Mortgage serviceability: Reality versus Fantasy...

The following article contributed by Mr. Kuo How Nam appeared in the Forum page of our de facto English newspaper today.

Borrowers need reality check

THE key element determining a person's ability to pay his mortgage is income, whether it is from employment or from rent ("One in 10 borrowers overstretched, warns MAS"; Wednesday).

Rising interest rates can be managed if there is sufficient income, and if it grows in tandem with the rate increases.

Trouble begins if this does not happen. All it takes is for one spouse to be retrenched, or go through a period of unemployment, to spark a financial crisis in the household.

The same happens if properties are unoccupied or if rents do not cover mortgage payments.

There has not been much discussion on expected rental trends. This is an important element in determining debt-paying ability, as many people have bought additional properties on the assumption that the promised rental yields are better than the returns from alternative investments.

In many cases, they will be totally reliant on rental income for mortgage payments.

But we know that there is a huge supply of completed units coming on-stream in the next couple of years. Many are in the outlying areas, and several are shoebox units or tiny apartments.

These new locations and designs are, so far, untested in the rental market. There is the real possibility, particularly with slower growth in the labour force, that these new units will go unoccupied when they are completed.

Owners will be hard-pressed to meet their payments if this happens.

Property owners need to do a reality check and evaluate their vulnerabilities in the face of such uncertainties. They need to assess their employment and job security.

Nothing is worse than being unemployed and having outstanding mortgage loans.

They need to think of alternative scenarios, such as whether they can rent out their properties, the expected interest rate increases and how these will affect their cash flow.

Lastly, they must look at what cash reserves and resources they have available to ride out a rough patch that can last several years.

If necessary, they should lighten their debts, perhaps even taking a manageable loss now as a preventive step.

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There has been increasing sound bites recently from both government and financial institutions about rising interest rates and how this may affect homeowners with huge mortgages. This raises concerns that the low borrowing rate environment that we have grown so accustomed to for so long may be under threat.

The property buying euphoria has grown from strength to strength over the past 5 or so years, despite seven rounds of cooling measures. However, the latest (8th) sets of cooling measures may have bruised (the wife and I wouldn't exactly say "broken"...yet) the camel's back finally.

While it is natural for people to want to "get in" on a bull market, many have either failed or refused to acknowledge the fact that the property market actually go in cycles and those who are over-committed or highly-leveraged will be in trouble once the market starts to turn. One does not even have to be retrenched to spike a financial crisis at home - a combination of falling prices/rental returns and interest rate spike is sufficient to cause many sleepless nights (trust us, we have been on that road before). This is made worse if you have more than 1 mortgage to service.

Many will pour scorn on our cautionary tale even as recent as last quarter of this year, but the scenario doesn't seem as far-fetched today, given the double-whammy of a huge influx of new "for investment" apartments that are steadily coming on-stream and a much poorer rental climate.

There is this other thing that the wife and I cannot quite comprehend: whenever we spoke with people who need to "downgrade" from their current apartment due to financial constraints, the common notion is that they will be selling at a "loss" if the price they fetch is less than the price that they have bought the property for, say, 5 years ago. Few (actually NOBODY, that we have dealt with on the subject so far) will take into consideration the opportunity cost of occupancy - everyone expects to stay in their apartment "rent-free" and then made a killing off it when they want to sell. The usual "justification" is that if they cannot sell the apartment for higher than what they bought it for, they will be out of pocket and that makes any replacement purchase an even bigger challenge. We reckon this is the main reason for the big price gap seen buyers and sellers, especially during a bull market. But if the market is indeed turning, maybe sensibility will finally prevail and such disparity should become smaller? The wife and I certainly hope so.....

Foreign buyers getting cold feet..?

New private homes sales up 5.4% in May!

Sales of new private homes, excluding executive condominiums, climbed 5.4% to 1,455 units in May.

This is compared to 1,380 new homes sold in April 2013, according to figures released by the Urban Redevelopment Authority (URA).

The number of new private homes sold in the city fringes jumped by about 27% from 473 units in April to 602 units in May.

This was mostly due to new project launches in the area.

However, sales of new private homes in the city area dropped to 125 units in May, compared to 178 units in the previous month.

Meanwhile, new private home sales in the suburbs contributed to slightly under half of the sales volume in May.

The take-up rate for new homes remained stable at 728 units in May compared to April's 729 units.

Source: Channel News Asia

Private resale dips in May!

Prices of resale private homes softened in May as the government's cooling measures continued to dampen the market.

Non-landed private residential units showed an overall price drop of 0.5% in May compared to April, according to data from major property agencies compiled by the Singapore Real Estate Exchange (SRX).

Prices of resale non-landed private homes in the city area dropped 0.5% over the previous month while those in the city fringes declined 0.4%.

However, prices of resale suburban private homes remained resilient, reporting a 0.3% increase.

The SRX projected the final volume figure in May to be around 750 units, which would exceed the 671 units sold in April. This would still represent a 40% drop from the same period last year. There were 1,292 non-landed resale cases in May 2012.

Orange Tee's Head of Research & Consultancy Christine Li said the stand-off in the resale market could be due to the mismatch in expectations between buyers and sellers, who are still reluctant to reduce asking prices amid record property prices.

As a result, buyers prefer to buy directly from developers who are offering discounts and incentives.

Meanwhile, overall rental prices for non-landed private residential in May slipped 0.6% from April, marking a fourth consecutive monthly drop in overall rents.

Ms Li expects rentals to slide further in the upcoming months, given the strong pipeline of new private homes slated for completion this year.

Source: Channel News Asia

First it was sub-sale, now both resale and rental continue to soften. Are we finally heading down the "cannot sell cannot rent" road..?

End of the road for "Specuvestors"..?

The level of speculative activities in the private residential market in Singapore has dropped substantially in the past few years.

Sub-sales of private residential properties hit a six-year low of 4.5% in the first quarter of 2013, according to data from the Urban Redevelopment Authority.

Analysts said sub-sales - which refer to the resale of uncompleted units - should continue to trend down in the next year.

In the past, some investors have been able to make a quick buck by flipping private residential properties.

But it has been a lot less profitable to do so after the government introduced the Seller's Stamp Duty in 2010.

It later increased the sales tax and holding period for properties in 2011.

The moves have helped bring down sub-sales, an indicator of speculative activity, over the last three years.

Nicholas Mak, executive director of SLP International Property Consultants, said: "The number of speculative sales as a percentage of total number of sales has dropped to about the same level as 2006.

"We are seeing one of the lowest levels, you can almost say that speculation has gone to such a low level it is no longer a problem."

From 14 January 2011, buyers who sold properties within four years of their acquisition will have to pay a tiered sales tax, with a hefty 16% levy imposed on those sold in the first year and 12% in the second year.

Units re-sold in the third and fourth year will have a Seller's Stamp Duty of 8% and 4% respectively.

Alan Cheong, research head at Savills Singapore, said: "People are not going to pay 16%; even if you make 20%, they are not going to say I am content with a 4% gain, and lose 16% in terms of a Seller's Stamp Duty. That will be a big turnoff for people thinking of sub-selling."

Mr Cheong said the sub-sales segment is also losing steam because many home hunters prefer buying new units from developers at project launches.

With these measures, analysts said the average holding period of private homes has increased from six years to 10 years in the last few years.

Ku Swee Yong, CEO of International Property Advisor, said: "Speculative activities are still around, but they are outside of the residential segment now. So (this is) good news for the residential segment; it means that we can expect more price stability and less speculative activity that might bring risk to the rest of the market.

"Less speculative activity means that there are fewer investors who are stretching themselves."

Going forward, analysts believe the sub-sales number should remain fairly low, unless there is a severe economic downturn forcing owners to sell, or if home prices run up substantially and home owners could still make a decent profit after accounting for the Seller's Stamp Duty.

Source: Channel News Asia