An Indian friend once told me, “To my parents, the house is scared. They would never
mortgage it, even if it means living from hands to mouths every month or they can choose to
down grade and enjoy a more comfortable retirement”. Remember the days when a
comfortable retirement is to buy the biggest house you can afford, pay off the 30 years
mortgage and sell the property for 10 times what you bought it for.
My grandmother used to tell me, “Ah Fai (how my grandma calls me, even today), never borrow
money. Use what you earn and be contented”. We grow up in a world where debts are frowned
upon. Remember the time when you exceed your credit card limit for your purchases and your
mother and grandmother “advice” just reverberates in your mind.
Most Singaporeans are brain-washed by their childhood experience and formed a skewed view
of debt and property: they will take a lifetime to repay.
Liquidity should be the number one consideration in a prudent investment. Many Singaporeans
believe that home equity (defined as the excess of your property valuation over your remaining
mortgage) to be a convenient nest egg which they can tap on when they are in financial trouble.
Nothing can be further from the truth. Many have realized it the hard way that home equity is
not as liquid as they thought.
Suppose you have a bank mortgage, and you do what many Singaporean did, make an extra
lump sum repayment every time you have some spare cash. Then one day, when you find
yourself physical disabled or retrenched, you go to your bank and say “I was faithful all these
years in my mortgage payment. Will you let me coast now for a little while since I am way
ahead of schedule? The banker will probably say, “Sorry, you’ll have to fill out an application to
see if you qualify to borrow that money back.”
You see, banks are income lenders, not collateral lenders. They associate assets with liens, but
their first requirement is that you show your ability to repay. The irony is that you almost have to
prove that you don’t need the money before they loan it to you. If you were to take a loan
application to a bank during a critical time in your life when you were sick, unemployed or had a
financial setback, chances are they would say, “Sorry, come back when you have the ability to
repay.”
What I am advocating is not piling up excessive debt but the proper management and utility of
debt to enhance your wealth. Most people do not realize that your mortgage interest can be offset
against your rental income by reducing your effective borrowing rate. For example, if your
yearly effective mortgage interest rate is 3%, by the rental income off-set, this could be reduce
to 2.4%, assuming you are in the 20% incremental tax bracket. If you have a sum of money, the
decision on whether to use it to lower your mortgage should be based on whether your money
can earn more than 2.4 % if invested. I can assure you even the most prudent financial advisor
would tell you 2.4% is not a very difficult mark to beat.
The main purpose of proper home equity management is to position you in a situation where
you can ACT upon opportunities rather than be forced to react to situations. When fluctuations
in the market occur, truly the rich get richer and the poor often get poorer. For example, in Sept
1997, the Singapore stock market crashed. People who lacked liquidity during that crucial time
period were forced to sell. Many scrambled to cover margin accounts. Those who had liquid
funds available were able to ride out the short-term market correction.
There are basically 3 types of people in this world.
1. Those who pay interest
2. Those who earn interest
3. Those who pay interest in order to earn greater interest (
corporations).
Between year 2002 and 2004, the Temasek Holdings has been actively trying to increase the
leverage of all its subsidiaries. They have been making use of the low interest rate environment
to raise funds through bond issues: which is paying an interest to increase earnings.
I was often asked by many of my opinion of the property market in the next few years. My take
is if you are buying a place called home, it is never wrong. Fulfilling a lifetime aspiration to own
one’s dream home is never wrong. However, from a solely financial standpoint, it does not
seem to be such a wise move. The residential market in Singapore is simply not going
anywhere in the next 3-4 yrs. My argument rests on four main areas of concern.
First, the impact of the CPF cut has not been fully felt yet. The greatest impact is not the cut of
ordinary account contribution from 26% to 22% but the reduction of CPF cap from $6000 to
$5500 monthly income and eventually to $4500 2 years from now. A young couple whom I
know personally committed to a 20 years mortgage to buy a condo 2 years back. By next year,
they would have to service part of their mortgage payments using cash or choose to refinance
their property and stretch their loan repayment period.
Second, the government has identified high business cost as one of the biggest deterrent for
new direct investment in Singapore. The money paid to employ one engineer in Singapore
could be used to employ more than ten in China. The government has a vested interest to
ensure that rental rate, which is a key component of business cost, do not rise to exacerbate
the already serious problem.
Third, over the last 20 years, the mean income of the average Singaporean had increased by
leaps and bounds. For example, if you work as a road sweeper 20 years ago, you earn
probably $200 per month. Today, if you work as a contract cleaner, you probably earn 6 times
as much. This significant increase in wages for doing the same job provides a pricing support
for basic HDB housing which in turn provides a very good platform for up-graders to buy bigger
flats or private property. Unfortunately, as I look forward, I do not see an accountant or
engineer doing the same job to be earning much more than they do now years later?
Fourth, if you are to speak to a private residential property owner between the ages of 45 to 65
and ask them how they plan to finance their retirement, a standard answer usually surfaces, “I
plan to sell my existing property in a few years time, downgrade to a cheaper place, and use
the cash generated for my retirement”. Like most Singaporean, they are suffering from the
asset rich and cash poor syndrome. Another way to interpret their cash poor position is, even if
the property market does not pick up in the next few years, they would still have to sell to raise
cash. Yet another way of looking at it is, they would need to take advantage of any slightest
recovery in the property market to sell there by ensuring that any recovery would be short-lived.
Most property analyst which I read look at supply and demand solely from the perspectives of
new development units and ignoring totally the supply and demand factors on the resale market
which obviously is much bigger.
