Last Monday (August 29), there was an article in The Straits Times titled “Drop in appetite for private homes among some HDB owners”. It said HDB upgraders’ love affair with private properties has cooled in the first half of this year.
According to URA’s data, buyers with HDB addresses only bought 3,649 new and resale non-landed private homes. The figure was down 26.2 percent from 4,942 in the first two quarters of last year. The drop was more obvious in new non-landed private homes sold by developers. A mere 975 units were purchased by HDB owners. It was 51.5 percent lower than 2,012 units sold during the same period in 2021. This is despite the fact that prices of HDB resale flats and private homes climbed 5.3 percent and 4.2 percent respectively.
So why are HDB owners no longer keen to upgrade to private homes?
The article cited last December’s property curbs and higher mortgage rates the two main causes behind the loss of appetite. However, from what we see in the current market, there are four major reasons behind the fast shrinking of private home sales transactions.
Reason #1: The loss of market confidence from developers
Higher ABSD and mortgage rates may be the push factor. But the weak pull factor from the developers is also to blame.
Local property agencies and our vested media may continue to brainwash us that “homebuyers sentiments remain positive”. But on the other hand, the developers show us that they believe otherwise and behave the opposite way.
Because all developers understand one critical thing: When there is no more low interest rates and cheap money flowing around, the “pent-up demand” from both HDB upgraders and investors will dry up quickly.
The article said that developers are highly cautious now and holding back launches. In fact, there was an unprecedented drop in new launches in the last two quarters. The 2,569 units launched during this period were an 18-year low. That implies developers’ market confidence of private residential home sales is even lower than during the last Global Financial Crisis in 2008. But it is slightly better than the post-SARS economic downturn in 2004.
As buyers, we see the same “old” projects being relaunched repeatedly to push unsold units. No wonder market excitement is fading. The situation is similar to fishmongers selling seafood in the wet market. When they first open a new box of seafood, buyers are excited. They rush to pick the freshest ones despite higher prices. But when fishmongers have been displaying the same seafood for a long time, interest from buyers wanes. The leftovers can only be cleared with price reduction.
Reason #2: The shrinking affordability of private homes
The article mentioned that private homes valued up to $1.5 million used to be most popular among HDB upgraders. These private homes accounted for 80 percent of transactions in 2019. But the percentage fell to 72 percent in the first half of 2021 and 62 percent in the first half of 2022.
Property agencies said some HDB upgraders may have difficulty paying the higher ABSD upfront after selling their HDB flats. Other buyers may be priced out with the widening price gap between HDB resale flats and new private homes.
Nonetheless, they failed to point out the underlying truth: Most Singaporeans are not cash rich. The lucky few are. The majority are not. Most homebuyers need to borrow from the banks to finance their home purchase.
After Singapore has tightened its monetary policy a few rounds, there is no more cheap money from the banks. When HDB upgraders can’t borrow with low interests, they face the brutal fact that they can’t really afford private homes. There is a big difference in monthly payment between 1 percent and 3 percent mortgage rate. With one million borrowed from the bank, the total interests paid for the next 25 years will be $292,000 more. This is provided that interest rates won’t climb further.
There is no loan in the world that the borrower is not obliged to pay back. Just like the popular quote in the Hong Kong gangster movies: It is you who make the choice. Be prepared for the payback.
– “More investors are playing Russian roulette”, PropertySoul.com
Reason #3: The contagion effect of inflation and recession fears
It is not just the developers. The homebuyers are losing market confidence too.
Our media may continue to report monthly private home price increase using extrapolated data. But the devil is in the details. URA data tell us that there is a rapid fall in transaction volumes. For non-landed private homes sold in the first half of the year, buyers with HDB addresses dropped 26.2 percent. Likewise, buyers with private home addresses also fell 25.6 percent year-on-year.
1. High inflation
DBS conducted a survey on 1.2 million customers using DBS as their main salary-crediting bank. The findings are published in a Straits Times advertorial titled “Higher spending, lower income gains: How to cope with inflation and rising cost of living”. The article highlighted the problem of higher discretionary spending. Monthly expenses are growing two times the rate of income growth. DBS recommends everyone to plan more and spend less.
Lower spending power may not affect all income groups with the same intensity. But we see frequent media reports on rising inflation and higher mortgage rates. As a result, the mental stress from higher prices and lower spending power becomes contagious like a pandemic. This makes even the bravest homebuyers hesitant to commit on big ticket purchases like buying a private home.
2. Recession fears
Recently, a leaked internal memo by Huawei’s founder Ren Zhengfei has caused a stir in China’s social media.
Ren wrote, “The next 10 years will come down as a painful period in history, as the world economy goes into recession … Huawei needs to tone down on any over-optimistic forecast and make survival its most important creed in the next three years.”
His openness and honesty shocked the commercial world. For what kind of people dare to break the silence and speak the truth at this time? Not companies who are still making money and are staying mum until they make the last dollar. Not politicians who are making every effort to cover up and paint a beautiful picture.
But Huawei doesn’t need to. Its advanced 5G technology has led to its barred access to advanced smartphone chips. Ren knows that it is not just for his company to survive the US sanctions, but to stay afloat amid China’s zero-Covid-19 policy and the coming global recession in the next decade.
US already has two consecutive quarters of negative growth in the first two quarters of this year. Politicians may explain it the way they like. But we cannot deny the fact that US is already in a technical recession.
Yesterday (Sep 4) CNBC published the article “A US recession will likely hurt Asia. Here are the countries that are most vulnerable”. As expected, economists said Singapore and Thailand will most likely be the first to be hit in a US recession. Singapore is “more vulnerable” compared to its regional peers because it is “very, very dependent”. This is understandable because Singapore is heavily dependent on export. Our domestic market is too small. Above all, China and US are our first and third biggest trading partner respectively.
Reason #4: The absorption superpower of banks and government
Back in July, I mentioned in my blog post “Cash is king now” that everyone wants our cash now.
1. The banks
The three local banks have recently raised interest rates of their saving accounts. The maximum interest from OCBC, UOB and DBS is 4.6 percent, 3.6 percent and 3.5 percent respectively. For those who don’t have any salary credit, credit card spend, mortgage, insurance or investment with the bank, it’s perfectly fine. CIMB gives away 2 percent interest to customers for just leaving their money in their saving account with absolute zero lock-in.
By the way, Singapore now has a magic show on the first day of every month. On this important day, all the banks will showcase their 吸水大法 or superpower to absorb water (money). They do so by posting revised tables of fixed deposit interest rates on their website. The resultant water absorption is more powerful than any sponge we can find in the market.
Just two months earlier in July, interest rate for a 12-month Singdollar fixed deposit was 1.9 percent and 2 percent from UOB and Standard Chartered Bank respectively. In September, HSBC is offering 2.5 percent interest. UOB and HL Bank give away 2.6 percent and 2.75 percent for the same 12-month fixed deposit. For UOB, it is 36.8 percent jump in interest rate in just two months. At the rate it’s going, it is not surprising to see it going up to 3 percent soon and above 4 percent next year.
The jump in interest rate for saving and fixed deposit accounts is very effective in attracting new cash. Because of that, banks suddenly have a lot of admin work. Customers are rushing to open new accounts. Many want to break older fixed income contracts with lower interest rates for the new ones. A friend visited the UOB Bedok branch and was shocked to find 60 customers in the queue.
2. The Government
Similarly, our government also showcase its water absorption superpower every month. The issuance of Singapore Savings Bonds (SSB) amounted to $700 million in August and $900 million in both September and October. With average interest rate over ten years between 2.76 to 3.02 percent, every month the SSBs were very much oversubscribed.
Of course, the government also demonstrates its superpower to absorb water through new wealth taxes, including higher ABSD, GST, property tax and income tax for top 5 percent of income earners.
3. The Money
Now we know why the appetite for private homes has gone. Apparently, potential HDB upgraders and investors have much bigger appetite for high interest payments offered by the banks and the government. For once, bigger returns don’t come with bigger risks. Better still, all these higher interest-yielding instruments are tax-free.
Understandably, there is now less incentive to book a new unit with the developer or buy a resale private home. Savings that could have earned high interests with banks and SSBs will be gone after making downpayment, or paying stamp duties, property taxes, mortgages and other expenses.
Rents for private homes may have gone up. But higher rent means higher annual value which translates into higher property tax. Can higher rent covers 12 percent property tax and rising mortgage payment? No one knows. On the contrary, interests from the banks and the government are certain.
Last but not the least, we all know that retail banks make money from the interest margins between account deposits and bank loans. When interest rates of savings have already gone up to 3 or 4 percent, it is frightening for borrowers to imagine how high mortgage rates will be raised in the near future.
Food for thought
Global economy and asset markets fluctuate from time to time. When the tides turn, stay calm and don’t panic. The magic words are “be prepared”. Besides, we can learn from the wealthy, especially those who have richer experiences riding through the storms in the past.
Richard Harris, Chief Executive of Port Shelter Investment, has just written a very good article on the same topic. He said we can’t hide the fact of global recession in the coming years. The only thing we can do is to be patient and hold the course, with ‘preservation of capital’ as the maxim. Let me share his original words in the article.
The motto for European and American consumers seems to be “eat, drink and be merry, for tomorrow we die” … the challenge is how to counter high interest rates, inflation, unemployment and low growth. Investors must expect all asset prices to fall as the bottom of the upcoming global recession is uncertain – you can’t run, and you can’t hide. But be patient and hold the course … Investors must invest less aggressively and wisely. “Preservation of capital” will be the maxim for the next half-decade as happy memories of capital growth fade.
– “As inflation sticks and recession hits, prepare for five years of hard times”, South China Morning Post, 2 September 2022
As I often say, we pray for the best but prepare for the worst.
If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.
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