Why We Should Not Buy Private Property Yet

Photo: Free Images

This article is republished with permission from DollarsAndSense.

Recently, Urban Redevelopment Authority (URA) released 1Q2016 statistics showing clearly that our property market is still weak with potential for further price correction, in the consumer’s favour.

The prolonged price struggle between property developers and consumers has occurred since the introduction of the total debt servicing ratio (TDSR) and developers are growing weary, as the end does not seem to be anywhere near (kudos to the government).

New private property launches have reached an all-time low since 2011 at only 953 units with take up rates nearing its lowest point too in 1Q2016. Looks like property developers are also feeling the pinch despite their strong balance sheet.

Brand new finance minister Heng Swee Keat laid the “smack down” in the faces of property developers when he said that it is premature to remove the cooling measures given current market conditions. If we have to pick two key cooling measures, it would be the TDSR and the Additional Buyer Stamp Duty (ABSD).

A quick summary of what TDSR does. It basically means that we cannot purchase anything else on credit if our repayment per month exceeds 60%. For example, if home monthly mortgage is $2,000, credit card bills averages $500/month and car monthly repayment is $1,000, it sums up to $3,500/month. This means that we must at least earn $5,833.33. So even if we have the extra $2,333.33, we still cannot borrow more money to purchase another property.

ABSD simply means, the more properties we buy, and the more we will be taxed. Our first property will be taxed at 1% for the first $180,000, 2% for the next $180,000 and 3% for the remainder.

Our second property will have an additional stamp duty of 7%, with the third and more being taxed at 10% extra. Imagine buying a few $1 million condominiums and get taxed $100,000 per transaction.

Since these two cooling measures will not be removed or reduce its severity, our property market is not expected to rebound from its downward cycle. In fact, it will continue to dampen property appetite with prices continue to dip.

As of 1Q2016, there were 24,919 vacant private residential properties while available properties have soared to 330,303.

Compare this to pre-cooling measure period at end-2012, with 15,980 vacant and 268,768 available.

This means that we have more choices to choose from and should therefore take our own sweet time. For once, we can be picky and demanding without feeling the urge that someone else will outpace us in grabbing that dream property of ours.

Interest rates and property owners have a love hate relationship. The lower it goes, the happier property owners will be for two reasons, (1) lower interest rate = higher theoretical property value and (2) lesser monthly mortgage payments.

However, since 2015, we have been hearing from the Federal Reserve (Fed) of the United States, that their benchmark interest rate is expected to increase in 2016. Upon the release of that information, we have witness our Singapore Interbank Offered Rate (SIBOR) increasing to as high as 4x from its lowest point.

If you intend to purchase a property soon, you may want to plan ahead of an impending interest rate hike. This will definitely create a larger dent in your disposable income, as a larger portion of your salary will be used to pay down your mortgage.

With higher interest rates, we are expecting property prices to continue falling to compensate for the potential increase in interest burden of mortgage payers.

The United States and most Asian countries have recovered very well from the Global Financial Crisis of 2008/2009. It is this largely fueled by supranational support (e.g. IMF) and global governments coming together to inject steroids to stop a depression from happening.

This steroid is called credit. Just looking at China’s balance sheet, we know that these steroids cannot be injected indefinitely. Structural reforms are painful and a drag to the economy, but it’s a path that these big economies must take.

As a small nation, we get shoveled into these big boys’ game of Russian roulette without volunteering to be part of it. Other than importing foreign talent, we have also imported the global slowdown. This can be seen from an uptick in retrenchment and slower rate of job placement.

These are all instrumental to property prices, as people spend lesser during slowdowns. Therefore property prices again are expected to drop further.