Tan Kin Lian's Blog: Escalating property prices

Monday, April 12, 2010

Escalating property prices

The root cause is the low interest rate. It gave the impression that the high property prices are still affordable. At an interest rate of 2% on a property of $500,000 payable over 30 years, the monthly installment looks affordable at $1,966 a month. If interest rate increases to 5%, which is a more realistic level, the monthly installment increases by 31% to $2,581. Many people cannot afford this type of increase on a tight budget. But, it will come. Low interest rate cannot continue forever.

Look at it from another angle. The property prices should have been 30% lower, to be realistic based on the affordability of the population. During a period of low interest rate, the property developers increase the price and their marketing approach was to convince the buyer that it is affordable. It took a while for the buyers to buy into this thinking. The foreign buyers enter into the picture and started to move the property market.

This is followed by the speculators who see the chance to make a big profit. They buy the properties at the prevailing prices and expect to make a big profit by flipping over the properties on resale. Their demand pushes up the price. More people jump into the fray. This is called the "greed" factor.

The next batch of buyers are from the genuine end users who buy the prices at inflated value because they were afraid that they would increase further and be out of their financial reach. They jumped in and accept the high prices. This is called the "fear" factor. This is how the low interest rate could increase the property prices by 30%.

The next level of increase comes from stretching the repayment period from the prudent level of 20 years to a more risky level of 30 years. It accounts for another 23% of increase. So, it is possible for the property prices to be 60% higher than the affordable level. The high property prices mean that most households are spending too much of their money on their homes, leaving less money for other types of spending and for their retirement.

Are high property prices sustainable? Just look at what happened to Japan 20 years ago. The crash of the property market put the economy in the doldrums for 20 years. Look at what is happening in America and UK today. They will suffer the same fate. Do you think that Singapore will be any diffferent?

Tan Kin Lian

13 comments:

Anonymous said...: The Government is quite happy to let the property price going up as majority Singaporean is property owner. Who benefit from it also? Who is the biggest land owner? There are other problems as well:-
social problem related to high property price, affordabilty, cost of living, competitiveness etc. Who is the real culprit to push up the property price?; April 12, 2010 8:28 AM
Anonymous said...: We should not compare Singapore to what happened in 'big land area countries' like USA or UK. We can only compare Singapore to 'small compact cities' that experience consistent economic growth, such as Shanghai, Hong Kong, Mumbai, New York.

Do not underestimate the importance of 'limited compact size' factor.

It will be hard for the property market to 'crash' if the Singapore government track and monitor the supply and demand situation closely. PC; April 12, 2010 8:36 AM
Anonymous said...: A relative of mine sold his little 4 room hdb flat in Holland Crescent at 655k some months ago. It is not a new flat at all but some folks are willing to part more than half a mil for such a small flat.
There is simply no logic in housing market.; April 12, 2010 8:42 AM
Anonymous said...: Come as early as 2H10 the stimulus measures will be rolled back. Both the stock market and property market will be primed for a correction.; April 12, 2010 9:40 AM
optimist said...: There will be no sudden correction.

The administrators are too aware of such an effect. The property market will be tweaked with measures that will allow a slow deceleration.

Some examples are:
A)return an extra 15% of the gains (on top of the original price ) to the CPF.

B)a lock-in period to disallow a resale.

These tools will not affect interest rates which are kept low in tandem with world efforts to avoid total collapse of world economy.

Yes, at some point in time, interest rates will rise: the question in when and how much?

I speculate that Fed interest rates will rise very marginally at 0.25%
and earliest next year 1st half.
Even then, not all countries will raise it at the same time.
In Singapore, I do not think MAS will raise at all. Our economy is too open and sensitive to sudden moves. After all.. elections are due.

Already, with the Thai political problems, hot money will flow into our stock market and all will be rosy for at least another 2 years.

There will not be any crash.; April 12, 2010 11:15 AM
jamesneo said...: Hi Mr Tan dunno if it is my browser but there is a mistake " payable over 390 years" should be "payable over 30 years" right?

When the Shanghai and Hong Kong property market burst due in part to the ending of the easy money from the stimulus, then next will be Singapore.

The news have already reported that some of the speculators have started to shift from the china market to Singapore and trying to probe up the market especially the private market which is not in control by the government as much. But they will come in droves once the Shanghai and Hong Kong property market burst.; April 12, 2010 11:20 AM
Anonymous said...: $655K for a 4 rm HDB flat?

The seller can now buy a 1500 sq ft HDB Exec flat at Bedok and still has more than $150K spare change, if his 4 rm bought much cheaper earlier had been fully paid up.

Fantastic isn't it?; April 12, 2010 11:36 AM
michael13 said...: In my personal humble opinion, the property market in Singapore is not likely to crash at least for this year. Beyond that it is everybody's guess. As Singapore is a small economy, we are therefore a trend follower. The two big economies, namely the US and China, the state of their economies have great impacts on our GDP's growth.

Firstly, as we know, the US is still struggling in the efforts of putting their economy in order especially the high unemployment rate(at 9.7% currently). Hence, the low interest rate's environment is required and necessary for the time being at least in the next 12 months.

Secondly, in China, the smart big property developers have (in the recent years) invested a big sum of their huge profits (from the escalating property prices in recent years) into both the state and private infrastructure funds which the Chinese government has used it for the development purposes. These intelligent moves by the developers have the leverage effects on the Chinese government's decision-making process for NOT taking too drastic a measure in controlling the bank loans to property investors. Because by doing so, the win-win situation will be jeopardised. Fortunately, the Chinese government-authority has an advantage in her political system - needless to face the electoral every 5 years unlike the normal practice of west democracy like ours. This has allowed them to better concentrate on the micro-economic front. Of course, many Chinese are angry especially the young couples who could not afford to buy and own one.; April 12, 2010 12:38 PM
Anonymous said...: Dear Mr Mah,

The current phenomenon of prices of flats, condos and houses shooting thru the roof is primary due to 2 reasons :
HDB and URA have cut down supply of land and flats far too much over the last 5 yrs.
BOT scheme rolls out flats too slowly & cannot meet demand during property boom
Population has grown from 3 millions to 5 millions in the last 5 yrs and MND & MHA did not cater for this huge growth.
MND made a serious repeated mistake by deliberately pushing up property prices instead of letting market forces decide..
MND has been ignoring strong ground feedback and clear &strong signs of problems
Most Singaporeans just cannot understand why the PAP govt can make such stupid and terrible mistake.. The govt shd from learn the mistake it made in 1990s by artificially pushing up property prices in wanting to enhance the asset value of Singaporeans. The property market burst in 1997 and prices of flats bought during the peak have not recovered until today.

Never never push up asset prices beyond it's economic fundamental. It just puzzles us why our govt has forgotten so qkly about the US sub prime crisis and the Japan's long drawn property-bubble induced deflation.

When Singaporeans have been crying out to you to lower the HDB flat prices since 2006, you keep insisting flats are still affordable. Even when we were hit by the most severe recession in history, our salary has dropped significantly and prices of property continue to shoot up, you still foolishly insist flats are still affordable and flat prices will continue to rise. How stupid and silly can you be?

Let us tell you, the mild property curbing measures you implemented will not work. Even the developers are telling you, with tongue in cheek, that MND must sell more land and HDB must release more BTO flats more quickly and not at the current pace as their land bank has dried up and demand is super strong due to several factors we all know..

Next MND must implement stronger measures like 50% capital gain tax for sellers who sell their property within 3 yrs and higher stamp duty up front and 50% loan for 2nd property for both HDB and private property immediately. Your callibrated and step-by-step approach will be disastrous. In a year's time, the propetry prices will rise to a very dangerous level by more than 30% if nothing concrete is done.

People are now saying MBT have helped the developers, the govt and the wealthy people who own multiple properties to make so much money, even during recession, at the expense of the average Singaporeans whose salary have been depressed and can't even buy a HDB flat. They even say MBT own a lot of properties and that is why he is selfishly and purposely pushing up the property prices to make a huge profit before he retires.

Why shd Singaporeans VOTE for MBT? Indeed, please give us 10 good reasons why Singaporeans shd vote for you and the PAP govt? The PRs and new citizens are taking away the good jobs, deprive our children a place in the good schools, crowding out Singaporeans from the govt hospitals, congesting our transport system and deprive us of our basic housing. Living cost is getting higher and higher. All the govt can tell us is that Singaporeans themselves are to be blamed because we are choosy, lazy and demanding. So the govt is clearly telling us they value PRs and new citizens more than the naughty Singaporeans.

Honestly, how can the ministers and top govt servants who are making $1.8 million a year plus MP's pay (tax exempted) understand and emphatise with average Singaporeans who are making a meagre $60,000 a year and struggles to make ends meet to feed a family of 4 to 6 persons with such high living costs.

Pure Bred Singapore Citizens; April 12, 2010 8:02 PM
Anonymous said...: Dear Pure Bred Singapore Citizens,
I can understand fully how you and many of the Singaporean feeling.
This is not new and has be going on since early 80s.Prices of flats has gone up steadily without fail.Our children will have difficulty buying an average size flat now.The salary you mentioned,$60k is on the high side.Many of them may not even have a chance to smell this figure.Look around you,lots of aged ppls are picking up empty cans to suppliment their incomes.Who is going to help these ppls.There are still many....of them seeking for assistance.

John Sim; April 12, 2010 10:37 PM
Anonymous said...: i believe in what tan kin lian say. he is an actuary.; April 13, 2010 1:27 AM
Anonymous said...: Newton's law also would apply to stock market and property market....what goes up must come down at some point..... prices cannot go up up up in a straight line forever? The question is only when this will happen.....the faster the prices move up, the more likely the correction will happen sooner....; April 13, 2010 3:48 PM
Anonymous said...: Hi,

Could you advise whether to get a resale (to lock in low interest rate) now or to wait for the price to dip slightly (possibly higher interest rate later)? FYI, I am only eligible to get resale unit.

Please advise.. thanks!; April 13, 2010 4:20 PM