Mar 7, 2009

Why Your House Might Not Save You

We don't know how long the current economic crisis will last. Maybe six months, maybe a year. Maybe two years, or three, or seven.

Some people might regard their residential property as their back-up plan. For example, they might be living in a 5-room HDB flat. In a worst-case scenario, if they really need cash, they could sell their flat and downgrade to a 4-room.

Will the property downgrade plan actually work? That depends on several different factors. One factor is whether you can find a buyer at all. In a prolonged economic crisis, the property market could become quite dead.

If you do find a buyer, the next consideration is the price your property will be able to fetch at that time. And then there's the outstanding amount of the mortgage that you'll still need to pay off.

In a very poor market, the sale price might not even be able to pay off the remaining amount of your mortgage. Let alone enable you to buy another smaller property to live in.

Here's an interesting case study from TODAY. In this case, the property downgrade plan proved to be a dud.
My Middle Class Prison
Friday • March 6, 2009
Tabitha Wang

MY FRIEND from Singapore just emailed me with the dreaded news: She has been retrenched. She could see it coming but even so, it still came as a shock, she said.

Her situation is not so bad, she admitted, with a rich boyfriend and parents to support her. Even so, she said, it felt weird to have no cash in hand. “What I wouldn’t do to be you now,” she continued. “You never had to worry about money.”

How wrong she was. I know poor because I’ve been there. Being poor doesn’t just mean living in a rented one-room flat with barely enough money to buy one meal a day. It can also mean owning a private condo and a car and still not being able to afford a meal a day.

Hong Kong’s Financial Secretary John Tsang recently came under fire from white-collar workers because the government’s latest budget didn’t make many provisions for them. He defended the decision by saying they could just re-mortgage their homes or live on savings. But what he failed to realise was that you can come from the middle class and still be poorer than a blue-collar worker.

Poor is not being able to sell your assets because their values have fallen so much that selling them would mean getting into bigger debt. And you can’t remortgage your home because no bank would give a loan to the jobless. So you end up living in a condo where you can’t afford to pay even the management fee and owning a car you can’t drive because you cannot afford the petrol.

Poor is when every bill strikes you like a body blow and you cross the road to avoid being seen by your usual bubble-tea seller because that $2 can buy you a meal.

I faced poverty during the Sars period, when my husband’s firm went bust and we were left with no savings and debt of over $200,000. Thankfully, I was still working, but my pay was just enough to service the monthly debt repayments.

It was a miserable time. With no jobs to be found, my husband plunged into despair.

No one wanted to rent my studio apartment. I wanted to sell it but the price had plunged so much that I would be owing the bank another $50,000 at least if I had done that. Keeping it and servicing the mortgage was, ironically, the cheaper option. We couldn’t afford to move back to it for a few months because we couldn’t raise enough money to hire a van.

The worst was praying my husband wouldn’t fall ill because we had no medical insurance. We couldn’t fork out the thousands needed to pay for his premiums.

When I tell people my story, they think I am exaggerating the difficulties. “Why didn’t you borrow from your family and friends?” they ask. Well, we would have were it not for pride (having been brought up by our parents never to beg) and the fact that we knew they didn’t have that much to spare anyway.

........ As the middle-income noveau poor, we were in limbo — we earned too much to qualify for any assistance but not enough to pay off our debts. But declaring bankruptcy was not an option, not if my husband wanted to start another business again.
I think that the above article is one that many property owners may want to bear in mind. One must recognise that there's a risk that the market value of your property could do a nosedive, just when you most desperately need to sell it.

Because the decision to sell your home is a big one (and may be attached to all sorts of emotional considerations), it's likely that you might delay it as long as possible. In other words, you treat it as a last-resort strategy.

The problem is that by then, you'll be at your most financially vulnerable. As Tabitha discovered.


Anonymous said...

And there are still many clueless govt-loving Sinkies SMUGLY going around telling other people to "downgrade and live in smaller home LOR".

Anonymous said...

That's why cash is called King in both good and bad times.

That's why networth is not only assets minus liability but also exclude property or other fixed assets. A millionaire is defined as one having net liquid assets exceeding a million.

That's why being asset rich and cash poor may not be a good thing. Can you eat brick and mortar?

The gahmen has been very proud that we are a nation of "homeowners" (99 yr HDB). Now the above reality is sinking in and may even well be widespread!!

In fact a measure of how desperate a company is when they even paid employees partly in kind rather than cash!!

Anonymous said...

i suppose it's a question of mindset. some people actually see purchasing a property (i'm not saying those that are bought to make a good buck by renting out, i mean those that u intend to stay in for the rest of your life) as an investment, thinking that if all else fails, they can sell the property, which is pretty much what u have blogged about, mr wang. i just personally feel that it's a very sad thing.

Anonymous said...

Nowadays commitments are made based more on the premise that the good times will last a long while.

People tend not to look at the possibility of loosing their jobs, or the need for much savings etc. As long as one can afford the initial payments, they never think too much about their long term ability to service the debt. After all, there is always this consolation that in the worst case scenario, just sell the house. But there are problems as you have pointed out.

Life is still full of uncertainties and you can never wait for the right time to prepare for the crunch. Trying to, when you are already in bad times is not feasible or possible.

Animals and insects know that if they do not store food for winter they will die of starvation. They have never erred from this natural behavior. What about humans?

Lost Citizen

CA said...

The property market in Singapore is currently weak, but it hasn't fallen off a cliff... yet.

Hard economic times are starting to hit Singapore, but the worst is yet to come. Singaporeans haven't felt the "heat" so to speak like their American counterparts because they are generally not as highly leveraged. But, as much as it pains me to say this, without the American consumer most of the global economy is in for a sh!tstorm. The job losses are just beginning in this region as the contagion spreads from the US. With the Dow likely to breach into the 5,000s, we can only expect the situation to worsen.

The glut of property that is about to come online in 2009 as well as impending job losses as well as asset declines do not bode well for the property market here. As ineffective as the policy response is in the US, the rest of the world (apart perhaps from China) is WAY behind the curve. The S$25b is merely 10% of GDP, and even less of GNP, and will likely not be enough to boost the economy for this protracted recession/depression.

David said...

Hello Mr Wang, this is the second time I am posting on your post. I wrote an email to you previously about the life of an IB.

These middle class you have expounded are not justified to be given any consideration for the supposed "plight" they had landed in.

(Too poor to service their loans, too rich to qualify for social aid.)

The problem with many middle class is that they failed to have a contingency plan for rainy days. They got a bigger paycheck - they desire bigger apartment, posher cars, further holiday destinations, bigger ticket items.

They might be academically inclined yuppies in their yound 30s, stood firmly (above the middle) of their company's corporate ladder, some were even in financial sector which pays grossly exorbitant paychecks - but yet these people are failures at financial literacy.

Middle class parents tend to score A* at teaching their next generation sound moral values but themselves are too smart for the concept of simple financial prudence like our forefathers.

Onlooker said...

just an observation:
The buy back value of hdb is way below market value.
And resale vlue have dropped below new hdb value.
Yet we still have people who can't commit claiming they are paying more than citizens.

Jim said...

While the rest of us scrimp and save for a rainy day, people like Tabitha spent all their money on luxury, then expect financial assistance when they lost their source of income. Should I sympathize them?

Strictly speaking, one can't really afford a condo and a car unless you can pay the installments for at least 2 years without a source of income.

Parka said...

Here's an interesting article by Donald Trump on his blog.

The 3 D's of Real Estate

Anonymous said...

I concur with David.

Like what Warren Buffett said: "only when the tide goes in that you can see who is wearing trunks"

The asset liability said...

Mr Wang, have you not noticed how some people's indulgence in property has accumulated to our current situation of needing cheap FTs to sustain the industries and yet cannot save ourselves?

Remember why Singaporeans are now in 30 year neck deep debts just for wanting a home? And not that we have a choice, being encouraged to marry and have kids, but parents are squeezed into ever smaller flat sizes "due to the new wants and needs of Singaporeans on housing."

Wasn't there this group of mavericks who said that Singaporeans should unlock our asset values? Or did I mis-remember. Would it be "asset enhancement"?

And we end up with housing so expensive, we need a higher wage to afford, but need to lower our wages to compete with other nations to survive.

And we need higher wages to improve our and our kids' education to compete with FTs for lower wages.

Confusing isn't it? Especially when all these come from the same source.

But I digress. Back to properties.

Why not sell our properties Mr Wang? We are punished for owning a HDB anyway.

When times are good and we bring in FTs to lower our wages, these FTs push up the rental market. So the rest of us who are not renting out, are punished by the FTs AGAIN through property tax on rental we never earned.

When the market is poor, and those who owned Condos etc downgrade and rent, supportig the HDB rental, we are AGAIN punished for not renting out our HDB and having work.

How is it then, that we should even keep a HDB? It is a liability more than an asset. An overleveraged liablity. And not by the home owner too.

Anonymous said...

Interesting story...

But who is to blame but themselves to over leverage on themselve?

I concur with Jim. If the market is good, they will be the one laughing to the bank. This is the risk that they have taken in a property investment which turn sour. Sorry but there is no free lunch in the world and you have to leave with your bad investment choice.


Anonymous said...

While I have to agree with readers that we all need a lesson in managing finances, I cannot say I agree that it's only the noveau riche among the middle class that slurge on luxuries. When given a windfall and opportunity, the first instinct of anyone these days-- middle class, low-income, or never-come-to-school-kenna-detention class-- will likely spend the extra cash buying luxuries they do not need instead of thinking about saving it up.

What I will say next will draw more flak, but what the heck: have you ever seen the queues of people buying 4D or Toto? I'm sure you know of people who spend a lot of money religiously buying a hope, and if you thought about it, if they actually saved the money, whether it's $100 or $2, it would actually amount to substantial savings per month no?

"Substantial savings" does not mean you save in the thousands-- for someone earning $800 a month (say) and spends $400 on lottery ($100 each week), he actually saves 50% of his income.

FYI, it's the people from the low-to-middle income group that spend more on 4D and Toto than the mid-to-high range.

Despite that, it doesn't matter which "class" you come from-- in a sluggish market, everyone is screwed, from Uncle Tan in his one-room rented HDB to Big Boss Mike in his D10 bungalow.

Trebuchet said...

Well, I'm middle-class and retrenched last year. 5-room HDB. Good thing is I don't owe any money to anybody and I have a lot of cash.

That's because 200k HDB beats a 1.2m condo with monthly payments for a couple of decades anytime.

Still haven't got a regular job. Still alive. And not upgrading anytime soon.

I'm not being smug, although I probably sound like it. I think I'm a normal Singaporean, financially speaking, except that I'm not greedy for status or wealth, which my finance friends say is very unusual.

I don't know whether it really is unusual or not. My friends aren't greedy either.

Anonymous said...

Let's touch earth. The reality is, many( i believe the number is huge considering the state of economy and a greying population) want to sell their homes( especially downgraders) AT MARKET VALUE but hard pressed in finding buyers.

Buyers also don't want to be caught in a "raw deal" so only a lucky few will hit the "jack pot" price for their homes.

As more new homes are being built, where do you find enough suckers for older homes? immigrants( i doubt immigrants are long term stayers and that would post future problems for the market)?

This leave me with one conclusion. Many homes are potentially "worthless"( you can't sell at market price especially if your home faces "ugly sights" "dumbs" "traffics" etc)

Unless they come up with some policies changes soon, many homeowners pigeon holes will be full of "holes" - pte homes worse hit!

arevl said...

As I'm working overseas but closely monitoring the SG market for "deals", just received an article titled "Property market starting to stir" frm my dad:

Thanks to the mini-buzz created by two new successful launches - Caspian in Jurong and Alexis @ Alexandra - a few developers have decided to release their projects for sale.

It is an improvement, even if it is just a slight one, from the very sombre mood a month ago, when market watchers were expecting the lull in the market to continue.

Over the weekend, TG Development launched 30 units of the freehold, 102-unit St Patrick’s Residences in St Patrick’s Road in the East.

On average, prices start at around $675 per sq ft (psf) for a two-bedroom unit and rise to about $900 psf for a four-bedroom penthouse.

Unit sizes range from 1,152 sq ft for the two-bedroom units to 3,423sqft for the four-bedroom penthouses. Some three-bedroom units can cost just under $1 million.

The interest absorption scheme, which allows buyers - if they take a loan from the start - to defer making any payments beyond the initial down payment until the project is completed, is offered at a 3 per cent premium.

Marketing agent Savills said the condominium offers quality furnishings and fittings usually associated with prime projects, and that a few units have been sold since the preview a week ago.

Near Upper Bukit Timah, Hiap Hoe has launched The Beverly, its 118-unit condo in Toh Tuck Road.

Each unit is served by a private lift. Prices start at $648 psf; the average price is $750 psf. This means that the total price per unit should start from just below $1 million.

Unit sizes range from 1,120 sq ft for the two-bedders to 4,187 sq ft for the four-bedders. There are also double-storey penthouses from 2,099 sq ft to 3,757 sq ft. Hiap Hoe is not offering the interest absorption scheme.

Other projects expected this month include Double Bay Residences in Simei, The Arte in Thomson, Domus in Irrawaddy Road and an 18-storey project in River Valley.

These are in the mass- to mid-market categories that, unlike the high-end segment, are still attracting buyers.

New home sales in January had plunged to a new low as developers and buyers kept to the sidelines.

The two new projects that sold very well about two to three weeks ago - Caspian and Alexis - helped revive the market mood to a certain extent.

The Caspian showflat was packed during the preview, when 300 out of 712 units were sold at average prices starting from $580 psf. So far, more than 500 units have been sold.

The 293 Alexis units were all sold at $950 psf to $1,250 psf, but the absolute prices were reasonable, given that most units are small.

At a results briefing last Thursday, City Developments’ Kwek Leng Joo cited the good take-up at the two projects as proof that there is still demand.

‘The good response to recent launches is true,’ he said.

Still, the stock market and buying sentiment remain weak.

Ms Phylicia Ang, director of Savills Residential, said: ‘The affordability threshold is key at this point. In the current market, it is important to price projects at an attractive level to attract buyers.’

The UOL group should start selling the 646-unit Double Bay Residences near the Simei MRT station soon. It declined to give pricing details of the 99-year leasehold condo until the launch, but there is talk that prices will be around $650 psf to $680 psf.

The one-bedders start at 538 sq ft, the two-bedroom units from 915sq ft, while the big units can go up to 3,703 sq ft.

Along Thomson Road, The Arte is expected to be released for preview sale by the middle of the month.

Property agents have advertised the preview of the 336-unit, freehold condo at prices starting at more than $950 psf.

About half of the project, or 164 units, are three-bedroom units from 1,399 sq ft to 1,625 sq ft. Another 100 units are 1,873 sq ft four-bedders.

There are also advertisements for the preview of the 18-storey, 67-unit project in River Valley, which offers the interest absorption scheme. It has mostly small units - 32 are 635 sq ft apartments and 30 are 1,044 sq ft units.

A Chinese developer, Lakeview Developments, may also push out its 104-unit Domus this month.

High-end launches will likely be few and far between this year, as current demand is coming only from owner-occupiers or very small investors, according to a developer.

There should be more mass- to mid-market projects coming up in the next few months. These could include projects like the 99-year leasehold Ascentia Sky next to the Redhill MRT station. It offers two- to four-bedroom units from approximately 1,000 sq ft to 1,800 sq ft.

Mr Wang, what about this Sunday Times article? As usual Government Propaganda as well???

Mr Wang Says So said...

I saw the article. And I have been monitoring the market myself.

I think it was what is sometimes called a dead cat's bounce.

For Feb 2009, URA's statistics are going to show a lot of activity, compared to Jan 2009. But the activity isn't broad-based at all. Take away the Alexis and the Caspian transactions, and hardly anything else is seen.

arevl said...

Mr Wang, Dead cat bounce or not, I'm just surprised that still so many Singaporeans have the audacity to snap up homes at this time.

Maybe most of them are civil servants since their jobs are secure, but in the private sector, most of my friends are hurting...

And Singapore because export oriented has suffered drastic drops in our exports to our 2nd biggest trading partner USA.

But this recent spate of "Good News" for the SIN property market, I still cannot fathom.

Anonymous said...

The recovery is going to be either a U or L-shaped one. It means asset deflation and stagnation for a long long time. The smart people are getting out of property, not in. Property as an investment class is losing lustre under such conditions because of the large quantum required. Worse, if it's leveraged. Of course if property takes up just 33% of one's investment/asset portfolio, sure, go ahead then.

Mr Wang Says So said...

That's assuming you see property strictly as an investment. Of course if you're buying to live in it, then some considerations are different.

Anonymous said...

Well I hope for those that bought recently realise they are exposed on both their existing abode and the locked in price of the yet-to-be-built 'dream home'. I have known of people who got stuck when they tried to sell their HDB flat when they wanted to upgrade. The price at which they wanted to sell their HDB was obviously too optimistic 3 years ago.
All it takes is a retrenchment before this risk is mitigated and the house of cards come falling down.
So buyers, please beware.. there's no hurry to jump in.

Anonymous said...

Looking at how some Singaporeans view investments, there's one thing that's worth them putting their money in-- on the betting tables at the IRs! :P

Just trying to liven up things here, too much bad news going around!

Vincent said...

Equities market has gone down by a lot. Property market is next. The other area which I am rather concern is the currency market. The reason why our Sing$ is able to hold up is cos of our large reserves. Now we are facing deficit and tapping onto our reserves, and the reserves themselves have lost over 30% in the last one year. Demands for our goods and services will go down. I wonder whether is it safe to hold on to Sing$ in the long term? I heard that money itself is not a safe holding.

Jimmy Mun said...

Some years back, my friend bought a condo. It was boom times for an IT worker, so the commitment did not seem excessive. In fact, he was switching jobs every few months and had massive pay increments each time.

Then he got retrenched, but he found a new job immediately but with a 40% pay cut. The mortgage payments grew from 40% of his take home pay, to over 60%. One year into the job, he suffered another 5% pay cut, a cut right into the bones for him.

But that is still manageable, right?

The trouble is, he is not a Singaporean. Not even a PR at the time when he bought the condo, so he could not borrow in SGD. He borrowed in JPY instead.

So just as the local property market plunges into the deepest doldrums, the JPY exchange rate also shot off into new heights, and he found himself with a letter from the bank demanding a top up or face foreclosure.

Fortunately for him, he has a rich dad to bail him out, even though it was an unpalatable choice for him.

Soon after, his Singaporean wife dumped him as well. Surprisingly, like a jinx was lifted, the IT sector recovered, and his salary resumed the previous upward trajectory at a breakneck speed again, and he is earning quadruple what he was earning at the height of the dotcom boom, not including bonuses. Ironically, even though he refinanced the loan ASAP to SGD now that he is a PR, he moved to a job that is paying him in JPY.

This young man can be called a rich yuppie now. But he came pretty close to being a homeless bankrupt, all because of a property "investment" that didnt seem excessive.

I met him at work everyday during those darkest hours, and I was his passive smoking buddy, and yet I didnt had a clue what was happening to him.

Just because you didnt miss any mortgage payment does not mean the mortgage is "safe".

Anonymous said...

well if one wanted to buy a property for investment, REIT might be a better option.

Anonymous said...

I've got a question for Mr Wang and his blog readers: How far do you think the HDB resale prices will fall? Generally speaking, right now, I think the prices are roughly 200K (3-rm), 300-350K (4-rm), 400-500K (5-rm). Will they drop by 20%, 30%, 40%, before they rise again?

The said...

/// Anonymous said...
I've got a question for Mr Wang and his blog readers: How far do you think the HDB resale prices will fall?
March 10, 2009 3:58 AM ///

Anon at 3:58,
I am not sure, but with about 850,000 units, there should be an absolute floor around the new unit prices as the bulk of the HDB units are owner occupiers.

Can someone check this out? All these while, I am under the impression that the valuation during the resale of HDB units are subject to the approval of HDB. In other words, the HDB can moderate the resale price through the acceptance or otherwise of the valuations. Not sure if this is the practice - if anyone here can confirm this or otherwise.

Anonymous said...

Guys, don't buy into REITS! RE the newspapers reports on REITS reaching their end of interest contracts and need new financing this year? And REITS asking for Gov to refinance them?

REITS is not the way to go!

Anonymous said...

>> How far do you think the HDB resale prices will fall?

In all honesty, no one can give you an answer as to whether the fall will be 20%, 30% or 40%. The financial analysts will be able to give you some projections, but I say if you wanted to strategise, plan for a worst case scenario and ask yourself before committing the first dollar if you have enough resources to weather a sharp decline, and one that could last for a couple of years.

We take risks in investments, yes, but taking risk also means playing it smart and know how to cut your losses when things go wrong. Take an internal resource assessment, ask yourself what is your risk threshold, and if you figure you can take even 40% for the next 2-3 years on an investment, then I say go for it. Else, better to hold your horses and wait. The danger is giving in to market euphoria only to find out it's a case of "dead cat bounce" and then realise you're screwed.

Anonymous said...

Here in Singapore HDB resale prices may not fall by as much as 40% because in the first place it is under Government control.

They just cut back on building new flats and the demand will automatically exceed supply and buyers will just have to turn to the resale market. It will fall if bad times prevail, but not substantially, not when 90% of Singaporean's housing requirements is under the control of a single landlord.

Lost Citizen

Anonymous said...

"Here in Singapore HDB resale prices may not fall by as much as 40% because in the first place it is under Government control. "

I'm not sure about that. The so-called boom of 2007-2008 has a lot to do with a huge influx of cheap foreigners PMETs (migrant workers) renting or buying HDB from the open market. With "Credit Suisse report has predicted that an astonishing 300,000 jobs could be lost in Singapore this year and next... Of the total, 200,000 would be foreigners and permanent residents who, if they leave Singapore, would reduce its population by around 160,000".