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Monday, 11 April 2011

The Property Bubble & Investment Trap - GE Update

Due to the current STUPOR of the property market following the last set of control measures, I have not been posting on this topic, but on the hotter GE issues.

I have received two emails asking for my personal views on Properties with the GE imminent. I take note that property agents are trying to push the market upwards. And there were some recent high land bids by large developers (even GLC ones) and expensive launches. After the GE, if the PAP wins by good margin; we can expect the new Govt to try to please the Developers more than the voters.

As a note of cautious, I thought it would be appropriate to re-post this letter from the ST Online here as we ponder on the effects due to the recent crisis in Japan, which may continue to drag the market sidewards for some more time as it awaits other external drivers to set the market direction.

Do remember that what our Govt or even agents could do is on the "push" factor, whereas what the market really need could be a stronger "pull" factor to get it out of the stupor. Any adverse external driver would force the market downwards.

Reference #001
Abstracted From :-
ST Forum  Apr 11, 2011

IT HAS been reported that property prices are moderating, with a reduced pace of price increases and drop in cash over valuation (COV) of HDB transactions ('Property cooling steps working: Mah'; April 3).

The reality is that prices are showing a net increase albeit at a slower pace. As HDB has been known to use market subsidy pricing pegged to open market transactions, current conditions mean higher absolute price levels for new flat buyers.

The downward trend in COV simply means out-of-pocket cash outlay has decreased. But if the average reduction in COV is $5,000, and average valuations have increased by tens of thousands, the absolute price point of HDB flats would have actually risen, requiring a larger debt quantum to be serviced, even though they may be arguably classified as affordable.

Economic cycles of late have shown there are few iron rice bowl careers now. When there is market exuberance, it is psychologically easy to join in the frenzy of acquiring homes simply based on affordability over the next few years. But loan terms span 20 to 30 years and the crunch comes during downward economic cycles when Central Provident Fund (CPF) rates are tweaked, salaries are frozen or reduced, and unemployment becomes prolonged. Many here tend to be asset-rich and cash-poor. This is partly because a large debt quantum translates to a larger loan interest payment, coupled with the opportunity cost of not getting the interest generated had the funds gone into CPF accounts.

This effectively diminishes the cash asset build-up for retirement. Should the home asset need to be realised for any reason, whether it would have sufficiently appreciated to cover all expenses incurred will depend on the luck of timing.

Some are benefiting from the market trend, especially those who downgrade, as they encash their assets, which have appreciated, and acquire lower-priced homes.

Many others are hopping on the bandwagon at entry points where home prices have escalated way beyond economic growth over the last few years. Hopefully, the 'soft landing' looked forward to in the property market balances the myriad factors in the property supply chain.

Otherwise, this may inadvertently contribute to the widening wealth gap.

Rafiq Hamjah

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