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Thursday, 26 August 2010

The Property Bubble & Investment Trap Part III - Certainty of Employment ?

Mypaper (19 August 2010) carried an interesting article in the Business section (Page A22). The article written by THOMAS FRIEDMAN was reproduced from THE NEW YORK TIMES. This article given the caption "What's certain is uncertainty" by Mypaper sent me thinking about the current UNCERTAINTY issue facing the world economy and its likely impact upon our own employment market, the "sustainability" of our own income and the property market which is at its record high. I would para-phrase part of his article (in blue italic) here to highlight my own points.

~~~Things are getting better, except where they are not. The bailouts are working, except where they are not. Things will slowly get better, unless they slowly get worse. We should know soon, unless we do not.

It is no wonder that with such “unusual uncertainty”, as Fed chief Ben Bernanke put it, businesses are reluctant to hire.

One reason it is so unusual is that we are not just trying to recover from a financial crisis triggered by crazy mortgage lending.

We are also having to deal with three huge structural problems that built up over several decades and have reached a point of criticality at the same time. ~~~

Hence, it would seem crazy and ridiculous that we here in Singapore, claimed to be the fastest Asian economy recovering from the same financial crisis triggered by aggressive sub-prime mortgage lending, would want to walk back the same beaten path ... as we now seek our version of structural solutions to these structural problems.

~~~ In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path – changes that will require a level of political consensus and sacrifice that have been sorely lacking in most countries.

The first big structural problem is America's. We have just ended more than a decade of debt-fuelled growth, during which we borrowed money from China to give ourselves a tax cut and more entitlements, but did nothing to curtail spending or make long-term investments in new growth engines.

Now, our[US's] government owes more than ever and has more obligations.

America will probably need some added stimulus to kickstart employment, but any stimulus must be in growth-enabling investments that will yield more than their costs, or they will just increase debt. ~~~

If you look at America's structural problem as a country, and reflect in on our own personal financial position, isn't it identical just as if we had taken up a highly leveraged mortgage to finance our own property purchase? Do we need to curtail spending to make long-term investments, when the future returns from such "investment" look so bleak and uncertain.

My Question : If you have no job and no income, how would you "structure" your mortgage repayment plan?

Good economic data in Singapore, such as GDP, perhaps could be achieved by having 2 casinos but such economic strategy is not going to help very much in sustaining yours and my employment contracts today, though we maybe so called seasoned PMETs.

~~~Second, America's solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less-skilled jobs that paid a decent wage at a faster pace, while spinning off more new skilled jobs that pay a decent wage but require more education.

There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers US$40 (S$54) an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. ~~~

The glaring issue is simply how our economy can also do just  that? - To pay S$54 per hour or about S$10,000 per month as salary to you and me. I would like to have that sort of a base salary as a bare minimum forever until I do retire, but I don't see any innovation of  a nature which can just stimulate that type of growth in our own economy on a bigger scale to afford me such comfort.

I work as a trained quantity surveyor in the construction industry for over 20 years. This is the very industry churning out those condominiums and HDB flats that each one of these other professional people - Developers (Marketing Agents), Banks, Real Estate Agents, Lawyers and also our Government - are hoping you will bite the investment "cherry", so that they could also make the same "S$10,000 per month salary" that we all want to have. But still I do not see the "innovation" forthcoming. Honestly, without any innovative ideas being adopted, I will still be able to handover to you that "beautiful" condominium you have booked with a "mortgage plan" and loan, as good as it was 10~15 years ago and at almost the same construction cost, if not cheaper; considering the still depressed world economy. That is why I said in an earlier posting, there is little change in the "construction cost" but developers are just making you pay that hike of S$200 psf of saleable area for the "land" or "land use" if it is a leasehold. Quite often, I see no "future" value adding possibility to the land, especially if it is 99-year leasehold. If so, why should you pay for this additional sum at all, especially if it is going to tie you up for the next 15~30 years in mortgage, assuming your employment could be sustained.

It is not the purpose of my posting here to predict whether a double-dipped recovery would manifest. What I do want to emphasise is as what Mypaper had put it in the caption - "What's certain is UNCERTAINTY". However, if you still believe that one's only property is "investment" which you are going to slog your entire working life to re-pay, at least; you should care about the basics an avid stock investor would want to know about the current state of the world economy.

Fear of a double-dip recession was already high after an ominous Fed warning on slow growth, flat consumer spending and decidedly mixed earnings. And that doesn't even take into account worries about a spreading European debt crisis or a slowdown in China.

~~~ But the global economy needs a healthy Europe too, and the third structural challenge is that the European Union faces what former US ambassador to Germany, Mr John Kornblum, calls its first "existential crisis".

For the first time, he noted, the EU “saw the possibility of collapse". Germany has made clear that if the euro zone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? It is uncertain.

Keeping up with Germany will not be easy. A decade ago, Germany was the “sick man of Europe”. No more.

Labour gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidised firms to keep skilled workers on the job in the downturn.

By contrast, America's two big parties still cling to their core religious beliefs as if nothing has changed. Republicans try to undermine the President at every turn, and offer their nostrum of tax-cuts-will-solve-everything – without ever specifying what services they will give up to pay for them.

President Barack Obama gave us expanded health care before expanding the economic pie to sustain it.

Well then, I say, get ready for a long phase of stubborn unemployment and anaemic growth.

With that said, will you still bite the cherry ? When it is a long term "investment" decision costing you a few hundred thousands or over a million dollars, with borrowing from the Bank and there is so much UNCERTAINTY,  if the BANK don't worry; you must. There is a Chinese proverb which best describe what you must do - 三思 or THINK THRICE ! 而后行 or THEN ACT.

Watch what they do, not what they say. This must be your own maxim, and that includes what our GOVT says.

You must also understand the mentality of a GOVT going for re-election, whether or not conditions might be skewed in their favour.

Are you going to trust 100% what a GOVT imminently going for re-election would say with good economic data, low unemployment figures and increasing land supply to build your EC, DBSS.... without a convincing Economic Review Committee (ERC) Report which offers you the sparks of sustaining your employment and rising your income level. Will you get that US$40 (S$54) an hour salary, with your personal upgrading and innovation you might have put into your job?

Conversely, you may want to factor in a reasonable "discount" over all such positive economic data and raw promises. This is not said to sow political discord but you just have to consider this bare minimum information about  the larger political climate which will help your "positioning" - the launching pad for new investment or reference point to review and restructure a mortgage plan.

My own innovative take is that the old "brick-and-mortar" strategy is not going to work anymore. It is not even enhancing my job and pay package in the construction industry where "bricks and mortar" are abound. I felt the same with the property or real estate investment, the old "enslaving model" to lock-in your CPF money and ensuing mechanics to prop up the private property market is not going to be sustainable. It will not work unless the ERC report is convincing enough to assure all of us that US$40 (S$54) an hour salary is available as a bare minimum and can be sustained for you, me and all others (hopefully including the wives) daring enough to bite this property "investment" cherry, notwithstanding beautiful GDP figures. It worked well in the 1980s & early 90s because rising income & CPF was a norm. But now income is stagnant and your CPF could not be restored even if your job is secure.

At the end of the day when we do retire (MM Lee said there is no need to), the issue is whether MBT or his successor can deliver (or liquidate) the real value of your property (HDB or private) he now promised is affordable but high, whichever way you may dispose off your "investment" later on. What if at the end of the day - he is no more around to tell your children "We must let them fight it out, the Government is not able to settle or fix ...". If you have no debts, your 2 kids may fight over the "estate" because you can afford only one property after being enslaved by your mortgage plan for 15~30 years. If you have debts, your 2 kids will fight over who should pay less of your remaining debts before splitting the "estate". The probability of this ultimate scenario is high with the old "enslaving model" and when all the interested parties is keenly waiting for you to commit to that additional "S$200 psf" right now. You may want to re-cap the maxim "Watch what they do, not what they say".

The present national approach still could not draw a clear line between public housing which requires real subsidy and private property investment, and it all get bundled and messed up as one whole for the average Singaporean (a layman ?). With a widened income gap, the old "brick-and-mortar" strategy needs a re-think and re-engineering, and if the policy needs to be skewed, the average Singaporean must be given the priority in terms of a roof, and not to generate more wealth for the rich developers or even the State as landowners.

SM Goh recently called on Singaporeans to spin their own Singapore Dream and live it, rather than focus on what he termed the Singapore Gripe which include high home prices. SM Goh has recasted the materialistic dream of the 5 Cs (Cash, Credit Card, Car, Condo, Country Club Membership) to a less materialistic form (career, comfort, children, considerate, charitable). While the less materialistic form is noble, these cannot not be achieved if you cannot juggle well with at least 3 of the other 5 materistic Cs. To the SM, "Career means constantly striving to be better in your chosen field", but does it really bring you more income by following his new model? Things on the ground are simply not so simple as he had argued.

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.

The article attached below reflects the "reality" on the ground despite the author presenting it as as one nice  picture "Fewer defaulting on mortgages". What do you make up from these statistics? I will have to end this post here lest it get too tiring to read and follow. There is a sudden surge in traffic to my blog the last one week and I see a few more thanks. The majority read about "The Property Bubble & Investment Trap".
Mr James Neo commented :- It is good that there is a Singapore blog that warns of the danger of the illusion of housing as an investment and that liquidity is still very important ... Hope that you will continue to highlight the property problems ... Singaporeans will be in a big mess like the western people are or will be facing when they placed such a big percentage of their net-worth into one asset class ... He also shared a Canadian blog which warned of the unafforability in Canadian real estate and debunk all the myths of real estate ... [
Link]. Without deviating too much from the general objectives I have set for my blog, I will oblige James and the others who may be keen to follow up on this topic.

Coming Up Next :
(1) Statistics on Defaulting Mortgages - What it really Means?
(2) Price Comparison Between Yishun Condo Site and Tampines DBSS Site Land Bids

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.


  1. Does Thomas Friedman Have to Talk to "Senior Economic Policy Makers" to Get So Many Things Wrong?

  2. Thank you for your hard work and sharing it with us. It goes well appreciated in my book.

  3. Thank you for providing your honest views on the property market.

  4. HI Anon 29 Aug 11.25

    Thank u for your support. The only way to find ways to resolve problems is to look at things in a transparent manner.

    Last Thursday, I wrote as per above blog about the $10K salary issue and 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 reported in ST Online that income ceiling for purchase of DBSS flats would be raised :-

    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....