Averting a property bubble

[corydorus]

The key is when will people buckle. A 30 years loan reduce the probability. Basically i believe many people is very dependent on immediate income to service their loan.
Their saving is little. A sudden abrupt in cash flow can have large impact. As time gets longer, with growing income, the risk gets lower with higher saving.

[2V.]

With rising interest rate environment, the critical aspect will be the drastic changes in the valuation of the property. valuation may change so drastic due to dumping / selling pressure, the vicious cycle will result property burst...

E.g (1). Since most property owners already "Deep in the money". When rising interest rate happens, these property owners may sell it lower at "buyer prices" and property prices may dip lower and lower and lower, thus result in lower valuation in subsequent months.

E.g. (2) The buyers who got from Launch sale from developers may also experience "CASH top-up" scenario. Some banks check the property valuation again prior draw down of loan. If at that point of time the valuation has change, borrower need to topup the difference in CASH.

You cannot do refinance because its too late to process.

If you do not enough cash to topup, then it will result force selling...

So be selective which bank you seek property loan from

I did a quick calculation, a higher interest rate is unlikely to result in the bubble bursting. There maybe few who fallen behind but is just worth a newspaper read. Will need other factor which clips the cash flow such as recession that is serious enough to make people out of job.

[nsengkia]

Some caveats to note if you are purchasing the $1 M condo:

At lower interest rates the entire loan repayment can be serviced with on-going CPF contributions. At higher interest rate, cash is required to service the loan repayment.

Also at higher interest rates you will hit the housing withdrawal limit faster. In my experience, most people (including housing agents and bank loan officers) are not even aware (or maybe do not want to be aware ) that there is a CPF Housing Withdrawal Limit!

Also should you drain your CPF completely and hit the valuation limit, you will have to service your loan repayments with cash until you build up your CPF savings to half the prevailing minimum sum.

(see http://mycpf.cpf.gov.sg/CPF/my-cpf/buy-h...eaflet.htm for explanation of both of the above)

Finally, CPF contribution does drop with age and occasionally gets cut when Singapore goes into recession.

So as time gets longer, the risk may actually get higher as more and more CPF restrictions kick in.

[corydorus]

With rising interest rate environment, the critical aspect will be the drastic changes in the valuation of the property. valuation may change so drastic due to dumping / selling pressure, the vicious cycle will result property burst...

E.g (1). Since most property owners already "Deep in the money". When rising interest rate happens, these property owners may sell it lower at "buyer prices" and property prices may dip lower and lower and lower, thus result in lower valuation in subsequent months.

E.g. (2) The buyers who got from Launch sale from developers may also experience "CASH top-up" scenario. Some banks check the property valuation again prior draw down of loan. If at that point of time the valuation has change, borrower need to topup the difference in CASH.

You cannot do refinance because its too late to process.

If you do not enough cash to topup, then it will result force selling...

So be selective which bank you seek property loan from

I did a quick calculation, a higher interest rate is unlikely to result in the bubble bursting. There maybe few who fallen behind but is just worth a newspaper read. Will need other factor which clips the cash flow such as recession that is serious enough to make people out of job.

This was taken into account which is why i have simulate 5% Interest Rate impacts to the monthly payment. The increase is not astronomical. As mentioned some people may fall but generally people will do fine.

The game changer is when there is deep recession and loss of regular income for longer period of time. They will have problem even servicing the principal.

---

Some caveats to note if you are purchasing the $1 M condo:

At lower interest rates the entire loan repayment can be serviced with on-going CPF contributions. At higher interest rate, cash is required to service the loan repayment.

Also at higher interest rates you will hit the housing withdrawal limit faster. In my experience, most people (including housing agents and bank loan officers) are not even aware (or maybe do not want to be aware ) that there is a CPF Housing Withdrawal Limit!

Also should you drain your CPF completely and hit the valuation limit, you will have to service your loan repayments with cash until you build up your CPF savings to half the prevailing minimum sum.

(see http://mycpf.cpf.gov.sg/CPF/my-cpf/buy-h...eaflet.htm for explanation of both of the above)

Finally, CPF contribution does drop with age and occasionally gets cut when Singapore goes into recession.

So as time gets longer, the risk may actually get higher as more and more CPF restrictions kick in.

The scenario of hitting the VL may be remote if we believe long term, the property is up. Furthermore if we are just servicing one apartment, cash top up in later years is less difficult with growing salary.

Yes i believe a deep recession will change the housing climate. Especially those who has little saving.

[2V.]

Deep recession unlikely to happen for the next 5 years.

So assume price appreciate conservatively next 5 years to 20%, and recession cause price correction 20-30%. You still get 5 years free stay and enjoyment!...lol


[/quote]

The scenario of hitting the VL may be remote if we believe long term, the property is up. Furthermore if we are just servicing one apartment, cash top up in later years is less difficult with growing salary.

Yes i believe a deep recession will change the housing climate. Especially those who has little saving.
[/quote]

[specuvestor]

Again this thread shows so much skeptism on the govt ability to burst a bubble. IMHO that is untrue in the face of a DETERMINED policy maker. People are taunting or betting against the "house". The question is the "tipping point". When property markets start declining the psyche of the herd will suddenly change. We've seen it many times. Nobody knows when the tipping point will come, is it 7th or 17th measure, just like 1996 2nd board, dot com, US and China property speculation, etc. That's what we mean by playing with fire. You don't get burn immediately but eventually all bubbles burst, engineered or not.

What is tricky for Singapore govt is the same issue for China: hard or soft landing. A landing is not the question.

Been the biggest land owner of SG, most of us know that the Gov IS the house. I think many do see the determination of the Gov based on the terms of the latest cooling measures, but the legs of the bull - low interest rates and an almost-full employed population - are still lulling the bulls and sceptics (of whichever side) to remain on their side of their respective emotions.

The long term growth rate of an economy is ~5-10%. I am reckoning this should be the growth rate of our median incomes as well. The seeds of the crash, has been planted when property prices consistently exceeded median incomes' growth. So, yes, the question is 'when and how', and not 'will or not'.

Wheelock and OUE has voted on the 7th measure. When retail property buyers are still so bullish, the developers are turning bearish. Interesting times.

[Musicwhiz]

Hi guys,

I am no expert on property (I just post the articles hahaha), so perhaps I should ask - with so many developers dangling huge discounts (some of up to 24%) to buyers, how will property prices ever "cool off"? Buying interest will still flow through as a result of the costs being absorbed by the developer.

And if the absolute price of the condo/property is lower, the upfront cash payment may also not be prohibitive enough a measure to dampen demand and dissuade people from taking the plunge, notwithstanding the issue of super-low interest rates persisting!

Thanks!

[specuvestor]

I quote myself: "When property markets start declining the psyche of the herd will suddenly change". This is irrespective of purchasing power due to low interest rate or income growth, though they are fundamental anchors in a long term NORMAL projection.

Will the primary market price decline hurt the secondary market? Or conversely did the primary market prices move the secondary prices in the first place?

The developers are willing to "transfer wealth" and cut margins to move inventories to the enthusiastic buyers. That tells us something about how well they think their cakes will sell in the midst of 200k cakes. Time will tell who is right.

[Muck]

Thanks for sharing Cory.

I was just computing from my today blogging and realized that the damage is not that bad.

Do your own sum as i am not an expert but just sharing my thought.

Cory Blog on Interest Rates on Housing

Using an example of 1M condo so a HDB impact should be much smaller.

At 1.5% rate, monthly payment : $3,860
At 3% rate, monthly payment : $4,437 (up 14.9%)
At 5% rate, monthly payment : $5,280 (up 32%)


Cory

[cfa]

In FM 93.8 yesterday by K Desuosa , guest of the speaker was Mano Sabmani. Mano's advice was ' avoid property all the way ', he said we are at the verge of big correction on price.