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New Property Loan Measures To Curb Buying Beyond Your Means
A new set of measures on property loans will be effective from Saturday 29 June 2013. A summary of these new rules is listed at the end of this article.
If there is a crowd that is cheering these new measures, I will be one of them. Not because the measures will be effective in halting buyers from buying beyond their means, but because the authorities are recognizing that this is something which has to be addressed. Too many people are buying more properties that they can reasonably afford because of the property gold rush, and there is little protection for these investors when something as basic as an interest rate hike can take them to the cleaners. It becomes more alarming when instead of looking at these condominiums as a long term property investment, a lot of buyers are looking at these “investments” like a product where they buy at cost and sell at a profit.
Why this can be a dangerous way to play the game is this. What will happen to you if interest rates spike suddenly before you even get into the time frame where you planned to sell? You might say that you will quickly cut your losses and sell immediately. But what if there are hundreds or thousands of people in a situation where their income is unable to service their mortgages? A small problem can quickly compound to a state of panic within a matter of days. Years of capital growth can be wiped out in a matter of days when the market sneezes. Just ask the stock market.
“Gurus” and “Trainers” will advice you how to own 2 private properties with no down payment. But they don’t train you how to pay the bank when you have no money because you have overleveraged yourself by following their advice. By that time, they will probably show you their disclaimers anyway.
Lately, the measures appear to target the financing sector. Calling easy access to cheap money as the underlying reason for rising prices is a fair assessment. But in my opinion, Another big issue with the property market in Singapore is how properties are valued. Buyers and sellers are not questioning the values of properties enough. We have somehow accepted that values are exactly what they are. The only thing that we tend to question is how much below or above the valuation to transact at.
Let’s just take an example. If a new launch condominium is priced at $1500psf in a neighbouhood with an average price of $1000psf, questions should be asked on how this can be so. Sellers will have the right to price them at whatever they want, but when valuers value these properties according to the seller’s price, it gets puzzling. The property is yet to be build and is very much just an empty space in the sky. How do you do a proper appraisal on the property when it does not exist? Based on a brochure? Perhaps a test can be carried out where valuers give a more prudent and lower valuation of properties compared to what they are priced at. Will sellers still sell at astronomical prices?
A reason why buyers are willing to pay sky high prices for new properties is that they are confident that they will be able to get a loan to value percentage of their purchase price. It is a little ridiculous to assume that the property you buy has the exact same valuation as the purchase price don’t you think? It gets more puzzling that the prices for new launches are actually “discounted”. So if you obtained a 20% discount on a $1m property, you will end up paying $800k. In this instance, is the value of the property $1m or $800k? I can tell you that the loan to value will be based on $800k. This means that the value of a property drops by 20% once a discount is given? If you have experience dealing with completed properties, you will know that property valuations are not as simple as that.
If every positive event is used as a justified reason to raise prices, then every negative event should also be used to decrease prices. Just like there is no good unless evil exist. If proximity to an MRT station is reason enough to sell at high prices, then a window view that includes a rubbish point should be reason enough to devalue a property. Sellers can raise their prices however they like. But when valuations follow these price quotes like a shadow, some clarity has to be given on what is happening. If you buy a KIA Picanto at $200k, I don’t know how a bank can give you a loan based on that purchase price.
To link valuations to leverage, you will see that if valuers value properties (whether uncompleted or completed and public or private) at astronomical prices, banks will give out loans based on these valuations. The result is that people are borrowing more money and highly leveraging themselves.
Key points of new rulings on property loans:
- Total debt servicing ratio (TDSR) cannot exceed 60%
- TDSR framework to take into account borrowers’ other debt commitments
- TDSR should be applied to gross monthly income on a consistent basis
- It will apply to purchases and refinancing
- Borrowers of loans are to become mortgagers as well
- Variable income like bonuses to be discounted by at least 30%
- New loan repayments to calculate using medium term interest rate 3.5%
- Income-weighted average age to be used to determine loan tenor eligible