Local developer's hope or dream

All signs point to a potential recovery in the property market even when the slew of cooling measures have not been lifted. However, one rule, Qualifying Certificate in particular that was in place to "By limiting foreign companies' holding period, the QC scheme was meant to prevent them from hoarding land or buying land for speculation in Singapore". Basically the developers had 5 years to build and 2 years to sell all to avoid any penalties.

However, this does not seem to deter them from aggressively biding for land recently. They do not mind bidding ahead of fundamentals, i.e. "They may bid at zero margins but by the time they launch it, they make a handsome profit out of it." In order words, they must be pretty confident they can sell them all and well.

Thus it is kind of strange when Mr Kwek raised the concern about the QC scheme. "..."Such penalties are heavy and erode all profit. I hope the Government reviews them again to steady the rate of growth in terms of price increase." What he did raise rightly was the aggressive nature of foreign developers risk pricing the locals out of the market. "If not, you can see every bid (for land) now is higher and higher than ever. Land is akin to raw material for a factory, and if we don't have that, the factory will be doing nothing. Therefore, there's no choice but to bid for the land. If you put in a cheaper bid because you think it's the right price, you'll get nothing." So its really up to the local developers to face up to the competition, wherever its coming from.

Subprime Crisis, Singapore's version?

The Year 2006

A few years ago, my wife and I are the 'fortunate' few to buy left over HDB flats under the walk-in scheme. As the flat came in standard condition, i.e. totally bare, we visited a few condominium showflat for renovation ideas. My wife was tasked to absorb as many ideas as possible while I entertain the agents as a prospective buyer. That was when I started to pay attention to the loan, interest rate etc.

Most mass market private property then was going around $600,000 for a 3 bedder of equivalent size to a 5 room HDB. Based on our combined income, the maximum loan the bank would grant us is sufficient to service the maximum 90% valuation of the property, as allowed then.

The Year 2010

With the economy out of recession with an expected double digit GDP growth for the full year, demand for private property surged strongly and continued to do so even with recent cooling measures. I am thus curious to find out more, especially from the perspective of not so deep pocket buyers on the street. We went to the Spottiswoode Residences near Tanjong Pagar to take a look. After the usual tour led by the agent, we found ourselves talking to a banker (I never met one in 2006) to assess our financial capability. My eye almost pop out when he worked out the maximum loan the bank will grant us. No, our combine income never shoot the roof. Though our income did increase, but definitely far far below the 300% jump in maximum loan allowed, in just 4 years. It never take too long to realise the key difference, 1.5% effective interest rate (not the initial year promotion interest rate). That's 40% lower than HDB's concession interest rate of 2.6%!! I can't remember what's the effective interest rate in 2006, but definitely higher than 2.6%. Using 50% of disposable income as a guide for maximum installment potential a month, no wonder we can take on such a huge loan!

Made in USA

First they lower their key interest rate to nearly zero, then they print money, then they printed some more. The net effect is the ultra low interest rate environment property buyers are 'enjoying' at the moment. Let's assume a typical couple with pockets of reasonable depth decided to buy a private property. Even if they are not crazy enough to take on the maximum loan that will shave off half their monthly income, they would still be forking out much higher monthly installments as they would like when the interest rate eventually recover to a more reasonable figure of 3-4%.

Potential Problem(s)

For the best case scenario, the interest rate raises to the 3-4% eventually and these genuine non-deep pocket buyer-stayers are able to folk out the higher monthly installments. A worse scenario would be the eventual burst of the property bubble and valuation drops below the outstanding loan. Bank theoretically can only loan up to 70% of valuation, so if valuation drops, they can lend less, and the buyer has to pay up the difference. But according to the Banker, so long as the buyer promptly pay up the installments, banks don't normally execute such 'margin calls'. The worst case scenario would be the burst of the property bubble coinciding with the next recession. i.e. drop in property value and loss of income.

Risk

From the buyer's perspective, the risk is personal. But from the banks' perspective, it seems to me that even the maximum 70% valuation limit on the loan is not quite sufficient to limit the number and amount of potential bad loan if the unreasonably low interest rate is used to justify the maximum loan allowed in a growing property bubble.

Stubborn HDB Property Bubble?

Some of my friends painfully resisted buying a flat for the past few years, hoping that the property bubble will pop when the global recession erupted. But to their disbelief, the prices and cash over value (COV) continue to defy gravity and broke new highs. This prompted me to take a closer look at this bubble, why is it so stubborn!?

Demand

Looking at the past prices (available data from 04 to present):
src: http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatResaleIndex?OpenDocument

it can be seen HDB resale prices hit the bottom and remained there after '97 Asia Financial Crisis to late 2006. Though this period included the dot com bust (2000 to 2002) and SARS crisis (2003), there is still generally good economic and population growth (local + foreign). Thus it is quite unthinkable that demand for flats will remain stagnant for nearly 10 years!


Supply

From HDB FAQ, it can be seen that they massively overbuilt in 1997 and and apparently took them nearly 10 years to clear their stock:

...

With the BTO System, flats are built based on real demand. Before any BTO project proceeds, we need to have a clear indication of demand - where to build, what type of flats to build, how much to build.

In this way, there is better management of supply and demand. Before the BTO System, when we tried to build ahead of demand, we ended up with a huge oversupply situation when the financial crisis hit in 1997. Prices were depressed which did not benefit anyone.
...

src: http://askhdb.hdb.gov.sg/Home/hybrid/Themes/HDB/Answers_internal_check.asp?MesId=4604291&isCFP=&FolderID=0&ProjectId=7875909&reAskpage=answer.asp&SelectedCategory=&RecordQuestion=

So if HDB is not going to build ahead of demand anymore and thus assuming there will not be an over supply of flats in the future, then prices will have already found a floor and the ceiling will be determined by demand. HDB will continue to launch BTO until all the demands (genuine ones) are answered, judging from the number of projects launched in first half 2010 (already more than last year), more coming up in second half 2010 and even more in 2011 if necessary.

(src: http://www.hdb.gov.sg/fi10/fi10296p.nsf/PressReleases/B6B5E10434F42EB64825776900154FF8?OpenDocument)

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/1073777/1/.html)

With the recent drive to sustain economic growth based on productivity growth and not via cheaper foreign labour, the demand for flats should be moderated further. Thus I see that price increase will slow down and subsequently stay flat, but not come all the way down since there will not be a repeat of large number of excess HDB flats.

Conclusion

The era of cheap HDB flats (when HDB overbuilt or even cheaper during my parents time when flats sell at cost) is over. Whether or not the current prices or cash over valuation is justified is not really easy to answer. But should young couples continue to wait for a major price correction? They will need to weigh the opportunity cost of waiting for the price to come down versus the risk of paying much more should their combine income exceed $8,000. It will not be an easy decision.

Valuer for HDB units, an easy job?

After years of painful search and watching the property prices continue to defy recession forces, a friend of mine finally settle for flat in a mature estate with about $50k above (already high) valuation. Querying the valuation of the flat, I discovered it is valued at the higher tail end amongst recent HDB resale transaction. And yet my friend is paying $50k above this.

HDB valuation methodology

I came across a recent article to the Straits Times forum from the Singapore Institute of Surveyors and Valuers commenting on HDB valuation:

...
For homogeneous properties such as HDB flats, the common valuation method adopted is the direct comparison approach. This approach is similar to that used by a potential buyer when considering the purchase of a flat. He would look at the location, consider the age, size, design, height and other important characteristics of the flat and compare the prices paid for comparable flats in the locality.
...

src: Straits Times Forum: HDB flats: No new valuation method

However, it seems to me the valuer simply value the flat based on recent transaction, pegging to the sales in the higher percentile.

Valuer and Stock Analyst

I commented on market-biased analyst before in my earlier article, Analyst's analysis --- to be taken with a tonne of salt? that many simply value stocks based on market sentiment, i.e. using high P/E ratio to derive stock valuations during market exuberance and conversely using low P/E ratio when sentiments were poor. Valuing HDB properties by tagging on to the high end of recent transacted prices is no different.

Boom Bust Cycle - here we go again

Sentiments in the property market is definitely pointing north. By valuing flats based on the higher percentile of recent transactions and willing buyers paying hefty cash over value over the inflated valuations to form the next higher transaction price, only lead to self-sustaining perpetual runaway valuations. The stock market parallel being investors bidding up stock prices fueling analysts to issue buy calls with even higher valuations by finding means to justify higher P/E ratios.

The Tipping Point

Any sane investor who lived long enough will know that surging prices will not reach the moon one day. Many events, usually unexpected, could put an end to all such craze and caught many by surprise even if there will be more 'experts' coming out to warn people as prices continue to defy gravity. The direct opposite will occur when prices tumble as all tried to exit the market at the same time. Stock analysts will slap stocks with ever lower P/E ratios as market sentiments continue to worsen. When sellers of HDB flats begin to sell below valuations that they finally agree to be over inflated, this leads to lower transaction prices and hence even lower valuations for other sellers.

Conclusion

While price surging and plunging in accordance to economic cycles is a natural phenomenon, the amplitude can be better managed if all valuers (analyst and property valuers) can be more impartial in their analysis, anchoring their judgment on solid fundamentals instead of ambient sentiments. Buyers (flats or stocks) need to do their part too, in not outbidding each another to ridiculous prices.

Condominiums - Opportunity or Trap

Upgrade or downgrade?

I came across the following article in the 联合早报: 是享受还是受罪. It described someone nearing retirement who 'upgraded' to a condominium of 102 sqm and a new mortgage to pay off, by selling his fully paid up EA flat of 145 sqm. When enquired about his rationale, the simple answer was " no choice, for the comfort, for a better external outlook, will have to suffer a bit".

Selling like hot cakes

I read with both amusement and amazement of the recent craze for condominiums, with new units flying off the shelf like hot cakes. Am I missing something? Are residents here are getting really affluent in the midst of recession or is money raining in corners of Singapore I'm not aware of? While foreign investors could possibly scoop up a substantial number of private properties, residents made up a significant half of recent purchases, as I found out when I went 'sight seeing' in one the recent showflats.

A natural upgrade?

Two independent friends of mine are pressured by their spouses to 'upgrade' to condos as a natural passage of life improvement process. While the financial commitment is substantial (as I will show later), the rationale of their spouses distilled from their conversations summarised as "if so many can afford, why can't I?"

Significant commitment

I worked out a simple table showing the commitment for getting a condo of various sizes under different prices per square foot and interest rates. My assumption is 20% down payment and 80% loan for 30 years.


A few things to note.

1. Interest rates are often pegged to SIBOR, Singapore Interbank Offered Rates and historically fluctuated between way below 1% to as high as 8%.
2. If a HDB upgrader intends to buy the condo as a 2nd property (i.e. retaining his/her HDB flat), only funds in excess of the minimum sum in the CPF account can be used for down payments and instalments. Otherwise, the 15% down payment in Cash or CPF and the monthly instalments will have to be paid in Cash.
3. After a few good years of locking in the mortage loan in low interest rate on purchase, the interest rate will be readjusted thereafter (usually higher). If refinancing at lower interest rate is not possible, the buyer will just have to service higher instalments.
   

Looking at the table above and my current instalment of about $1,100 for my EA HDB, no way I'll swap the monthly payments for that of a condo of equivalent size.

Benefits: Hedge against inflation?

Despite the higher commitment, I'm often told that land constraints in Singapore will always make property investment a rewarding adventure. I do not have the stats for property prices before 1993, but comparing the inflation rate and property price difference over the same period (very dependent on the choice of period of comparison, so the following is just an illustration):

Singapore Inflation Rate from 1993 to 2008 = 24.3%
(src: http://www.singstat.gov.sg/stats/themes/economy/hist/cpi.html)

Private Property Price Index from 1993 to 2008: = 62.5%!
(src: http://www.ura.gov.sg/pr/text/2009/pr09-35.html)
Thus there IS truth in this 'conventional wisdom'.

Risks: The other side of the coin

I do not doubt the investment quality of property as a inflation hedge (but I still think equities are better investment, see my article on this issue), but one must not ignore the other side of the coin in property investment. If one have ready cash to pay off the mortgage loan any time (but choose to prudently invest the cash else where to take advantage of the good debt), then the risk of using property as inflation beater is tolerable.

But if one is taking the maximum loan of 80% to invest in property, then I do not think its a wise choice at all. Should one or both the spouses takes a dent in income (pay cuts, lost of jobs etc), the financial pressure of paying off the hefty monthly instalment is immense. As one bad thing normally urshur more bad things to come, recession that trigger the income drop normally also meant a drop in property values. In one of the worse case scenario possibe, a couple who hope to 'downgrade' from a condo might not be able to easily dispose the condo at a depressed market, especially when they find themselves in negative equity (outstanding loan greater than value of private property)

Conclusion

I still subscribe to a better conventional wisdom that I know: "Live within your means". An improvement in life do not mean less spare cash to indulge in little things I can enjoy. The last thing I want to experience is trapping myself in a condo because I can no longer afford to drive my car, take my family out for restaurant treats once in a while or have an overseas trip once in a longer while. That thousands of dollars in monthly instalments is enough for a short trip for 2 or 3, and combined a few months of instalments, a long trip overseas for more!

Put it another way, if I can afford the hefty condo instalments, I can afford to go for holidays overseas every month, a life style I hope I can retire to :)

HDB Prices - Still so sticky???

In my earlier post on property prices in February this year, I shared my view on why I think there are still room for the prices to drop further. However, one waiting since then will be quite disappointed to note that the prices are still very sticky, especially HDB resale prices:

(src: http://www.hdb.gov.sg/fi10/fi10201p.nsf/WPDis/Buying%20A%20Resale%20FlatStatistics%20-%20Resale%20Price%20Index?OpenDocument)

High prices to stay?

I came across at least one article that doubts the prices can be sustained for long. But prices seems stuck on an up trend, although at a slower pace. To provide potential glimpse of the future prices, HDB had voiced their position:

Mr Mah continued: "If there is increased demand, yes, we will push out new flats. But we cannot be building new flats to cater to every last person who wants a new flat because if you do that, you are overbuilding and you don't want to do that. So some of the new demand will have to be met by resale flats."

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/441255/1/.html)

Comparing DBSS and Resale Condominium in the suburbs

If high resale prices are indeed here to stay, what alternatives are there? Personally, if I can afford to wait, I'll prefer the more reasonably priced BTO in the suburbs. Anyway, I'm living in Sengkang but my parents live in Queenstown and my in-laws in Toa Payoh, though my wife and I do hope to live near them.

But for those who value location above everything else, they can either get the resale flat they wanted and pay the hefty cash overvaluation or the DBSS. The latter does not come cheap either. The recent launches, Park Central @ Ang Mo Kio, Natura Loft @ Bishan and The Peak @ Toa Payoh averaged above $500 per square feet.

I had a chat with my colleague and he brought my attention to 'competitively' priced resale condominiums in the suburbs. To my surprise, the price difference over HDB resale flats is really very small. Projects such as The Warren near Choa Chu Kang MRT, Astoria Park near Kembangan MRT and Compass Heights beside Sengkang MRT averaged about $600 to $700 per square feet.

As the DBSS prices get higher with each new launch, buyers should really think hard whether they are really getting value for their hard earned money. Staying in Bishan, Ang Mo Kio or Toa Payoh does not make much difference compared to Kembangan or Choa Chu Kang if the morning gridlock are there to stay. Taking the trains nearer town just means more crowded trains or not able to get on the first arriving train. But at least you got a pool to cool your heads in the condominium.

Conclusion

Other then the rich and wealthy, a property to normal working class couples should be just a decent roof over their heads, a place they retire to after long hours of hard work each day. Taking into account the hefty debt one must take on, it pays to be prudent in selecting ones' cave in this modern age when income security is always a challenge.

Property prices, how much lower can it get?

I read with interest an article published today on Sunday Times, 22nd February 2009, Keen to cash in on mortgage sales? Quoting from the article,

'... potential buyers are "coming in floods", asking to be on her company's list or calling about properties on offer. ... but it is very difficult for us to strike a deal because the buyers are putting in very low offers. They want to go only for a killing...'

looks like the current economic crisis have lured out these buyers, waiting to pounce on distressed fire sales. Though prices had came down recently from the peak, I do wonder whether these prices are reasonably cheap, even under a fire sale?

A picture tells a thousand words

A picture tells a thousand words, so 4 pictures should tell an even better story:

*2008's GDP growth and GDP are taken from advance estimates.

src: The data for Singapore GDP comes from www.singstat.gov.sg; STI index from finance.yahoo.com; HDB resale price index from www.hdb.gov.sg; private property price index from www.ura.gov.sg

I compile 4 graphs into one above, trying my best to align them in the same time line I could. The graphs are, from top down, Singapore GDP and growth, STI index, HDB resale price index and private property price index.

Indicated on the graphs are 4 red lines, each indicating the 4 significant events affecting Singapore's economy, namely Asia Financial Crisis, Dot Com bubble burst, September 11th terrorist attack in the US and SARS crisis.

From the graphs, I found the following:

1. Property prices (both private & HDB) are much higher now than during each of the 4 crisis.
2. GDP growth is badly hit during each of the 4 crisis and Singapore entered into recession (-ve growth) during 2 of the them, Asia financial crisis and SARS.
3. V-shaped GDP growth recovery seems to mark the bottom of the property prices, around beginning of 1999 and during the period from 1Q02 to 1Q05.
4. No conclusion to be drawn for relationship between property prices peak and GDP growth.

Reasons to wait further

If it is true that the current economic crisis is worst since 1930s great depression and even worse than Asia Financial Crisis (this time the crisis affects not only Asia but US and Europe as well), then I don't really see how the prices at current level are justified in any way.

In simple reasoning, the fire started in US, then spread to Europe. They contributed most of the demand for goods and services produced or outsourced to emerging economies, particularly in Asia. With US and Europe in trouble, the vast factories in emerging economies producing goods for export became idle or redundant. The MNC branches in these economies either scale down their operations (restructuring leading to retrenchments) or simply closed down.

For Singapore, I believe (no data to support my opinion, just reasoning) most of the housing rental demands are driven my foreign talents, expatriates or just simple foreign workers including permanent residents. It does not make sense for them to buy properties if they meant to leave Singapore eventually. Thus it becomes lucrative to purchase properties, especially private condominiums and renting them out. During the last few years, the rentals had been shooting for the moon and I remember seeing on TV some expats complaining about the rents are getting more and more unreasonably high.

Similar to any other economies, when companies restructure, it is a natural consequence that many laid off are foreign labour. Their departure will meant downward pressure on rents. Property prices will follow suit when the severely reduced rents no longer make holding these assets at high mortage payments sustainable.

Conclusion

Graphically and logically, property prices have a long way to go before the price is deemed reasonable. Property is a game of patience and tolerance. The owners of crazy sky high buys will try to hold as long as they could while the fire sale type buyers would have the capacity to wait too, they are not desperate to get a roof over they heads, I presume.

Property vs Equity as an Investment

Rationale

I happen to have chat with my former colleague on the investment merits of equity versus property, in the context of passive income as primary concern and capital returns being secondary. Under this context, an investment must be one that provides a stable cash flow, either from monthly rentals or dividend payouts.

Property vs Equity

Rents vs Dividend

At first glance, property provides stable rental returns, usually in substantial monthly figures that can supplement or even substitute active incomes from work. Monthly rental figures in the magnitude of $3,000 to $5,000 are reasonable for renting out entire 3-room condominium units in reasonably attractive locations, close to basic amenities like MRT station, food centres etc.

On the other hand, dividend from equities are usually paid out once a year and are far less stable than rents. The amount are usually meagre and are regarded more as extra annual bonus than monthly income supplements.

Leveraged vs Unleveraged Portfolio

But on closer look, the significant difference in payout can be attributed to leverage. To obtain the rental figures listed above, a typical condominium would have cost anything from $700,000 to above $1,000,000. A typical well-to-do middle income household that can afford to purchase a second property would typically have to draw down a housing loan ranging from 80 to 90%. Few from this group will be expected to 'cash and carry' their property.

In contrast, few sensible people who invest in stocks with objective of getting stable dividend returns would take up any loan to finance their purchase. If the typical well-to-do middle income household above who can afford to pay a 20% down payment or $200,000 on a $1,000,000 property, instead use the down payment to for share purchase, it would have earned them only $14,000 in dividend annually or $1167, assuming a 7% dividend yield (a respectable figure in 'normal' times). This is way below the $3,000 to $5,000 for rents above. The difference attributed to leverage can hence be seen quite clearly.

What if they are willing to take up a $800,000 loan to buy shares? Combined with their original $200,000, there annual dividend income would have been $70,000 or $5833 monthly, a equally respectable figure. But in both scenarios, I have not taken into account the cost of borrowing. Since equity loan are usually unsecured and the cost of borrowing will be much higher than a comparable housing loan.

Fall out from current financial crisis

Every crisis offers new opportunities. The current credit crisis is no different. Property prices and rents have started falling and could plunge further given weaker demand and greater supply in the years ahead as more new property projects are ready. More information can be found in the URA's website.

If falling property prices offers opportunities, plunging equity prices offers even greater opportunities, though the risk should be higher (risk must commensurate higher returns). Once built, the condominium should remain there but there is no guarantee the company still exist to honour the claim by the shareholder.

I extract out 7 relatively high and stable dividend play equities from SGX and summarise them in the following table:

The 7 are well represented by 3 shipping trusts, 2 REITs and 2 food industry related business. The stability in yield arises by nature of the business, e.g. Singapore Airport Terminal Services and Pacific Andes, or by long term contracts e.g. The shipping trusts and REITS.

Taken together, these 7 offers an averaged yield of about 26%. Reusing the example of the middle income household above, a $200,000 investment would give $52,000 annually or $4,333 monthly, without leverage!

But the fact these equities offers such high yields is due to the underlying risk. Other then Singapore Airport Terminal Services, the other 6 businesses are highly leveraged and there is no certainty all will survive the current credit storm. Even if they could, there is a high chance dividend could be cut due to lower income and hence reduce the yield significantly.

Conclusion

Given the current credit storm, if I have the funds to purchase a private property, I would rather threw them into equity. The chance that all 7 high yield stocks above turn into useless scrap paper ALTOGETHER is actually quite low, at least, that's what I think. Unfortunately, I don't have such funds now...still waiting for Singapore Pools to give me a hand.

Can 'we' afford that HDB flat?

I read with interest an article in the Straitstimes on Saturday, 22nd November 2008, "The longest crisis ever?". Much have been mentioned about the economic crisis, credit crunch and technical recession and the article is not really interesting at first glance. However, what really caught my eye was the fact that in each economic crisis that hit Singapore, CPF employer contribution rate was tweaked time and again to save jobs in Singapore.

Hence, as a follow up to my last article on property prices, it brings me to wonder what is the maximum price tag on a HDB flat that a young couple, just starting out, can afford comfortably if it is to be fully financed by CPF funds. i.e. not a cent of cash.

Current CPF contribution Rates and Amount

I began with a hypothetical scenario biased on the side of optimism. If this fortunate couple can only afford a HDB for price $X, surely less capable ones shouldn't be overstretching themselves by getting anything more expensive.

The following table is drafted for a successful, fortunate individual with the following profile:

• Age: 25
• Salary: $4,500 per month (maximum CPF contribution for employee is capped at $4,500)
  
• Average bonus: 2 months (inclusive of 13th month)
• Profile: Able to be gainfully employed until age 62 (earning at least the above)

A few points (and simplifications for more concise analysis) to accompany the above table:

1. Total contribution drops progressively from age 50, from a high of 34.5% to a low of 10% after age 65.
2. Maximum contribution (capped at a salary of $4,500) to Ordinary Account drops progressively from a high of $1,035.40 at age 35 & below to $45 after age 65.
3. The maximum accumulated CPF funds column displayed accumulated CPF contributions up to that juncture, e.g. by age 55, the individual would have accumulated $173,961,71 in the special account.
4. Funds in the ordinary account is not compounded because all of which will be used to pay for the montly HDB loan mortage.
5. Funds in the special and medisave account are compounded annually at 4%.
   

Coincidental Assumptions

• This individual found a corresponding successful and fortunate partner with equal, if not better, earning power and employability
• Both initially earned less than combined $8,000 on application for their love nest
• Both got promoted and earned more than $4,500 each when they began to service their loan at age 25.
  
• They choose to take the maximum allowed 30-year HDB loan.

Under such a scenario, their combined mortage payment power is two times of $378,054.34 or $756,108.68 at the end of 30 years, or age 55.

Using the Total Interest Calculator available on CPF website, $756,000 is sufficient to pay for a principal of $525,000 and interest of $231,642. They can afford to buy a flat that cost nothing more than $525,000 if they only want to finance it solely with CPF funds and not a cent in cash.

CPF contribution rates in major crisis since 1985

The following rates were sourced from either the CPF website or from an article, "The longest crisis ever?". The CPF employer rates were revised down during each crisis and restored (though seldom to the initial rate before the crisis) slowly thereafter.

1. In 1986 (cost outpaced productivity), employer rate was cut from 25% to 10%.
2. In 1998 (Asia Financial Crisis), employer rate was cut from 20% to 10%.
3. In 2003 (SARS), employer rate was cut from 16% to 13%.
   

Historically, CPF employer contribution rates had been slashed (towards 10%) in each crisis to bring down cost and hence save jobs, payment power via CPF ordinary account will hence be threatened in each juncture.

Buy within one's means

Many new 5 room (and even some 4 room) flats launched recently are in excess of $525,000 each. This brings one to wonder whether those young couples who bought them can actually afford them comfortably. Given major risk factors like employer contribution rates and employability as one ages, the chance for a cash top up sometime down the road is quite material.

If new flats are expensive, resale prices are even more prohibitive.

Conclusion

If the above couple was really able to fully finance their flat with their CPF ordinary account funds, they'll have about $273,396.74 each should they retire at 62. Buying a 30 year,2.5% compounding annuity then will translate to a monthly payout of $1,061.97 or equivalent of $510,40 in today's dollar (assuming inflation rate of 2% over the next 30 years), not really a glamorous sum. But since the flat is fully paid with CPF, they should be cash rich by then to retire comfortably...provided they are prudent with their spare cash.

Property Sale - Anytime Soon?

Rationale

I had stayed in Queenstown all my life. After getting married, I found that I could not afford a HDB flat there and moved to Sengkang. In fact, during the time I'm looking for a flat, a new 4rm flat in Queenstown actually cost much more than a new EA in Sengkang. It has always been a dream for me to move back to Queenstown. It is so much more convenient there, no jams, no ERP... With the subprimed induced stock market crisis that is now spreading into the real economy, I might realised my dream of moving back sooner than I thought.


HDB supply and prices

A check with the HDB website seems to indicate that about 8000 (BTO) units are planned each year. A further look at the price index of HDB resale flats shows that HDB prices tend to be sticky. At each of the last few crisies, e.g 1997, 2000, the price takes about a quarter or two to come down. Thus it is quite understanble that the resale price index actually rose 4.2% in 3Q 2008 from the previous quarter even though Singapore already went into technical recession.

Thus the recent DBSS at Bishan where a 5rm can fetch up to $739,000 could easily mark the peak for new HDB flats. At $525 per square foot for a 99 year lease hold property, one can easily find a full (but resale) condomium in reasonable locations.


Private property supply and prices

A check with the URA website shows that there are 10,007, 6,049 and 8,450 units under construction and scheduled to be ready by 2009, 2010 and 2011 respectively. Most of these projects are located in the central regions. A further look at the residential price index shows that private property came down faster compared to HDB prices, but still slower then the stock market and technical economic downturn. The index for 3Q 2008 declined from 2.2% to 5.3% from a quarter ago.


Outlook for private (landless) property

I already had a HDB flat and the last thing I will do is to sell it and 'upgrade' to a private property. I'd rather buy another one if the price is right. (HDB flats bought with HDB loan are shielded from creditors in the worse case scenario of bankruptcy). Looking ahead, I am optimistic the prices of lower end, 99 lease hold projects in reasonable locations will come down to 'earthly' levels for the following reasons:

1. A sheer number of projects due for completion within the next 3 years
   
2. The local banks are turning cautious in granting loans for property purchase
3. The economic downturn could affect those who live beyond their means and could not substain the hefty monthly installments of the property bought during the housing bubble in 2007.
   

Conclusion

I will be monitoring the private property transacted price on URA's website closely for potential bargain hunting over the next few years. Hopefully, my dream can be realised before 2012, else I will be rooted to Sengkang ... might not be a bad thing afterall.