In 2004, Ireland was one of the world’s wealthiest countries and the year after, was judged to have the world’s best quality of life. On the back of low corporate tax, it attracted a lot of foreign direct investment by European MNCs, which fueled its economic growth. Yet, it went all wrong so quickly through a series of missteps. Public spending rose dramatically while income tax was cut. Then, government policies “encouraged” property speculation and allowed a huge housing bubble to develop.
House price growth between 2001 and 2007 was a bubble, driven by banks over-extending themselves (lending relative to deposits) and over-extending borrowers (higher loan-to-value). The sharp rise in property forced rental yields down. When the economic crisis came, investors who were already cash flow negative since rental income did not cover holding costs exited in a hurry, helping to force house prices down.
In 2010, Ireland was forced to take an economic bail-out from the European Union of more than €67bn (SGD117bn) from the IMF and the EU to rescue the country from bankruptcy. What a reversal of fortune in a mere matter of years!
The credit-fuelled boom in property that caused the spectacular crash, affected Irish citizens from all walks of life. Lead Singer of popular Irish boy band Westlife, Shane Filan, was also a casualty. Like many highly indebted Irish property developers, he filed for bankruptcy as the property development company he started with his brother collapsed under a mountain of debt. Before the economic crisis hit, Shane and his brother Finbarr had borrowed millions from several banks in Ireland. Recently, he came back as a solo artiste (after Westlife disbanded) to start all over again.
Today in 2013, Irish property prices in general, are about 50 per cent below their peak in 2007. The Irish Government estimates that there are 1,300 so-called ghost estates and hundreds of thousands of unoccupied new homes, abandoned by developers and investors gone bust. Some abandoned projects are in such bad shape that the Irish government is actually demolishing them as they are posing health and safety risk to people around them.
Will this happen in Singapore? This recent Irish property bust fallout has been studied by many governments around the world and many know the consequences of allowing a property bubble to go unchecked. You can certainly bet on our government to engineer a soft-landing no matter what.
Our Best, Always!
By now, you would have read about the latest cooling measures for Executive Condos (ECs). What we’ve read in the news so far are topline comments from analysts that HDB flat upgraders are likely to be the hardest hit by the changes. Is it that true? First the 2 main changes.
A) Resale Levy for Second-Timer Applicants
The levy will range from S$15,000 to S$50,000 depending on the flat type of their first HDB property.
B) Revision of Mortgage Loan Terms
The Monetary Authority of Singapore (MAS) will cap the Mortgage Servicing Ratio (MSR) for housing loans granted by financial institutions for EC units bought directly from property developers at 30% of a borrower’s gross monthly income.
Let’s go through some numbers and draw some implications
Going by the maximum cap of $12,000 household income for ECs, a 30% cap will mean $3600 used for loan servicing. Just for illustration purpose, assuming an average 25 years loan, (more realistic) for a typical couple in their early to mid 30s, they can take a maximum loan of about $720,000 (MAS require banks to use 3.5% interest rate to compute mortgage servicing). Since banks can only loan up to 80%, this means that the purchase price will be at max, $900,000.
As our example uses pretty much a scenario for a couple that is at the extreme upper end of the EC buyer profile, it is reasonable to say that the sticker price of $900,000 calculated is near the maximum price that new EC units (where the Option to Purchase is granted on or after 10 Dec 2013) will sell for. If we stretch our parameters a bit, using a 30 years loan tenure, a sticker price of $1 million can be achieved.
But developers know their sums. To avoid stuck inventory, we expect that going forward, developers will try not to launch any EC unit for $1 million and more unlike previous EC launches in 2013 where many of the larger EC units were priced more than $1 million.
Should developers sensibly bid more cautiously for the latest 2 EC sites at Choa Chu Kang Grove, launched for sale yesterday, you could be looking at ECs in 2014 launched at 690 to 750 psf instead of the 800+psf we have seen in 2013.
We’re quite sure the government is watching closely. Very, very closely. Would the government start to regulate the minimum size for different EC unit configuration to re-align ECs more closely to pubic housing? Already they have capped the maximum size of an EC unit to 160 sqm. Watch this space!
Our Best, Always