By Gerald Tay (Guest Contributor)
After seven cooling measures and now another “shadow” one again, I think many of us are already immune by now, “Another one again! When’s the next one?” From my previous writings, I’ve mentioned we do not need a rocket scientist brain to comprehend how hot we are in the property market cycle with so many cooling measures from the government.
As for the magic question “To buy or not to buy now”, you should have known by now (I hope you do) that if you are going to buy any property today, you will be paying very expensively. Unless you do really know how to create value despite the high price you paid for, or you’re drowning in cash, buying just about any property today is like trying to walk across a field of landmines without getting a leg blown off.
Poor returns for mass market buyers?
For many mass market buyers and investors who bought into local new property launches during the last two years to get better returns than bank deposits, they would most likely be disappointed with the pathetic rental yields and capital gains if any in future, upon completion or T.O.P.
Some eager mass market buyers might say that with all the strict property measures and a tighter market, property developers today are offering many freebies and discounts, so they can benefit from a buyer’s market with lower prices. Surely, no logical mind will even expect close to a good deal from a developer in a hot market?! Buyers now might not know what ‘sucker’ looks like until they look at themselves in the mirror.
Developers cashing in on mass market frenzy
Property developers, like any other business, are in the business of making profits to account to their shareholders – they are not some charity home dishing out “free stuff” for nothing! Everything has a price to it and one will be paying for it one way or the other. With continued price increases from previous months and sell-outs of several property projects, there is still a market for mass market property developers to make good money.
With strong holding power (especially for large developers), coupled with low borrowing costs for acquiring land and other capital expenditures, there is no reason why any property developer will want to miss out on the tasty opportunity of cashing in on a ‘sucker’ mass buyer market, make easy money and accumulate enough ‘food’ before the dreaded winter comes. Developers will want to reap in as much profit as they can now before a severe price correction, rise in interest rates or market crash occurring. They know it is not a matter of if it will happen, but when.
Many middle class buyers will unfortunately be slaving away in their jobs (if they still have a job to keep later) to pay off their loans, while the rich sellers and other vested interest groups, will simply laze away in the Bahamas.
What it all means for mass market buyers on the latest cooling measures:
1. Tighter credit availability means restriction in growth of future capital gains, if any
Credit is the ‘blood’ of any booming property market. Like a blood transfusion, without enough access to it, one is going to get blood clots and heart attacks.
The MAS announcement even took pains to emphasize that these rules are “structural in nature”, which means that they are here to stay for the long term and will not be removed even if there is a correction in the market (unlike the LTV rules, which are flexible depending on market conditions).
2. Retiring on future property gains is nothing but a dream
If the latest measures are going to be “structural in nature” for years to come, for the many mass market property buyers hoping to retire on their property gains, this may turn out to be nothing more than wishful thinking.
The concept of owning a home as an ‘Asset Enhancement’ for the middle class is no more than mistaking lead for gold.
3. An even more limited pool of future buyers in the market
If no one is going to buy or can afford to buy, then who are sellers going to sell to? If someone truly believes he/she can try their luck and sell to some ‘sucker’ foreign buyers in the future, I suggest he/she goes to a casino instead to avoid a painstakingly ‘slow death’ in servicing losses. At least it’s faster there. With the internet, many foreign buyers are a lot more knowledgeable and savvy today.
For the many new property projects that are due for completion soon, many will face a very limited pool of buyers. Those speculators, who assume they will sell at higher prices, will be sorely disappointed when the current party ends.
For the mass market investors who cannot sell or rent out their property at reasonable yields and think that alternatively, they can stay in it for themselves, they have to pray hard they can remain in their jobs and be able to afford to pay off the mortgage payments and other expenses of the property when interest rates rises.
4. Today’s middle class consumers may find it difficult to buy a good property investment and grow their wealth when the opportunity arises in future
The Total Debt Servicing Ratio is taken into account when borrowing to buy a property. It takes into account the monthly repayment amounts for all (property and non-property) loans of the borrower. In the case of joint borrowers, the TSDR is computed based on the total monthly debt obligations and total gross monthly income of the borrowers.
A discount of 30% on all variable income (e.g. bonuses and commission) and rental income is applicable too.
For the middle class who have been spending a large portion of their monthly income or commissions to service their expensive car, credit cards and other loans to lead conspicuous lifestyles in good times instead of prudent investing or spending for an uncertain future (i.e. spending tomorrow’s money), this ruling may prove to be the ‘knife in the back’ for many of them.
Will the latest property measures cause a major price correction?
Not yet. Rather than a simple demand and supply equation, the dynamics that fuel our unique property market works on many highly complex and intricate factors, some of which are unknown and not within the control of our government policies.
These measures are implemented to hopefully prevent any further price escalation beyond reasonable levels and maintain a stable property market. In the event of a major price correction due to uncontrollable economic factors, the government hopes to prevent a market crash that may be catastrophic to our fragile economy.
Well as they say, hope is not a guarantee.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.