Sunday, May 16

Property crash of 1996

Posted by at 1 comment
I'm not sure if anyone still remembers the previous property crash of 1996 where prices of properties tumbled over 40% from the 2nd quarter of 1996 to the 4th quarter of 1998. Going by the euphoria sweeping the market and the tendency for people to forget, the bad memories of this crash are probably distant by now.

I found an excellent chart on the private residential property price index on Singapore Real Estate Info here that gives a graphical representation and the significant news and measures taken by the government from 1960 until 2010.


(Taken from singaporerealestate.info)

Back then at the peak of the market, the property news that made it to the papers were of the following;
  • Enbloc sales being carried out or being proposed at private estates
  • Record sale prices by developers
  • Buyers queuing overnight with long queue lines at launches
  • Influx of foreigners buying properties
  • Flipping of properties to get rich
The government tried to stem this bubble by introducing more land sales to increase the supply and to show that there is adequate land to meet the demand. When that fails, more drastic measures were introduced such as;
  • Housing loans limited to 80% for property purchase
  • Tax on gains from the sale of properties bought within 3 years
  • Additional stamp duty within 3 years of purchase of properties for sellers
  • Stamp duty for buyers of sales and sub-sales of uncompleted properties
  • Foreigners not allowed to take housing loans
  • Permanent residents limited to one housing loan
The property market started to head south and with the impact of the Asian Financial Crisis acting as the catalyst, the housing bubble burst and the property market crashed.

Fast forward 14 years later to the current state, the property news that are making to the papers now are generally the same as in the past though the property market now is not as hot as it was back then. Similarly, it is also seen that the government has introduced an increase in land sales to meet the demand and HDB will also be ramping up its flat supply. Measures to counter speculation have also been introduced though they are not as draconian as in the past. To me, it seems like history is going one full circle in a milder manner though. So the question is where will the market head to from now ? That is something for you to think about.

Tuesday, May 4

Dream Home Loans

Posted by at 1 comment
Dream Home Loans
By Gabriel Chan and Harsha Jethnani
Taken from the Sunday Times on 2th of May 2010

If you thought low mortgage rates would stay unchanged this year, think again.

Over the last month or so, some banks have upped the spreads they charge above Sibor - the rate at which banks lend to one another - making Sibor-pegged home loans more expensive.

The three-month Singapore Interbank Offered Rate, or Sibor, was at 0.54 per cent last week, below the previous all-time low of 0.56 per cent in June 2003.

At DBS Bank, a home-buyer taking a loan of 80 per cent of his property's value around March would have paid a rate of Sibor plus 0.5 percentage point for the first year and Sibor plus 0.75 percentage point for the second.

A buyer opting for this Sibor- linked DBS package now will have to pay Sibor plus 1 percentage point for the first two years.

Some fixed-rate packages have also shot up recently.

Standard Chartered Bank's one-year fixed package stood at 1.25 per cent in March, but has risen to 1.95 per cent.

Sibor, which is already low as it tracks prevailing United States rates which are at rock bottom, fell further following gains in the Singapore dollar last month.

In line with the improving global economic outlook, interest rates in some countries have moved higher - with more rate hikes expected globally in the second half of the year.

Some experts tip Sibor to rise later this year and to go even higher from next year.

Standard Chartered economist Alvin Liew predicts the three-month Sibor rate will likely rise to 3 per cent in 2012.

'Mortgage rates are hitting one of the lowest levels in recent years,' says Providend's head of financial planning, Mr Eddy Cheong. 'I think, going forward, there is a high chance that rates will move up if the economy continues to improve.'

When interest rates rise, monthly instalments on home loans that are not fixed will be driven up.

This could have severe implications for buyers who have over- extended themselves with big mortgages, believing interest rates will always stay low.

'Do your numbers properly. Buying a home should be a blessing, not burden,' says Mr Apelles Poh, a financial planner with Professional Investment Advisory Services.

While some home loan rates are now higher, there are still bargains and benefits out there for the cost-conscious home-buyer.

The Sunday Times shopped around to find out what some banks have to offer:

Fixed-rate loans

If you want loans with fixed rates locked in for a term of three or five years, try DBS Bank.

Last week, the bank introduced its five-year fixed package, an unusual tenor in the market.

Rates: Three-year package: The bank's current promotion requires a customer to also sign up for its mortgage insurance plan. Rates are fixed at 1.99 per cent for three years, and Sibor plus 1.25 per cent thereafter.
Standard rates are otherwise 2.2 per cent for three years, and Sibor plus 1.5 per cent thereafter.

Five-year package: For those taking up mortgage protection as well, rates are 2.25 per cent for five years and then Sibor plus 1.25 per cent.

Standard rates are 2.5 per cent for five years, and Sibor plus 1.5 per cent thereafter.

The managing director and head of DBS' consumer banking group, Mr Jeremy Soo, says: 'Our three-year fixed rate remains highly popular with home owners desiring more certainty in their repayment, especially with our three- and five- year fixed rates at a historical low'.

He says the current promotion includes mortgage protection, which is a 'key consideration for many home owners since mortgage is a long-term and significant commitment'.

Sibor-linked loans

If you are exploring Sibor-linked loans, HSBC will be the bank of choice. Its 'no lock-in' Sibor-pegged loyalty home loan is the only package that offers decreasing spreads over the tenor.

Rates: You pay the three-month Sibor plus an additional 0.9 per cent for the first year, three-month Sibor plus 0.8 per cent for the second year and then the three-month Sibor plus 0.7 per cent thereafter.
'The interest spread reduction feature serves to benefit customers regardless of how Sibor rates move,' says Mr Sebastian Arcuri, head of personal financial services at HSBC Singapore.

This bucks the conventional home loan package, which typically sees interest rate spreads rise over the loan tenor, he adds.

Sibor-linked loans with flexibility

Citibank provides the best solutions if you are looking for flexibility through the widest variety of Sibor- linked loans.

Unlike other banks, Citi offers loans pegged to the one-month Sibor. Other loans are pegged to the three-, six- and 12-month Sibor. Lock-in period varies from zero to two years, and spreads are determined based on the size of the loan and customer relationship.

Citi offers the lowest rate on one-year fixed packages at 1.5 per cent. For its two-year fixed package, it charges 1.88 per cent for the first two years.

Rates: For the first year, rates are Sibor plus 0.7 per cent to 1 per cent. For year two, rates are Sibor plus 0.9 per cent to 1 per cent, and thereafter Sibor plus 1 per cent to 1.25 per cent.
'Customers have the flexibility to switch from one tenor to another upon tenor maturity date,' says the business director for secured finance at Citibank Singapore, Ms Vibha Coburn.

As an example, clients can make use of the low one-month Sibor and subsequently, when the month is over, perhaps pick a 12-month Sibor if they feel that interest rates are likely to rise.

SOR-linked loans

For loans tied to the Swap Offer Rate, or SOR, OCBC and United Overseas Bank (UOB) are good picks.

UOB offers a package tied to the one-month SOR, now at 0.35 per cent, that allows customers to pay a fixed monthly instalment for a one-year period.

Rates: For the first three years, rates are one-month SOR plus 1.25 per cent, and thereafter the one- month SOR plus 1.5 per cent.
In the first year, if interest rates increase, 'customers can be assured that their monthly cash flow will not be disrupted. Conversely, if the rates decline, customers can pay off more of the principal amount', says a UOB spokesman.

The one-year constant monthly instalment feature can be re-continued for subsequent years as the fixed monthly instalments will be re-computed based on the remaining tenor and interest.

SOR-linked with lowest rates

OCBC offers the lowest rates on loans pegged to the three-month SOR, which is hovering at around 0.39 per cent, with a two-year lock-in.

Rates: SOR plus 0.75 per cent for the first year, SOR plus 1 per cent for the second year, SOR plus 1.25 per cent for the third year and SOR plus 1.5 per cent thereafter.
Ms Phang Lah Hwa, OCBC's head of consumer secured lending, advises buyers to guard against being swayed by just their sentiments.

Properly assessing your financial ability before making a commitment is important, she says.

'Consider longer-term issues, like affordability in the event that interest rates rise or instalment amounts increase,' adds Ms Phang.

Loans with variable rates

As for loans with variable rates, Maybank emerges the top of the lot, with the most affordable rates, with a two-year lock-in.

Rates: The loans are tied to the bank's board rate, currently at 3.75 per cent.
Rates on the loans are discounted from this 3.75 per cent, starting at 1.18 per cent for the first year. Customers will pay 1.68 per cent in the second year, and then 2.28 per cent in the third year, and 3.25 per cent thereafter.

To mark its 50th anniversary, Maybank is offering a cash gift of $5,000 to customers who pick up the variable-rate loan, says consumer banking head Helen Neo.

Rates for loans inclusive of the gift are slightly different, at 1.68 per cent for the first year, 1.88 per cent for the second year, 2.38 per cent for the third, and 3.25 per cent thereafter.

The two packages offer 'customers discounts off the bank's board rate throughout the period of their loan tenor', Ms Neo adds.

gabrielc@sph.com.sg

harshamj@sph.com.sg

Saturday, May 1

Be prepared for higher mortgage interest rates

Posted by at No comments
The graph belows shows the historical 3 months SIBOR chart starting from Jan 1988 to the SIBOR now. The data that were used from to obtain this chart was taken from MAS's website here.



The current SIBOR, at the time of publishing of this post, stands at 0.646% and this is one of the lowest SIBOR which we have seen so far. In fact, the SIBOR has been hovering at a very low rate at around 0.69% as compared to the previous two decades, which can be seen from the chart.

Typically, interest rates will begin to rise when the economy is recovering as this is the case we we should be seeing now. Admittedly, low interest rates for the past year or so has enticed buyers to make purchases of properties since mortgage payments will be very affordable given the low interest rates. As such, buyers can be lulled into the belief or assume that mortgage payments will continue to remain affordable for a long time and this can be a rather expensive assumption.

As an example, we can consider a loan quantum of $500,000 with a loan period of 30 years. With an interest rate of 3%, the monthly mortgage payment will be $2,168. If the interest rate is increased by 2.5% to 5.5%, the mortgage payment will increase to $2,839 and that will be an increase of $671. So the question is that will you have any difficulty in servicing the monthly mortgage payment if the interest rate increases ? Otherwise, it will be prudent not to over leverage and set aside an amount of funds to cover implications that may arise from an increased interest rate.

Sunday, April 25

Factors crucial to financial freedom

Posted by at 3 comments
There are three factors which I consider as crucial to get started on the journey towards financial freedom. To get started, I would define financial freedom to be the ability to sustain your desired lifestyle with little or no further work. That means that without having to work, there will still be income being generated from other avenues that can meet or exceed your expenses.

What are these factors which I consider as crucial ? These three factors are Earnings, Savings and Investment. These three factors are closely linked to each other and the combined strength of these factors is greater than the individual sum of these factors alone. If you are able to do well in just two of these factors, you should be rather financially stable after all. But if you can do well in these three factors, you should be able to achieve financial freedom after a period of time. The three factors are being elaborated below.

Earnings

The ability to generate earnings can give rise to a higher proportion of savings which can give one much more capital to channeled it into investment, which can then give rise to a higher absolute return. Consider the case of two persons who are earning $1,000 and $5,000 monthly. Let's say that both are able to save 20% of their salaries. At the end of each year, both of them will be able to accumulate $2,400 and $12,000 respectively. If both of them are able to generate the same investment return on their savings, who will take a shorter time to hit $100,000 ? This answer is pretty obvious for the one who earns less must either take a longer time or generate a higher investment return to hit his investment target.

Savings

The ability to save is equally important too though this factor is usually not deemed to be as important as earnings generally. Irregardless of your earnings, if you are not able save much, there will not be much capital left for investment. Without capital, it will be difficult to acquire assets which can generate streams of income. As such, both earnings and savings are equally important to me.

Investment

If the above two factors are satisfied, you should have a substantial amount of capital for investment. But the foremost rule of investment is to preserve your capital. As such, one should always be wary and prudent of any investment opportunities for it takes time to build up a substantial amount of capital. The capital should be deployed to investments which can offer capital gains and a steady stream of cash flows over a period of time. Some examples could be in the form of purchasing equities or properties which can give capital gains during a price appreciation of these assets. Dividends and rental income from these assets will also give a steady stream of cash flows. Such gains and cash flows can also be reinvested to acquire more of such assets which can give rise to a higher capital gains and cash flows.

However, it is not easy to satisfy all these criteria. The reality is that all of us are in different circumstances and these circumstances may not allow us to meet the criteria easily. Some of us may be stuck in industries or companies that do not pay as well or do not possess enough qualifications to command higher earnings. Others may find it hard to save due to inevitable expenses such as payment of loans or parental support or even the need to sustain one's lifestyle. To add on, investment is an another totally different game which the majority of us may not do extremely well for it takes knowledge and experience on top of the ability to rein in your emotions to be able to achieve a higher return. Doing well for any of these two factors should ensure that you should be financially stable but doing well for these three factors will get you started on the road to being financially free.

Monday, April 19

The more things change, the more things stay the same

Posted by at 1 comment
Has the sudden change of market taken anyone by surprise. Last Wednesday, the STI broke the elusive 3000 level by closing at a level of 3019.74, fueled by the news of an excellent quarterly GDP growth by Singapore. When I logged into Facebook on the following day, I saw a few comments that goes like this.

"NOL huat arh !"

"XX% profit on Cosco, more to come !"

"Time to do analysis on Genting !"

A rising market that makes the most noise draws in speculators easily. Fast forward to the present, STI closed badly at a level of 2960.93. Now I wonder if those speculators and punters are sitting uncomfortably on a loss now. This episode is a stark reminder that the stock market is not an ATM machine. But as human nature goes by, greed is inherent in us and many will still continue to speculate and punt.
Subscribe to: Posts (Atom)