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Monday, 30 August 2010

The Property Bubble & Investment Trap Part IV - Making Sense of Mortgage Default Statistics and Key to Invest

TODAY (Aug 24, 2010) carried a report with a beautiful caption "Fewer defaulting on mortgages". It looks encouraging on the surface but what can we make up from the accompanying statistics?. TODAY (Aug 27, 2010) soon carried another report which shifted emphasis to the 50-something. It  reads "50-somethings overtake the young ones as highest ones as highest loan defaulters" and carried comments from 2 prominent MPs and some other social researchers.

I pay keen attention to problems faced by the 50-something  due to our population demographics. As a "baby-boomer" borned in the early 1960s, I will soon "upgrade" to this group and share their blessings and plight. I also pay close attention the "baby-boomers"  not because I am one, but because we are often made the "scapegoats" of policies. In Singapore, this refer to those borned in the 1960s. In the US, it would be those who are borned a decade or more years back from our 1960, post WW II; because Singapore had developed at a much slower pace.

So you note the 3 structural problems facing the USA has got to involve the "baby-boomers", particualrly on healthcare. So President Barack Obama gave them expanded health care before expanding the economic pie to sustain it.

A personal joke about my age group (Singapore baby-boomers) is this : If you want to test policies use them as "guinea pigs", and if you can't solve the problems just treat them as the "scapegoats". The logic is simple, the birth rate is highest during this phase. This is a good reference point. So if MBT or any other MND Minister can squeeze all of them into their parent's flats or their own if they can service the mortgage debt, he could at least take a breather.

Coincidentally, the baby-boomers went through the ups and downs of the Singapore boom-and-bust cycles soon after they graduated from university. (1987 Black Monday, 1997 Asian Financial Crisis, 9/11 2001, SARs 2003, 2008 Black Monday, Sub-Prime/Mini-Bond 2009). Not coincidentally, this is also the period I had followed construction costs and property prices.

For baby-boomers who failed to get a place in university, they were blessed with higher CPF rates for joining the work force early. They got married early and would have enjoyed appreciation of their HDB flats and upgraded during the phase of rising income and high CPF, perhaps a blessing in disguise.
 
Now back to the statistics. In keeping with the maxim, "Watch what they do, not what they say", statistics are dead and misleading unless analyse to see their full implications on the market (on us!). The first report from TODAY said that "the number of mortgagors failing to meet repayments on their loans has dwindled" with the strong recovery in the property market. This is wrong or only partly true. Not all mortgaged properties are for investment (renting), there are more homeowner-occupiers. The lower mortgage default is therefore also due to lower unemployment with economic recovery, and not directly or solely due to strong recovery of the property market. I factored out rising income totally.

Singapore's mortgage market is one of the most developed in Asia. Outstanding housing loans were around SG$79.6 billion (US$57.3 billion) in 2008, or approximately 30.9% of GDP. In the first half of 2009, it must have gone up further and then fell lower after September. So when we need to apply the percentage mentioned in the reports to see the quantum, this is it as the multiplicant.

The DP Credit Bureau (DPCB). said the average default rate across all age groups fell to a low of 0.43 per cent in March this year. Generally, this is good. There is no information on the quantum of loan to co-relate with, and I could not comment more.

It also said that the percentage of those in the 21-to-29 age group defaulting on their mortgages has steadily fallen to 0.42 per cent, a decrease from 2.2 per cent two years ago. This is OK which means the young are able to get a job. The quantum of loan also tend to be smaller for this age group unless they commit on a heavy mortgage. What is worrying is the borrowing age starts from 21. I hope this is only a small percentage of those who committed to a mortgage, since a female could have just graduated and a male would have just entered university at 21. The tendency to marry late in S'pore also suggest otherwise.

It is also not surprising that the CPF Board disclosed that based on data till 2006 - that out of 153,000 graduates who tapped their parents' CPF monies to pay for tertiary education here, 5 per cent have defaulted on their loans.

The report mentioned that the 50-to-59 group has overtaken the 21- to 29-year-olds as the age bracket with the highest percentage of loans in arrears, with 0.62 per cent behind in their payments. This is worrying but not surprising to me. I feel it was due to setbacks of the revised CPF policies and also wage restructuring efforts by the GOVT during the past few crisis since 1997 (Asian Financial Crisis -13 years past). Taking the average age of 55, that would mean these people were then in their early 40s. I recalled the NTUC Labour Chief landed in hot soup for his remarks soon after the 911 Event and SARs crisis about trend of "pre-emptive lay-offs" for those reaching 40 because they were considered old and slow. There were rounds of wage and CPF cuts due to wage re-structuring, a topic I followed very closely then. This group should be about 45~50 then.

The report warned that with rising property prices and bigger mortgages, younger borrowers would be shouldering a larger debt burden that may not be sustainable in the long run. Not forgetting employment and income UNCERTAINTY now as I pointed out in my last potsing.

The report also showed that 49.7 per cent of all mortgage defaults took place between the third and the fifth year of the loan, while 31 per cent occurred after the fifth year. This is interesting.

In March 2008, the total outstanding housing loans amount to S$79.6 billion. Based on the DPCB Report, the average default rate across all age groups fell to a low of 0.43 per cent in March this year, down from the 0.89 per cent in March 2008. Hence, in 2008 the default quantum was 0.89/100 x 1 000 000 000 (US billion) = S$8.9 million. The low of 0.34 % this March would mean the default is S$3.4 million. There is no alarm here but we do not know how long the mortgage loans are stretched. It would be good to look further into such statistics.

Mr Tan Kin Lian advised that a mortgagor should not borrow more than 5 years the combined annual income of a married couple after deducting maid expenses. This is even putting aside car loans. Hence, almost half of those who defaulted are high risk (3~5 years). 31 % happened after the fifth year.

We have no information in this report on how long mortgagors had stretched their loans. Minimum loan tenure to be 5 years. The usual maximum loan repayment period is up to 25 years or 65 years of age, whichever earlier. Only in exceptional circumstances would the mortgagor be allowed to stretch to 30 years. Affordability is blinded by ability to service longer mortgage loans from 10~25 years or even beyond. Personally, I feel stretching it for more than 10 years after the full loan quantum is dispensed is already too highly leveraged. It is marginally possible but very stressful. If there is a drastic correction, banks will certainly call for a "make-up" due to fall in valuation.versus loan quantum.. It make sense for those over-stretch to build up a small cash reserve.

The story of Madam Kee mentioned in the article is quite typical for defaulting mortage. She was saved after 2 frustrating years in 2007 when her condominium went en bloc ... which is why I cautioned against paying a high price for a 99 leasehold property ... an en bloc is only possible with some pre-requisites. She was lucky that there was a mini-boom in 2006~2007. The real good investors will make a "kill" when a home-occupier is at his worst.

Two prominent MPs attested to the problems faced by the 50-somethings as quoted in TODAY paper.

"Mdm Halimah Yacob said she has seen more seniors seeking help over their mortgage payments. From a few cases a year, she started to see a few cases each month over the last two years.

They typically have lost their job and face difficulty finding another due to their low education levels and skills; even for those re-employed, they take as much as a 30- to 40-per-cent pay cut, she said.

MP Inderjit Singh (Ang Mo Kio GRC)said seniors have always been more vulnerable to losing their jobs. "The best thing we can do is to get them employment that would give them a salary enough to handle the (mortgage) payment," he said.

Financial planning, as always, is key before committing to a big loan, said the MP, who has seen residents whose incomes do not rise as significantly, as had been hoped, or decrease instead.

Financial services consultant Daniel Lee advised home owners to explore re-financing their homes to reduce the interest owed, and not to take a full loan since banks may call for a top-up if there is a property slump."

Let me do a sub-conclusion of the paragraphs above -

(a) So those borned in the 1970s and 1980s may not be so lucky in respect of what they have to pay for a property. They had not benefited from the rising income and CPF phase which most of the baby-boomers did. In particular, those borned after the 1980s are also identified as the defaulting-high-risk group in above DPCB report. Not only they start to borrow from young (21-to-29 age group) but also the quantum of loan is high while the business cycle has shortened and job security is more unpredicatable. More importantly, they should give due consideration before committing on a heavy mortgage or even defer their investment and wait for a good price.

(b) For the 50-to-59 group it is more worrying. From my analysis, it would suggest that they are those who had not gained from our economic growth but also lagged behind due to our policies. Unfortunately, age is not on their side, and they can only be save by "help" or "chance" like Madam Kee. Less fortunate ones who might be caught should explore re-financing their homes to reduce the interest owed. Or as MP Inderjit Singh said, "The best thing we can do is to get them employment that would give them a salary enough to handle the (mortgage) payment", if they are unemployed...this often comes with re-structuring a mortagge repayment loan ... which may drag beyond 20 ~30 years.

Taking responsibility of your property investment and mortgage repayment plan is a sure way to avoid a default. TODAY (Aug 27, 2010) carries another good commentary by Mr Colin Tan captioned "The key to investing in homes". I would suggest this as a must read for beginners and a refresh for those already in the property game and over-leveraged.

I borrow his caution :-

Given today's price levels, the vast majority of Singaporeans who own their homes are sitting on large paper profits. Many are paper millionaires; for them to become real millionaires, they would have no roofs over their heads.

This article clarifies and make a good distinction between the mechanics of investment of an "owner-occupier" and "a fully leveraged investor". The complication is that we are all in the same market. Most of us can only afford to be "owner-occupier" but we share the same "market" with these "fully leveraged investors", who are often speculators. I had personally seen many of them failing to take over condominium units booked and their Bank exercising foreclosure during the late 90s. This is one reason for me doubting the sustainability of having the HDB and private property market all bundled and messed up as one whole when the prices get ridiculous. I will probably amplify this in another posting but finally wish to draw your attention to Colin Tan's conclusions in this commentary which is quoted below :-

"When an owner-occupier mis-times his purchase, he spends his whole working life paying for it. When a fully-leveraged investor gets it wrong, like in the real estate board game Monopoly, he becomes a bankrupt and retires from the game."

I like to add to Colin's cautionary words, the really good "fully-leveraged investor" will make a "kill" on the "owner-occupier" when he is at at his most rough and sticky patch in life.

Note on PM N-Day Rally (Latest) : Last Thursday, I wrote in my posting about the S$54 per hour or $$10,000 a month salary issue, following THOMAS FRIEDMAN's article in the THE NEW YORK TIMES. I also wrote the following :-

"The true reality about life in Singapore is that we are constantly "caught-in-between" the ideals of what the strategic plans, policies, and whatever the GOVT says and crafted as their goals versus what and where you actually can managed to achieve. The rest of it you have to dismiss and resign as fate or even Act of God."

It was not surprising for me that the PM said in the rally that the HDB will raise the income ceiling for buying DBSS flats. Read here : HDB to raise income ceiling :-

"Prime Minister Lee Hsien Loong, who announced this at the National Day Rally on Sunday night, said the higher income ceiling will allow those caught in the $8,000 to $10,000 group to qualify for both DBSS and executive condominiums.

'I think this group is quite anxious about falling in between, as they are not eligible for HDB and they can't afford private property.. And because people are marrying a little bit later, so their incomes tend to be a little bit higher, so they worry that they will get promoted before they get settled. So we will do more to help them own their homes,' he said.

If you are keen to read about the full and true implications about this development, do follow up. With this, allow me to stop here for this posting which I had promised earlier. I will also write in the next posting on Price Comparison Between Yishun Condo Site and Tampines DBSS Site Land Bids, and the likely implications with the PM's Rally announcement. HDB may also come up with more details...I will need some time to digest.


Reference #1
TODAY Aug 24, 2010
by Ephraim Seow

SINGAPORE - With the strong recovery in the property market, the number of mortgagors failing to meet repayments on their loans has dwindled, with the percentage of defaulting borrowers halving over the last two years, according to DP Credit Bureau (DPCB).

In a report released yesterday, the bureau said the average default rate across all age groups fell to a low of 0.43 per cent in March this year, down from the 0.89 per cent in March 2008. This means that, as of March this year, only one in every 233 mortgagors were in default, compared to one in every 112 mortgagors in 2008.

DPCB general manager Lincoln Teo said this was a result of the rebound in the property market, which led to more positive sentiment and, in turn, better payment behaviour.

But the bureau also noted while the proportion of loans in default was trending lower, there were variations across different age groups.

The percentage of those in the 21-to-29 age group defaulting on their mortgages has steadily fallen to 0.42 per cent, a decrease from 2.2 per cent two years ago.

Notably, the 50-to-59 group has overtaken the 21- to 29-year-olds as the age bracket with the highest percentage of loans in arrears, with 0.62 per cent behind in their payments.

Mr Teo warned, however, that with rising property prices and bigger mortgages, younger borrowers would be shouldering a larger debt burden that may not be sustainable in the long run.

The report also showed that 49.7 per cent of all mortgage defaults took place between the third and the fifth year of the loan, while 31 per cent occurred after the fifth year.

Reference #2
TODAY Aug 27, 2010
50-somethings overtake the young ones as highest loan defaulters
by Alicia Wong

SINGAPORE - With a car loan, three schooling children and daily expenses, it was a "terrible time" some years ago when Madam G T Kee's husband lost his job.

"I was very worried. I didn't know what would happen if I couldn't pay the housing loan," she said. Keeping her job as an accountant was one of her foremost concerns, since Mdm Kee, 56, was using her Central Provident Fund to pay the loan.

She deferred her insurance premiums and borrowed against her insurance to pay "critical loans". Her husband had set up a business after being retrenched but the income was unstable.

Their troubles lasted about two years. Then, their condominium went en bloc, and she cleared the housing loan in 2007.

While fewer in her age group still face difficulties meeting mortgage payments, some observers feel that there is reason to remain concerned, now that it has been revealed that the 50-somethings have the highest percentage of loans in arrears.

They have overtaken the 21- to 29-year-olds, traditionally the group with the biggest proportion of defaults.............

Reference # 3
TODAY  Aug 27, 2010
The key to investing in homes

by Colin Tan

Most of us have heard it all before from the experts. Investing in homes is one of the safest and surest forms of investment. If you cannot re-sell the property for a good profit within a couple of years, you can always hold it for the long term because it will always appreciate.

But if everyone follows this advice, will it still work? Surely it is a recipe for disaster. If everyone is going to earn it the easy way, who will do all the hard work?


Given today's price levels, the vast majority of Singaporeans who own their homes are sitting on large paper profits. Many are paper millionaires; for them to become real millionaires, they would have no roofs over their heads.

Nevertheless, it is hard to argue against such a track record. In fact, the earlier the property was purchased, the greater the capital appreciation ..................

This brings me to my last point. When an owner-occupier mis-times his purchase, he spends his whole working life paying for it. When a fully-leveraged investor gets it wrong, like in the real estate board game Monopoly, he becomes a bankrupt and retires from the game.
Reference # 4
TODAY Aug 26, 2010
by Ng Jing Yng

SINGAPORE - After leaving university, a graduate owed $4,700 that he used from his mother's Central Provident Fund (CPF) account before he finally got in touch with the CPF Board to start monthly repayments of $200. He then had to defer payment, citing personal reasons, before he eventually repaid the loan in one lump sum.

The graduate is one example out of an average of 450 local graduates per year who fail to repay these loans for four consecutive months since the CPF Education Scheme started in 1989.

Responding to media queries, the CPF Board disclosed yesterday - based on data till 2006 - that out of 153,000 graduates who tapped their parents' CPF monies to pay for tertiary education here, 5 per cent have defaulted on their loans.......

3 comments:

  1. What many people forget the whole

    "Investing in homes is one of the safest and surest forms of investment. If you cannot re-sell the property for a good profit within a couple of years, you can always hold it for the long term because it will always appreciate."

    point only applies to owner-occupied housing. And the property may not appreciate in real terms.

    Owner-occupiers are directly responsible for the relative stability of property as an investment class.

    With that in mind, form your own assessment of whether the Singapore market (or submarket you are interested in) possesses this stability.

    ReplyDelete
  2. For the 50-to-59 group, would this spike in this age group suggests that the finances of them is becoming more dire? My view is that in the coming decade, many of the boomers in this age group will be forced to downgrade either because to finance their retirement( because most of their wealth are locked in this asset) or sell it outright and will try to live with their children. This is likely to exert downward pressure on the prices of HDB onwards. Moreover, with the government announcing to build more than 22000 new flats next year and decreasing the time for the BTO and with worsening economic times coming ahead, this suggested that buying of any property within the next 3-5 years will become more challenging. Mr Yak, what is your view and assessment?

    I fear that the decrease in the age group from 20-40yrs is only temporary. There are several structural problems going forward. The percentage of young getting contract, underemployment are getting larger and in the extreme case where a country undergoes economic stagnation( i am not suggesting singapore will suffer it) like in Japan, the problem for the young are enormous. See : http://www.oftwominds.com/blogaug10/Japan-lost-generations08-10.html

    Moreover, the stagnation in the pay of the newly employed except in certain sectors are not helpful.

    I am keen and look forward to your next post about true implications about the DBSS announcement.

    ReplyDelete
  3. Hi James

    I would just reply you simply here :-

    50-to-59 Group (borned in the 50s). I think the income gap is very accentuated for this group. Hence, we have the top 5~10% of them who are very very rich (either graduates or businessmen). They could be having more than 1 property or owning private properties including landed. The bottom 10~15% or so I think are very low income earners. My gauge is that the balance 75~80% are between 3~5 Rmers, but would have benefited from the old "Construction cost-based pricing approach" in the 70s and even paid off in the 80s or even upgraded.I agree with you that "many of the boomers in this age group will be forced to downgrade" to liquidate for about 50~60% of the original composition. Say half will consider downgrade from 5 to 4 Rm and the other half from 4 to 3 Rm. Hence, the price of smaller units may be more stable with the same lease span and condition. The problem is that those who had not upgraded before might have flats which are pretty old which the younger generation will not want to purchase. The self-employed grp particularly will also face problem with healthcare needs...without sufficient medisave.

    Those borned in the 60s (40~49) are luckier although HDB implemented "Construction cost-based and land-based pricing approach". For this group the upper middle income group & above tend to be only asset rich but cash poor. (The 5 C generation) More logical to see downgrading from private properties to HDB or from FH to leasehold properties.

    For 20~40 age grp, I will agree with you that they will have to contend with employment and income uncertainty. Even highly leveraged grp from 40~50 age grp will be hit. If the current high property prices is not controlled, I believe this grp will be badly hit...unless they have "silver spoons" from the 50~59 top earners.

    ReplyDelete