment rate, if significant return can be expected from the economy even if unemployment rate does not drop to the expected level, higher interest rate expectation will set in. FED has to up its interest rate, otherwise, inflation will rise higher and higher, it will run out of control. But it seems that there is not any particular industry leading US to higher return yet. FED is hoping to suppress long term interest rate to have something innovative out.
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#9
(02-12-2012, 03:56 AM)Musicwhiz Wrote: Amazingly I've spoken to some who don't believe property will ever crash. Similar to sentiments echoed here, they simply think it will be a "minor" correction, though no one an agree on the exact definition of "minor". Some reasons given:-

1) Interest rates should remain low indefinitely. Even if they rise, it will be gradual and everyone will have time to react as they had locked in their loans at fixed rates for 2-3 years.

2) The Government will NOT let the property market crash.

3) There is still ongoing healthy demand for property from expatriates and there are still a lot of foreigners who are coming into Singapore as per Government Policy.

4) Having property is a much "safer" asset as there will be long-term appreciation and a property can never go to zero, unlike investing in equities.

Recently, I was discussing this with my wife and her view is also that property is a rocket-fuel for gains, so her views echo that of the general population! My portfolio of pure equities (without investment property) does not sit well with her as she can see so many couples with kids owning an investment property, and she has the impression they will make significant gains in a few years + good rental income to boot (to rival my dividend income).

Of course, no one accounts for the leverage which acts as the rocket fuel. Or that property, once it corrects, has a much larger impact than a stock market correction simply because property is a leveraged investment and is closely tied to the banks (mortgage loans).

I would conclude sentiment is buoyant and some may even say bullish. I may even stretch it by saying some people are complacent about the risks and more and more seem to be jumping in without realizing the real risks. Cycles in property play a part, as do valuations (e.g. what is considered "cheap" in OCR region for a 99-year leasehold condo). People seem to be playing a game of "Follow the Leader".

What about those groups of people who do not need or use very little leverage? FTs, PRs, Locals, F-Investors. If you are one of those blessed with liquidity, so besides investing in Stock markets where are you going to invest next? And don't forget GOVs of US, Euro, ??? just can print money anytime. In fact, US has announced printing of money until she recovers her economy. And what's that? Does anyone knows?
No wonder one FH unit of 800-900 sq. ft. goes for > $1.xx million in district 15/16. if you bother to serve the net on property.
Be careful! Don't wake up one day and found you have been be short-change by the "Printing of Money." TongueBig Grin
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#10
Thanks for the details on money flows.

To continue, today manufacturers need to sell theirs goods in US Market and there will be kind of spiral (in the work for some time now) to entice sales without price increase in USD term therefore indirectly containing inflation in US which allow Uncle Sam in name to print.

I guess there will be a point the music has to stop. Question is in what form.

Just my Diary
corylogics.blogspot.com/


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