Just to recap, in my previous post, I discussed the risk of additional cooling measures for the property market, which I think is low due to the demography of the people who are actually pushing up the housing prices here. In this post, I shall discuss leverage and interest rate risk.
Risk 2: Risk of US-style housing defaults due to falling prices
A primary cause of the housing crisis in the US is the high leverage that homeowners there have on their property. Leverage means the use of loans to finance purchases of assets. Leverage is good in the sense that you’re using OPM (Other People’s Money) to buy your property, which can significantly increase your return on capital. It also allows you to borrow money cheaply against your home’s equity. However, using loans requires you to pledge your property to the bank as collateral, and in the event that market value falls way below the loan amount, then the bank has the right to ask you to pay down a portion of your outstanding loan. If you were not able to comply, the bank has the right to take over your property and sell it in the market to recover their loan. Although you will get any excess after the bank and CPF board are paid, the amount is typically very little, if any, since this usually happens at the worst time when the market is down. Buyers of such properties are looking to buy at fire-sale prices, and the bank’s main concern is to cover their loan, rather than to try to get a good price for the property, so transaction prices tend to be low. Continue reading “Is the Singapore Property Market in Trouble? Part 2”→
Recently, I’ve been hearing a lot of speculation in the newspapers, blogs and forums about new cooling measures for the property market and how domestic lending has gone through the roof and may precipitate in property crash etc. The common thread in all the rumours and commentaries is that the property sector is not going to be good. I’d like to list out some of these topics to just discuss how bad the situation is, or if the speculation is unfounded.
It looks like it’s going to be quite a long discussion, so I’m going to break it up into a few posts to make it more readable.
Risk 1: More cooling measures
With housing prices continuing to rise, are we going to need new property market cooling measures? Before I try to answer that, here is a quick overview of the 5 rounds of property market cooling measures that the government has already implemented over the last few years:
Have a read of the article out today in The Straits Times.
In a nutshell, for someone interested in property as an investment, there are 3 main takeaways:
1. Rentals are seasonal. If you’re planning to rent your property out to expats, April and May (or more accurately the couple of months after that) are crucial months;
2. The rental market is still firm for now. However, there seems to be somewhat of a temporary bootstrapping effect, with rents supporting prices and prices supporting rents; and perhaps most importantly
3. Expat packages are waning. Increasingly, expats are now being localised with little or no housing allowances.
You’ll have to draw your own conclusions about what this means for you, but this information certainly helps to steer my investment decisions…
I used to like the idea of holding on to properties forever to collect rent, but my view has changed recently. The main reason is that while collecting rent every month and seeing my bank account inflate is lots of fun, it’s also taxable at my income tax rate. In contrast, capital gains in this country is tax-free, and who’s to say seeing a lump sum in the bank is any less fun?
Some may protest that they may not be able to find a replacement investment to put their money in, and with inflation numbers running up and interest rates so low, they’re losing money by the day. I would argue that there are ALWAYS under-valued properties for sale, but you have to find them and they must fit your profile. Some are hard to find, while others may not fit your criteria or budget. You just have to do your homework, or get a good agent to do it for you.
A lot of people spend a lot of time researching when they are buying an investment property, but neglect to think as hard about selling it. Perhaps they wanted to keep it forever for rental income like I did, or they think that they would just think about it when the time comes. However, when the time comes, owners tend to over-estimate the value of their property, which leads to the situation where they are always asking for above-market prices which don’t get done. Owners are left holding on to property which may be growing in value but the value is not easily realisable.
Therefore, I argue that there is a need to think about your exit strategy. As an example, when I am deciding whether to sell a property, I make my judgement based on certain criteria:
Many a time, the layperson investor will take the annual rent collected, divide that by the price that he bought his property, and consider that percentage as his rental yield. Or even worse, there’ll be a few that take their monthly rental minus their monthly loan installments and consider the net cash flow as their rental yield.
As I said in my post on freehold property investments, maintaining a healthy cash flow is a key determinant in your success as a property investor, but it’s important to recognize that monthly installments are part interest and part principal-repayment. To accurately compare property yield to alternative investment yields, you should actually take the total rental income, minus taxes, maintenance fees, annual mortgage interest along with any other costs associated with owning the property, then divide that figure by the total cash downpayment and any related costs rather than by the purchase price.