It’s the season for rate hikes.
This Wednesday (July 27) the Federal Reserve raised another 0.75 basis point for second consecutive month. It vowed to go for more rate hikes to fight the battle against inflation.
Taking the hint from the Fed, Singapore banks are likely to follow suit to raise rates like the previous round. After all, this was how the three local banks drove the 3-year fixed-rate mortgage rate up to 3.08 percent end of last month.
Developers facing rate hikes
The NUS Institute of Real Estate and Urban Studies (IREUS) conducted their latest survey on property players. Nearly 97 percent of the respondents flagged rising inflation or rate hikes as the top potential risk in the next half of the year. Furthermore, eight in ten indicated “a decline in the global economy” and “tightening of financing and liquidity in the debt market” as the next top potential risk.
An unnamed respondent said: “Developers will want to launch quickly while sentiments are positive and before interest rates run up further. With high land prices and higher construction costs, pricing for new projects are expected to be moderately higher in this resilient market. But developers have to price them attractively since interest rates and inflation have risen and that may impact buyers’ affordability.”
“Singapore property players turn cautious as economic outlook darkens”, The Business Times, 20 July 2022
In the first place, inflation causes higher construction (material and labor) costs for developers. For homebuyers, inflation implies lower affordability, less spending power and weaker buyer sentiments. On the other hand, higher loan payments from rate hikes are putting more financial pressure on all borrowers, including the developers, builders and homeowners.
What’s more, developers still have over 40 new projects waiting to be launched. Their long wait started since the new cooling measures last December. Then this February the government announced higher property taxes as part of Singapore’s new wealth taxes. Next came the Ukraine War. Now we have inflation and rate hikes. It looks like the longer the developers wait, the gloomier the outlook.
Homebuyers facing rate hikes
With no major project launch last month, Singapore’s private new home sales fell to the lowest level since May 2020. Developers sold only 488 units or 64 percent less than 1,356 units sold the previous month. The best-selling project that sold 25 units is Riviere which was launched back in May 2019. The project still has 34 percent units unsold despite up for sale for over three years.
Will rate hikes have any big impact on potential private home buyers?
IREUS has done another recent research to check the affordability of private homes under rate hikes among households with the top 30th percentile income. This study is based on the assumption that they are first-time buyers of a 1,000 to 1,200 sq ft unit in OCR or RCR.
When mortgage rates hit 3.5 percent, for a 20-year loan, the group will be priced out of the resale market. However, if the loan tenure is extended to 35 years, they are only unable to pay the median price of a first-hand unit if mortgage rates reach 5.5 percent. For new private homes, the tipping point for affordability of a new unit is 4 percent or 4.5 percent mortgage rates for a 25-year or 30-year loan respectively.
“Rising interest rates and private home prices could push some out of market”, The Business Times, 11 July 2022
Buyers returning units to developers amid rate hikes?
Developers are expected to report sales result of their new project after the first launch weekend. Nonetheless, it is not a secret that there are always returned units at the end of the month. This can be calculated from URA’s monthly release of “private residential units sold by developers”.
Below is a table showing the number of returned units the following month as a percentage of reported units sold after first weekend for recent new launches.
From 28 September 2020, URA is supposed to clamp down on developers’ re-issue of Option To Purchase. So gone are the days when there were 20 percent of returned units for each new project end of every month. In fact, the percentage of returned units has come down to a single digit percentage.
The local media has started covering more on Singapore’s mortgage rate hikes in June. Do we see more returned units from homebuyers of uncompleted projects?
For the whole month of June, there is a total of 89 returned units. Most of these new projects have one to three units returned to the developer. It is difficult to tell whether the developers are simply readjusting the number of units sold the previous month.
1) Florence Residences
Launched in March 2019, Florence Residences sold 20 units last month and is one of the top 5 selling projects in June. EdgeProp mentioned every month that the Hougang condo is one of the best-selling projects. But it skipped the fact that it also tops the list in returned units. The project’s numbers of returned units are 11, 9, 6, 5, 9 and 8 in January, February, March, April, May and June respectively. For the first of half of this year, the “best-selling” project already has a total of 48 returned units. Out of 154 units sold during this period, the return rate is 31 percent.
2) North Gaia
Yishun executive condo North Gaia was released for sale in April. Although predicted to be “the hottest-selling project of 2022” by PropNex, it only moved 164 out of 616 units during the first weekend. Five units were returned from launch the following month in May. Last month, another 15 units were returned to the developer. That dragged the total units sold down to 162 in June which is even lower than the 164 units cleared on the first weekend.
3) Liv@MB
The popular new project Liv@MB sold 225 units at launch end of May. In June, there are 11 returned units. The return rate from the new launch weekend is 4.9 percent.
4) Cape Royale
99-year lease Cape Royale was only put up for sale by Ho Bee nine years after built. Units at the Sentosa condo are asking for an average price of $2,300 psf. On July 7, The Business Times reported that Cape Royale “moved about 50 percent of the 50 units” released on its first day (July 6). However, as of July 29, only ten transactions can be found in URA’s published private residential property transaction database. Where are the other 15 units sold on the first day?
Buying an RCR project at CCR price
On Sunday (July 24) afternoon, the local media reported that AMO Residence sold 365 out of its 372 units. The Ang Mo Kio neighborhood condo is not that near to the MRT stations as advertised. It is 12 minutes’ walk to Mayflower MRT, 35 minutes to Ang Mo Kio MRT, and 17 minutes to future Bright Hill MRT.
Selling an average of $2,100 psf, it is also not cheap for a mass market condo in District 20. In comparison, the nearest project Bishan Park Condo, though completed in 1994, is only $1,100 psf. Another nearby project 2 ½-year-old The Panorama has its two-bedders recently transacted between $1,600 to $1,700 psf.
This reminds me of J Gateway launched on that fateful day of 28 June 2013 when TDSR was announced in the evening. It was fully sold out on the first day of launch. Eager buyers submitted 1,400 blank cheques for the balloting of 738 units. Buyers bought at a record $1,735 psf pn average for a one-bedder in this Jurong East project. With cheap money nine years later, prices finally climbed to $1,800 psf. However, these “early buyers” are still holding onto their units. They can hardly breakeven after deducting transaction costs, taxes and expenses paid over the years.
With less competition in the area, J Gateway buyers are already more fortunate compared with those who bought RCR and OCR new projects in 2012 and 2013. Early buyers of new condos like eCO, The Glades and The Trilinq are still under water after ten years. (Read “What happened to buyers who overpaid at new launch?”)
Buyers of incomplete projects face higher default risk
When homebuyers put down a deposit at the sales gallery, they all think that property prices will go up by the time the project completes. After the downpayment, they pay the rest according to the progressive payment scheme from the developer. This is exactly why buyers of incomplete projects often face higher risk of default, for three main reasons:
1. Change of borrowers’ ability to pay
A new project takes a few years’ time to build. When it’s time to collect the key, the buyers’ financial situation may have changed. If they fail the stress test, they will be unable to secure financing.
2. Lower loan amount after rate hikes
Rate hikes lower the affordability of potential buyers and put pressure on property prices. As a result, banks become more conservative on property valuations. By the time the buyers arrange their mortgage, they may not secure the loan amount originally approved by the bank.
3. Tightened borrowing in a downturn
There is time lag between the approval of a loan and the disbursement. When the economic situation changes, banks start to tighten borrowing. They may not grant buyers the housing loan originally approved for their property.
What happen when banks withdraw loans
This is exactly what buyers of TOP projects faced during the last Global Financial Crisis. Buyers bought their units at high prices in new launches. When the financial crisis spread to Singapore in 2009, that was exactly the time when these projects obtained TOP. Banks either offered lower loan-to-value or completely withdrew the originally approved loan. After valuation of their new home dropped, many buyers could not find a loan to match their purchase price.
To avoid mass return of units, developer of the Centris arranged a roadshow for buyers who were looking for financing. Far East helped some buyers to lease their new homes under their leasing arm. Some new owners resorted to exchange for a smaller unit.
Prices of these condos have gone up since then. But this is only relevant to owners who could survive and avoid default during the bad times.
Another story: Marina Collection is a high-end project in Sentosa launched for sale in 2007 at $2,600 to $2,800 psf. Unfortunately, prices soon plummeted to $1,600 to $1,800 psf. By March 2011, 38 owners of 42 sold units defaulted on their UOB mortgage. At the end, UOB sued developer Lippo for inflated selling prices with furniture rebates up to 34.5 percent of purchase prices. UOB sought to recover S$181 million inflated housing loans disbursed.
According to Knight Frank, auction listings rebounded 47.5 percent in Q2 2022 under rate hikes. Mortgagee listings were up 6.4 percent to 50 properties. Out of the 13 properties moved at the three monthly auctions in Q2, 10 were mortgagee sale.
Food for thought
Many people are penny wise pound foolish. For small amounts, they will go all the way to compare prices and bargain for a lower offer. They won’t hesitate to complain when they find that they have paid more. They will do everything to ask for an exchange or a full refund. However, when it comes to the most expensive big-ticket item like their home, they will tell you things like it’s priceless. They’ve found their dream home. They buy because of leap of faith …
According to the URA data, last quarter private home prices are still up 3.5 percent. Celebrate while we can. This is likely to be the last quarter we see any good news from the private home market. Even the URA figures show us the increase in the supply pipeline and the bulk of new homes obtaining TOP in 2023.
Inflation, rate hikes, bear markets and recession fears are not going away any time soon. We will be seeing more bad news than good news coming. There is really no hurry to take the plunge now.
If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.
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