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Thread: Will history repeat itself?

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    Default Will history repeat itself?

    http://www.todayonline.com/Business/...repeat-itself?

    Will history repeat itself?

    Interest rates are at an all-time low, but what will happen if rates begin to rise, asks Colin Tan

    by Colin Tan

    02:25 PM Jul 08, 2011


    These days, when I am asked in casual conversations about the local housing market, I am at a loss for words.

    Do I describe the market assuming that housing interest rates remain as they are, which has been abnormally low for about two and a half years now, or do I launch straight into the explanation of rates and describe how they have been underpinning the entire property market today?

    Either way, the listener is bound to be misled or confused as he is expecting me to just talk about demand and supply.

    However, what drives our market today is not simply demand and supply but interest rates - or the cost of money - as well. Increasingly, the market may continue to rise or correct just on interest rates alone - neither supply, nor demand.

    But you may ask, what is the big deal about interest rates? When the banks are flush with liquidity, promotional housing loan rates for the first year are very low, sometimes provided at cost. That is, the bank charges you the same rate as it pays its depositor on his or her cash deposits with the bank and earns nothing. That is how much money banks have today.

    Such low rates reduce the monthly mortgage payments to almost its minimum. Where previously, households struggled to purchase a million-dollar property, it is now within the reach of many more people - for the first few years anyway, never mind whether these households can eventually pay off the mortgage or not.

    In property-obsessed Singapore, many buyers take a short-sighted view: Future problems are tomorrow's problems. Let us focus on today; who knows what will happen tomorrow? Prices may shoot up and I can just re-sell my property for a tidy profit.

    Not being able to afford the monthly payments or pay off the mortgage is no longer an issue. This isn't a problem if this is limited to only a few households, but if the majority of buyers act this way, who do owners sell onwards to?

    So many more people than before own more than a single property these days. But who really owns all these new property purchases? For the next few years at least, in reality, it is still the bank.

    What about renting it out if you cannot sell it? Again, low interest rates and low holding cost distort market behaviour in the leasing market.

    Suppose rental demand is not as buoyant and, as a result, rentals are flat and may even be poised for a correction. But rental yields or returns rise when interest rates fall. This is because the cost to the landlord is falling in terms of having to pay less in terms of interest cost on his housing loan. And rates may be falling faster than rentals are correcting.

    So, what is the correct decision - to buy or not to buy? The people closest to the prospective buyer, namely the housing agents and bankers, are not likely to give sound advice or even warn of future potential pitfalls, because they depend on the commission from the purchase for their bonus.



    What comes down, can go up

    Those of us who are not swayed by the transient allure of the low-interest rate environment try to warn of the dangers of a potential sharp interest rate hike but this advice is falling on deaf ears.

    If you trace the recent history of interest rates, there was also a bout of low rates occurring in 2002 up to the middle of 2004 (see chart).

    However, the rates were not as low as today's and not as consistently flat as today's. It is almost like the animal that is the interest rate, no longer has a heart beat.

    Also only a few seasoned property investors remain who remember the period - towards the end of 2007/start of 2008 - when interest rates rose not only sharply but almost to a new high.

    Many multiple-property investors and speculators then were having sleepless nights. For those living at the edge or those highly geared, one by one, the properties went until they were left with just the roof over their heads.

    Out went the luxuries, the fancy cars, the club memberships and so on. The super rich or those with lots of cash reserves were not affected as the spike did not last too long but it was a painful lesson for those whom I can only describe as people who are not there yet, but who aspire to be among the ranks of the rich. It is this group I am most worried about.

    For most of the people in this group, this episode is either ancient history or they were not in the market then. If you have spoken to one of the veterans who lived through this traumatic period, you would know that words cannot even begin to describe the panic, desperation and pain they experienced, not just for themselves, but for their families as well.



    The writer is head of research and consultancy at Chesterton Suntec International.

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    Fei Hua as usual...he should start to give some constructive comments for a change...or at least make a few predictions since he's so senior in his position...

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    I think his comments are constructive....... maybe just not what a lot of people here want to hear.

    He even says as much with "falling on deaf ears" quote.


    I will give you a prediction - interest rates will eventually go up, rather easy as there is no downside possible at the moment.

    When is the key. I'm sure there are lots of smart guys who intend to sell before it happens and make sure that they are not the one holding the hot potato.....

    but everyone thinks this way, it will happen to someone else not me.

    Quite frankly yesterday I was walking home on devonshire road and asked to view new apts by agent outside. I ask him how much psf - he tell me 2800 psf after eventually forcing it out of him. I just smile and walk on.

    Time is coming to pick off weak holders - within next 2 years I think.

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    i think there are a lot of buyers these days who have not experienced the pain period he mentioned. So i guess the article is still useful as a reminder.

    but life is like this, if u have not been through it personally, u probably cannot feel how painful or risky it is. so he is right that the advise falls on deaf ears.






    Quote Originally Posted by mantrix
    Fei Hua as usual...he should start to give some constructive comments for a change...or at least make a few predictions since he's so senior in his position...

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    Quote Originally Posted by mr funny
    ...............
    Many multiple-property investors and speculators then were having sleepless nights. For those living at the edge or those highly geared, one by one, the properties went until they were left with just the roof over their heads.

    Out went the luxuries, the fancy cars, the club memberships and so on. The super rich or those with lots of cash reserves were not affected as the spike did not last too long but it was a painful lesson for those whom I can only describe as people who are not there yet, but who aspire to be among the ranks of the rich. It is this group I am most worried about.
    .......
    did ST run articles on these people during 2008-2009?
    I think mayhaps author exagerating, volume of transactions very low during that period.

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    Quote Originally Posted by bargain hunter
    i think there are a lot of buyers these days who have not experienced the pain period he mentioned. So i guess the article is still useful as a reminder.

    but life is like this, if u have not been through it personally, u probably cannot feel how painful or risky it is. so he is right that the advise falls on deaf ears.
    The wisest investors are those who learn from the mistakes and pains of others, as such, from this article.

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    Quote Originally Posted by bargain hunter
    i think there are a lot of buyers these days who have not experienced the pain period he mentioned. So i guess the article is still useful as a reminder.

    but life is like this, if u have not been through it personally, u probably cannot feel how painful or risky it is. so he is right that the advise falls on deaf ears.
    Its aso vy painful to miss the boat completely while seeing their banana notes being eroded by inflation

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    as we had been discussing. always have some exposure and vary the weightage etc (but not feasible for those with limited resources). just don't overstretch.

    Quote Originally Posted by devilplate
    Its aso vy painful to miss the boat completely while seeing their banana notes being eroded by inflation

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    Quote Originally Posted by bargain hunter
    as we had been discussing. always have some exposure and vary the weightage etc (but not feasible for those with limited resources). just don't overstretch.
    Tats y some turn into buying mm bcoz dunwan to overstretch? Hehe

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    Hmmm...if many people have this idea...to sit out the 4 year SSD and then sell that MM 99LH condo....there will be a rush of sellers in 2014?

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