Saturday, July 9, 2011

Singapore Property in 2011 and interest rates

Colin Tan, head of research and consultancy at Chesterton Suntec International asks what will happen to Singapore residential property market if interest rates begin to rise from its all-time low values. Singapore Interbank Offer Rate (SIBOR) is the major determinant of the mortgage rates in Singapore. And SIBOR is influenced by 2 factors: The United States Federal Funds Rate (Singapore Central Bank uses currency exchange rate as policy tool while leaving interest rates to markets) and the amount of liquidity within the Singapore banks. Since SIBOR is ultra-low, mortgage rates are also ultra-low.

Colin Tan argues that simple supply-demand fundamental is not the only driver of Singapore residential property market: interest rates, cost of money, continuously has increasing role. It has been kept ultra-low for so long time (2.5 years now) by FED that enough number of investors has no idea how high it can get. They, with the help of property sellers and agents, concentrate only on the current positive cash flow. This positive cash flow is in fact thanks to artificially low interest rates.

Colin Tan puts the psychology of a typical Singaporean buyer boldly:

“In property-obsessed Singapore, many buyers take a short –sighted view: Future problems are tomorrow problems. Let us focus on today; who knows what will happen tomorrow? Prices may shoot up and I can just re-sell my property for a tidy profit”. [Source: Property 2011]

This reminds the warning Professor Chau Kwong-wing of the University of Hong Kong put boldly about Hong Kong residential property buyers:

"People think they can afford an expensive flat with a reasonably cheap mortgage. Their dreams will burst and the flat will become unaffordable when the interest rate rises." The professor has a point. Variations in interest rates can mask or magnify structural affordability, which is measured by the Median Multiple. This is because interest rates are subject to fluctuation, while buyers and sellers do not renegotiate sales prices after the deal is concluded."

But if majority of the buyers think they can sell and go with a handsome profit to justify their property investment, they will try to offload their units at the same time to a probably shrinking demand pool. Again, enter the Greater Fool:

"The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price."

Unfortunately as Mr. Tan observes “the people closest to the prospective buyer, namely the housing agents and bankers, are not likely to give sound advice or even warn of future potential pitfalls, because they depend on the commission from the purchase for their bonus” (See also our article What your friendly property agent won't tell you).

We have to add that mainstream media does not help either.  Many of them “consult” property developers or agents for comments on every single property news and all these specialists answer in the same way “there are slight pressures but no worry things are going up and will go up”. They also feature all those property investors who made good profits from their past property investments (an almost always no article on the ones who burned on their investors). Mainstream media just fuels the kiasu fire burning in the people.

In the not so distant past, the very unlikely or completely omitted scenario of the” interest rates up, rental and prices down” scenario was realized several times. Since many current buyers have no memory of it. Forget about Asian Financial Crisis, just look at interest rates hike of 2004 after just 3 years of low interest rates. Yes, the investors here are very different compared to USA. Here you cannot buy a house without an income or you do not have something like 100% loan to value ratio. But still, there are many overstretched multiple property investors whose only intention is to protect their money against inflation or have a future rental income. Many of these people do not look like thinking about a possible negative cash flow on mortgage payments or price fall.

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