Ever since the CPFB introduced a colorful pie chart of our CPF savings a few years ago, I would look forward to mine every year like a teena...
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UPDATE (December 2016): I sounded the alarm 4 years ago.
"Many who bought their properties three to four years ago are settling for rents that don't cover their mortgage payment..." Mortgagee listings this year expected to reach or surpass the 237 recorded in 2015, which exceeded the 236 in 2008 during the global financial crisis. A mortgagee's sale occurs when an owner defaults on the mortgage. Source: http://www.straitstimes.com/business/property/more-properties-could-be-up-for-auction-if-interest-rates-bite (8 Dec 16) -----------------------------------------------------------------------------
8 March 2012 Today, I stumbled upon an interesting if disturbing bit of information. "Online loan" is the hottest in a list of keywords being searched for in Yahoo Singapore! For whatever reasons, Singaporeans are leveraging up or looking to it, it seems.
With the economy almost at full employment, it is harder to imagine people borrowing because they are in dire straits. Then why? They could be borrowing to fund purchases of consumption goods or to put into investments.
I also continue to read articles and see advertisements telling people how they could own real estate with little or no cash. How is this possible?
The low interest rate environment is here to stay for the next couple of years, with what is happening in the USA, Eurozone and Japan. As Dr. Marc Faber said, a low interest rate environment encourages people to take risks. Is this a bad thing?
I have been told by many that a judicious amount of leveraging could magnify the returns from my investments. So, with zero gearing in my personal balance sheet now, am I a stick in the mud when it comes to leveraging?
I do understand the benefits of leveraging and, indeed, without it, I would not have been able to make money from real estate investments. However, I would leverage sparingly and would try not to take the biggest possible loan or the longest repayment period, given a choice.
On the other hand, savvy investors who know how to exploit low interest rates would probably benefit a lot more. The fear is always in overdoing it. Overdoing it? Yes, too much of a good thing is probably bad. I am talking about overleveraging, of course.
A simple understanding of overleveraging is a situation when people are borrowing money, hoping to make money but do not have enough capital assets to cover any likely future losses.
The Singapore government is prudent in capping the loan to value limit at 60% for a second mortgage. In the event of a crash in the property market, it is unlikely that property values would decline by more than 40%.
However, some people have purportedly found ways of going around this ruling. Indeed, from their claims, they have probably found ways around any ruling. If we were to do a search online, we would find websites and blogs with such claims. To find out more, however, we would have to pay to attend related seminars.
I would caution that there are reasons for why the cooling measures are here. Whether the reasons are good or not would depend on where we stand.
However, it is obvious to me that the government is sending a clear message that they want property prices in Singapore to lower in the next couple of years, not that they need to do much more to achieve this.
Given the rising vacancy and lowering rentals in the last few months, how would things look when record numbers of condominums are completed over the next few years?
Over the next 2-3 years, supply of completed new units is set to surge as the government’s current efforts to address the undersupplied HDB and DBSS markets bear fruit and as the bumper supply of land parcels for private housing in the government land sale programme is developed. We estimate that an average of 33,434 units of housing could enter into the market annually between 2012-2015 or 3.5x the average over 2004-2010. This compares with an average household formation of 18,000-26,000 over the past few years.
The current low interest rate environment and low vacancy levels are supportive of rents and the positive rental carry makes property investments attractive. However, with the large incoming supply over the next 2-3 years, vacancy rates are expected to trend up and this would exert pressure on rents and yields, resulting in a drag on prices.
Source: DBS Vickers.
Betting against the government and basic principles of economics, buying more investment properties now, does not seem like a savvy thing to do. Overleveraging would make this worse.
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