Saturday, October 04, 2008

Property UP, Property DOWN....

13 months ago I received an unsolicited call from a property agent telling me that he had a buyer for my property at $XXX. He really got my heart pumping as I had no idea my property was worth so much. I was not too busy at that time so I invited him to my place for a discussion. When came over, he walked around my place and told me his best estimate for the property was now "$XXX-$100K". Yeah sure, I know all about property agents pushing selling price down and buying price up to close a deal. I told him frankly that I wasn't interested but the agent turned out to be a friendly feller with some smarts. He told me that volume had dried up and there was some expectation that prices would fall. Some of his clients who were old time speculators had gotten out in Jul 2007....he suggested that I consider renting out the place as the rental market was still strong at that time.

In Singapore, if you buy a piece of property at the wrong time, you end up with a decade or more of pain servicing the loan. We have these bubbles once every 10 years....1985, 1996, 1997. It takes about a decade to climb back to the old peaks. For all the young fellers who just join the workforce and planning to get married....its seems like HDB is best, start small and keep your obligations manageable. HDB is best....hmm....until you check the recent HDB prices. I heard that Pinnacle@Duxton is going for an eye-popping $645K. Young couples are complaining that even a 4 room flat costs $400-600K on the resale market. The average American home even after the massive property bubble cost US$238K (S$333K)....that is freehold, landed, with a garage.

In the 80s the govt liberalised the use of CPF for the purpose of buying private property. In 1993, they decide to have it further liberalised so that it can be used for HDB purchases. At the same time HDB allowed purchasers to borrow up to 80% (of market value) for resale flat. These policy moves to expand financing directed large amounts of CPF savings for the purchase of property. One of my relatives bought a property in 1969 and he told me this story about how he tie up the cash in bundles using a rubberband and paid in full to the developer for his landed property - a landed property cost something like $20K in those days. In 1980s, the Japanese banks created a 99-year mortgage loans so that the Japanese can pay for their property over 2 generations - boy did they have a big bubble then. In 2005, Americans banks expanded subprime mortgage landing which we now know what that led to. What I'm getting at with all these examples is that property bubbles and property prices is directly linked to how property is financed. How property is financed can lead to problems down the road...the price levels and swings are the result of changes in the way property is Jul 2005, MAS relaxed the financing of property even further leading to a 2 year surge in property prices - downpayment reduced to 10% . The end result of this boom bust cycle is a lot of pain that Singaporeans have to bear....however the boom bust is only one aspect of this issue. The large and more long term issue is high property prices have left many Singaporeans with insufficient to retire.

Consider this logic:
  • If CPF is not liberalised for the purchase of property, Singaporeans would have sufficient for retirement without CPF Life.
  • Since the mandate of HDB is to provide affordable housing, they have to price it at a level Singaporeans can afford without touching their CPF.

What about allowing only home loans that have to be repaid within 10-15 years instead of 30 years? That would allow Singaporeans to pay fully for their property within 10 years and start saving for their retirement after that. It will be a lot healthier if the price of HDB flats is link to rise in income level because that is the best measure of affordability rather that the market price...a market in which HDB itself is a participant. See the problem with these solutions is it does not maximise the revenue of Singapore Inc - the govt with HDB along with the banks are prime beneficiaries of high property prices - prices that Singaporeans have to spend a lifetime to pay longer and work harder for a roof over your head.


Anonymous said...

Dear Lucky,

Totally agree with you. The solutions proposed are not profitable for HDB,GIC and Temasek. Let the rich enjoy F1, let the dirt poor "enjoy" on MRT tracks.

Singaporeans are the true capitalist. Other developed free economies like Japan, S.korea, Taiwan, U.S and Europe can't hold a candle to Singapore.

Even in Japan, if you are retrenched, govt still give you money pegged to last pay as long as you show that you are looking for jobs. My japanese friend has gone back since. She was shocked to learn that there is no such help here.

An Australian trader I met that was invited by MAS, was surprised that there was no "Capital Gains Tax" for people who profit from trading. Instead we have GST, where the poor will feel the most pain since food & utilities takes up most of their wage.

I suspect most Singaporeans didn't even care about the CPF debate. A study by NUS economists brought up by NMP Siew Kum Hong: For 17 yrs, CPF failed to give compound returns after deducting inflation of 1.2%.

Singaporeans better wake up NOW!


Economist with a heart :)

Anonymous said...

Dear Lucky,

Thanks for putting this in perspective! Makes alot of sense - something which was obvious, but hard to articulate. But you nailed it.

Onlooker said...

What goes up must come down...
Law of gravity...
For those who plot the Up,up and away policy...
The down part is what they must worry the most....

Anonymous said...

Dear Lucky,

In the early 80, my Dad purchased a 4-room flat for $36K. He was working as a clerk, I don't how much he earns, but he is able to paid off the flat in 5-years time. The maximum number of (5)years all HDB owners must paid for the purchase.

Now, for a 4-room flat, it took some people more than 10-25years to paid it off. Hence, Our HDB flats are considered affordable as long anyone can paid it within 25-years.

I guess my Dad must be paying too much for the flat.

Anonymous said...

If we all had to repay our housing loans within 10-15 years, most of us would be cash-strapped during this period.

Prices of flats had spiralled to ridiculous levels, and most fresh grads start off with less then $3k per month salary.

yamizi said...


I think no one in the right mind would like to take up a 30-year housing loan. The very reason why people have to go for it is simply that the price is too steep!

The only solution to this problem is for the prices of house to dip which I think is near impossible in Singapore?

Anonymous said...

for all your smarts in economics, this is probably one of your most unintelligent piece.

but it's ok, we all get slammed now and then. lol

Anonymous said...

The only solution to this problem is for the prices of house to dip which I think is near impossible in Singapore?

I remember back in the 90s, the govt was proudly touting the Asset Enhancement Scheme along with Swiss standard of living. This is essentially allowing new HDBs to be priced at market rates, correspondingly unlocking citizens' CPF to be used for all kinds of investments. This injects liquidity into the market and fuels a bubble. This is all in the name of economic growth, as more economic activities took place. So savings level begin to drop and debt rises. However real income for the majority did not rise as fast, save for a lucky few. Eventually things got too hot, along came the Asian financial crisis, and a correction took place. The PAP has started something that they could not reverse. If HDB prices are to dip drastically many Sporeans with bank loans will be in trouble as banks rework outstanding loan liabilities based on decreased asset values. Eventually it will become a political issue. Currently allowing resident population on the island to keep rising is to maintain consumption in the absence of real or erratic growth. The F1 and IRs aims to create new growth areas. Ultimately whether they will deliver promised benefits is anyone's guess. And if benefits do not materialise as anticipated, a real correction will come. In a sense the economic planners operating on a top-down basis have run out of ideas and are at their last lap since biomed and life sciences did not bring anticipated results.

Anonymous said...

To make the housing affordable again, there are 2 option gov can do
1) lower the house price. But this will create a big mess for the current house owner, who might end up with negative equity. Thus, this is a big NO-NO.

2) Subsidy the first time buyer. This is done by gov currently. Increase the rebate to the first time buyer. This lower the purchasing cost of first time owner . This will keep housing "affordable" and at the same time high price.

To solve the retiring problem, reverse mortgage type of scheme has been introduced.

I can see in the future that gov policy will be biased to gradual increase in property price, increase in rebate for first timer and ramp up in reverse mortgage scheme to fund the retirement