Market naysayers claim that cheap financing has resulted in hot money, which has in turn created an unsustainable property bubble. While I constantly remind young, first-time home buyers not to overstretch their budgets by projecting affordability on the basis on today’s abnormally low interest rates, the continued upward march of property prices here was certainly not due to low interest rates alone. In any case, with the various phases of loan-to-value and loan tenure restrictions introduced since February 2010, the capacity for interest rates to create heat in the property investment market has been brought down to a minimum. (After the latest cooling measures in January 2013, the maximum loan-to-value in certain situations is a mere 20%.)
And so, when a property agent friend recently asked me for my opinion on whether she should advise her home-buyer client to “wait for property prices to drop”, I responded with a question in kind, “how long can she wait?” If you ask me for my honest opinion, today’s market is indeed a challenging one for buyers seeking an investment unit in the residential sector, and it takes a sharp eye to spot a gem worth surmounting the ABSD payable (there ARE such gems out there, I can personally vouch for that!). However, for those without a home to their names hoping to eventually get out of the rental cycle, I silently worry when they confide that they are waiting for prices to drop. (I stay silent in such cases, as my policy is never to give unsolicited advice, the opinions shared on this blog are for you to consider only if you choose to.)
Besides the fact that they are betting the roof over their heads on an event of uncertain magnitude and indefinite time line, very often the turning-point they have in mind may in fact work to their disadvantage if and when it actually occurs. Let me just run through the two situations commonly cited by those hoping to pick up homes during a property crash:-
Interest Rates Rising:
Some home seekers are waiting for rising interest rates to spark a housing market crash. While I certainly agree that interest rates will eventually rise, let’s not forget the reason for them being so low in the first place. The Feds have committed to keeping interest rates low until the US unemployment rates dip to at least 6.0-6.5%, in a bid to boost their flailing economy. What does this mean? That when they do decide to jack up rates, it will be because their economy is back on track and market sentiment has improved. Would an improved global market outlook help with bringing home prices in Singapore down? I doubt it.
Next let’s consider how the recent increase in local mortgage rates affects the housing resale market. The interest rate payable by a home owner here is based on a moving rate (SIBOR is the most commonly used one at present) plus a fixed margin (determined at the onset of taking up the loan). So a home buyer may, for example, take up a loan that charges him a margin of 0.75% per annum above SIBOR for the first 3 years, and 1.25% per annum above SIBOR in each subsequent year. In a bid to improve profitability, several banks have in recent months moved to increase the fixed margin they charge new mortgagors over and above SIBOR. So while we managed to secure a SIBOR + 0.7% loan package in mid-2012, we would probably be offered a package of around SIBOR + 1.15% if we sought to refinance the loan today. While the hike in rates does little to dampen first-time buyers’ demand, it could actually cause existing home owners to reconsider their upgrading plans, since their subsequent replacement home would likely attract mortgage rates at least 25 to 35 basis points higher than what they pay on older loan packages pegged to lower fixed margins. This in turn reduces the stock of resale units available to home seekers – not the best environment for home shopping.
Huge housing supplies scheduled for completion:
Firstly, the pipeline of private housing projects due over the next 4 years is competing with record numbers of public housing and infrastructure projects for both building materials and a tight foreign worker market, housing prices would tend to move in tandem with escalating construction and manpower costs.
Secondly, as I’ve highlighted before, developer companies aim to achieve profitable returns for shareholders. If there are serious signs that home prices must drop, they must and will source for other ways to reduce costs. There’s a reason why projects completed during times of economic crisis tend to have less impressive finishings than those completed during times of strong growth. There’s a wide spectrum of grades for marble floor tiles and wood parquet, a China-made glass window pane may look identical to an Australia-imported, shatter-resistant pane yet cost just a quarter of the price. Do you really want to be buying a new home when developers are at the point of slashing prices?
And finally, thanks to the 7 rounds of extensive cooling measures, there is a huge arsenal of tools available to the Government in the event that the market were to start showing signs of collapse: reduce ABSD, completely scrap ABSD, reduce/remove restrictions placed on loan-to-value and loan tenure. It doesn’t take much imagination to think, if this is how our property market performs under such draconian restrictions, what would happen if such restrictions were to be completely removed.