Property season part 2: Get real Singaporeans

Since I have posed that last article on getting on the property ladder, I have been alerted to another post on Yahoo Singapore written by Ryan Ong on the same topic. I am going to do a quick response to that article - thus it would make sense for you to read that article first, so you know what I am disagreeing with.

1. "You Can’t Take Advantage of Low Interest Rates"

According to the article, whilst interest rates are low, the reason why many Singaporeans cannot take advantage of them boils down to the fact that "to get this low interest rate, you need a bank loan. But a bank can only loan you 80% of your home’s market value, max. So to buy a $400,000 flat, you need to make a down-payment of at least $80,000 in cash. Yeah, why don’t you just reach in your back pocket and get that?"

There are strict rules regarding mortgage applications.

Now, let me tell you why I have a problem with this line of reasoning. It is so flawed in so many ways I am convinced that the writer Ryan Ong is ignoring basic economics and just trying to stir up anti-PAP feelings. Don't get me wrong, I hate the fucking PAP so much that I had to emigrate, rather than spend my most productive working years in PAP land. However, I am also a very pragmatic businessman who understands basic economics and I am appalled that Ryan Ong of Moneysmart Singapore can come up with something so utterly ridiculous just to appeal to typical anti-PAP Facebook groups like "Remove Tin Pei Ling as an MP"  and TherealSingapore.

Ryan, do you remember why we are in a recession in the first place? Do the words "subprime mortgage crisis" ring a bell with you at all? Let me jog you memory - back in the heady days of the mid-2000s, there was a property boom and banks were giving out loans to people who were clearly not credit worthy. This was mainly in America but it also happened in other countries like Ireland, Canada, Spain and Greece as well. They were given 100% mortgages, even 110% mortgages. After all, they had assumed that as long as these people got on the property ladder, the increase in the value of their property would automatically make them richer by virtue of the fact that they are a home owner, regardless of their ability (or rather, their inability) to repay the mortgage. There was a feeding frenzy on the property market as everyone wanted to get in on the action. Much of this debt was repackaged and sold on as CDOs - spreading the amount of people exposed to this subprime mortgage bubble that was about to burst. 

Then came the crash in late 2007 - what happened? That's right, these folks on low income who couldn't get a decent deposit together defaulted on their mortgages and banks suddenly found themselves with a glut of property repossessions. The recession kicked in and more of these folks who should have never been given such huge mortgages in the first place defaulted and it was a vicious cycle, that sent the world into a deep, painful recession that we've yet to emerge from - remember? 

What is the moral of the story? You shouldn't give mortgages to people who simply cannot afford - we're not talking about a loan to make a more modest purchase, like for a car or for a university course. Getting on the property ladder is a big commitment and the whole subprime mortgage crisis was fuelled in two parts: firstly, a sense of greed on the parts of the banks to get in on feeding frenzy that was the property market. Secondly, there was a sense of entitlement by folks who were on low-income who think, "why shouldn't I have a home like rich people? Just because I don't earn a lot of money, does that mean I am not entitled to be a home owner as well? Why isn't the government or society taking care of me? I am entitled to these things, give me this, give me that, gimme gimme gimme just fucking give it all to me damnit, I don't wanna fucking work for these things, I want somebody, anybody to give it to me for free." 

There are meant to be checks & balances in the system that should prevent such people from getting a mortgage on a home they clearly cannot afford. "Sir, you want a $950,000 mortgage for a condominium but you barely earn $4000 a month and you have two children and an elderly mother to support. On top of that you already have an existing car loan and a student loan that is yet to be repaid, so how do you intend to repay this mortgage when you barely can make ends meet?" Yup, but such was the case back in the pre-subprime mortgage crisis days. It was not that those who defaulted on their mortgages were all on low-income per se, rather they were people who simply had over-extended themselves financially when they already had other financial commitments, such as children and existing loans. One cannot live on credit indefinitely because of interest. Oh yeah, you think the banks are just going to let you borrow money out of the goodwill of their hearts without charging you any interest? Dream on. 

Do you understand how mortgages work?

This is why there are rules for banks to prevent the banks from lending you anything more than 80% of your home's market value. That 20% deposit is a demonstration of your ability to repair the rest of your mortgage, it is a safeguard to make sure that only those who are financially sound are given mortgages. If you can't find $80,000 in cash, then tough shit - you are not ready to buy a flat. Newsflash: you can't freaking afford it (regardless of what Ryan Ong seems to think.)  Get real. You're not entitled to nice things you can't afford. Go work for a few more years, get that promotion, sort out your financial situation then think about buying a flat in five years' time. 

After all, as we say in Chinese, 良药苦口, literally "the bitter medicine is good for you". It may not be what you want to hear, but it makes complete sense. What do you think happens to the folks who default on their mortgages? Losing one's home like that can be an extremely traumatic experience that turns one's life upside down and affects the entire family. Just ask anyone who was in that situation! Let me show you how things can go desperately wrong despite the very best of intentions. Here's a true story. 

I have a friend, let's call him Zee. Now Zee had a relative who passed away a few years ago and he was left her home - Zee was a young man who had just started working then and he thought, wow I am instantly on the property ladder. Now Zee's aunt had left him a mortgage as well, which he inherited with the house. He had two options - he could either sell the house off and take the money, or he could keep the house and continue to service the mortgage. The thought of becoming a home owner was too tempting so Zee decided to keep the house. 

Zee didn't know what he was getting himself into when he inherited his late aunt's house.

However, Zee was not earning as much as his late aunt and was struggling to meet the mortgage payments. In a desperate bid to keep the house, he started borrowing money to service the mortgage and soon, it was a vicious cycle. He then found that he couldn't repay the loans he had taken to service the mortgage, so he had to borrow even more money to service those loans. Zee was sentimental about the house for it reminded him of his late aunt. He found himself stuck a big house with a lot of debt and eventually, he surrendered and said, "Okay okay, I give up, I can't do this any more. I'll sell the house and pay off all these loans." 

Guess what? His aunt bought the house at the peak of the property boom and had paid too much for it, the best selling price Zee could get wasn't even enough to pay back all of those loans. Do you know why? That's right: he had to pay a lot of interest on those loans! Well, he managed to repay most of it from the sale of the house - but he is still in debt today, trying to work off the remainder those bad debts. So instead of inheriting a big house worth a lot of money, he lost a lot of money instead simply due his bad decisions. He had bitten off way more than he could chew in taking on his late aunt's mortgage - he should have simply sold it off the moment he inherited it, that way, he would've had a small deposit for a very small, modest flat which he could afford, rather than his aunt's rather nice house. 

Now the problem with the Singaporean property market is that there are virtually no cheap options - Singapore is a city state and flats in places like Tuas or Kranji may be somewhat cheaper than the ones closer to the CBD, but they are simply not far away enough for distance to be a significant factor. In my previous post, I talked about how property prices in Northampton (107 km from London) are about 20% that of central London's and the equivalent for Singapore would be Ayer Hitam (107 km frm Singapore) where you pay about 5% of what you would in Singapore. Londoners who cannot afford to buy a home in London will routine move out to somewhere cheaper like Northampton to get on the property ladder. If you are not prepared to move to Ayer Hitam to get on the property ladder, then the sensible thing would be to manage your assets wisely in the meantime and save up until the day you are able to afford a property on mainland Singapore. 

Ayer Hitam, Malaysia: 107 km from Singapore

2. Insane Sellers’ Expectations

"Resale flats get pricier by the week. You’ve seen the stories about the million dollar flat ; and some property agencies keep stoking that fire. Sure, they’ll claim it’s an irregularity. But some will add a “maybe” to it:  This is a freak show, but just maybe, in X years, we’ll see more million dollar flats. Who knows, who knows. Hey, their comissions aren’t going to pay themselves."

Where was Ryan Ong during that economics 101 lesson? There's a very simple response to this - if you're not happy with the price, then don't pay lah. Duh. I had the same bullshit when I was entertaining the idea of buying my neighbour's flat. I had it independently verified via an estate agent friend of mine who priced it at about the £500k mark and told me that I shouldn't pay more than £499,999.99 for it because of the stamp duty threshold. My neighbour asked me for £575,000. I said no, that's way too much. I was hoping for him to come down in price but no, he refused. Instead, he taunted me about not being able to afford £575k. And I was like, duh, if I can afford £500k, then I can afford £575k - it's not about me not being able to afford it, I can get the money but I just want a fair price. In the end, I ended up buying another flat in town for a great price whilst my neighbour's flat is still on the market at £575k.

Another flat in my block recently went for £490k recently and that was a far more realistic price as the flats are identical - it's just on a lower floor. I didn't believe that being a few floors higher would add £85k to the price. Guess what? My neighbour still refused to budge on the price and to date, he has failed to find a buyer. Why? Because all it takes is a bit of research to find out what kind of prices similar properties are fetching and you're highly unlikely to find a sucker who will pay an extra £85k for your flat. Sure there may be a few idiots who will pay a lot more than what a flat is worth - but these are indeed irregularities. Come on, we're talking about a very large sum of money here, how many idiots are there out there with this much money to spend on property? Idiots tend not to be able to accumulate this much wealth to speculate on the property market in the first place. 

Your home is probably going to be the most expensive purchase in your life. 

I have had a look at the million (S$) dollar flat in Queenstown that Ryan Ong has mentioned - it's huge, it's in a good location and the price does sound right for a flat like that. However, Singaporeans have this knee-jerk reaction when it comes to HDB flats, they have that sense of entitlement that these flats should be 'affordable'. What a fucking joke - this sense of entitlement doesn't alter the rules of engagement when it comes to the private property market, particularly the resale market. Sure the nice properties in Singapore will fetch in excess of S$1 million - what's new? Did you expect properties to remain super cheap in spite of population growth and inflation? What planet are you living on? Did you seriously expect the PAP to artificially depress property prices for you Singaporeans? Like really? 

It's not just properties - the same principles apply to retail as well. I was in a shop just yesterday when I saw a rather nice tie and I thought, ooh that's a nice shade of blue. I picked up the price tag and the moment I saw it, I thought, no way, it's nice but it's not that nice. I'm not paying that much for it. I put it back and walked away. It's not that I couldn't afford it - it's just that I had a price in mind the moment I laid my eye on that tie and it was then a matter of how close the actual price matched the price I had in mind. The more I liked the tie, the higher that price would've been in my head. It's basic consumer instinct - everyone loves a good deal, a bargain. Nobody wants a bad deal - I was prepared to forgo that nice blue tie than to have paid more than what I thought it was worth. I hate getting ripped off. I hate a bad deal and I knew I could go shopping elsewhere and get equally nice ties at a better price. 

Likewise, when a seller puts an insane asking price on a flat, they risk the same reaction. People are going to react in exactly the same way I reacted when I saw the tie - they're going to say, "that's a nice flat/tie, but the price is crazy compared to other flats/ties on the market, I am going to go elsewhere to get my flat/tie - bye!" The bottom line is this: if you are serious about selling your flat, then you have got to be reasonable in your pricing strategies or risk not making a sale at all. I remember another man looking at the same tie at the same time as I did - and like me, he walked away too after having seen the price tag. 

How much would you pay for a nice tie?

3. The ABSD Didn’t Work

Anyway, the ABSD made foreign buyers pay 10% stamp duty on their property. As it turns out, this hindered the rich to the same degree that a toothpick would hinder an attacking polar bear

Okay for those of you not in Singapore, ABSD stands for 'additional buyers' stamp duty' - basically, the ABSD made foreign buyers pay an extra 10% stamp duty on their property. It was never really designed to be a deterrent to stop foreigners from buying property in Singapore (given how the Singapore government has taken a very expatriate-friendly stance) - but rather, it was just another measure to raise more revenue for the government. An additional 10% stamp duty is hardly a deterrent for those who can afford it - rather the question that should be asked is what the government has done with the money raised through ABSD. Has it been spent on public housing? Has it been channelled directly into helping low-income Singaporean with housing issues? Or has it simply gone into a big pot of government revenues to be spent on a range of issues that may or not have that much relevance with housing?

Call me cynical, but whilst the Singapore government is really good at raising revenues for their coffers (COE, ERP, ABSD, CPF, GST etc), it is a means to an end. ABSD was never ever going to cool the property market down and if you actually believed that it was going to have that effect, then good grief, you're incredibly naive. As far as the government is concerned, it has worked for it has raised a tidy sum of money for their coffers through ABSD. 

Like, seriously, what were you expecting from this lot?

Even without ABSD, local property prices were going to shoot up anyway because of the scarcity of land. The population has more than doubled since the mid 1980s but the supply of housing is limited by the fact that Singapore is but a small island. What did you think was going to happen to property prices when you combined those two factors eh? I hate to attack a fellow blogger like that, especially one who is clearly attacking the PAP. Believe you me, read my blog, I hate the fucking PAP too. I have been vehemently anti-PAP on my blog since I started blogging. However, Ryan, you've neglected some very basic economic principles - especially that on the issue of deposits vis-a-vis the subprime mortgage crisis. If you were some other blogger who talked about a whole range of social issues, then fair enough, I might've just ignored your article. But good grief, in your own words, "I'm the editor for MoneySmart.sg... I took this job because I believe financial news should be accessible and fun to read."

I recognize that Ryan Ong didn't come through the usual banking route (frankly, neither did I), he has done a number of other things (writing, teaching etc) before turning his hand to financial journalism. However, I think Ryan Ong is trying way too hard to please his readers rather than sticking to pragmatic financial principles. There are very good reason why people who cannot get a 20% deposit are refused mortgages - trying to tell them rhetoric like, "yeah it's all these nasty greedy bankers, it's not our fault, it's the bankers! They are evil, oppressing hardworking folks like us" doesn't change the fact that we are still reeling from the consequences of the subprime mortgage crisis. As a blogger, you can't just write what you think people would like to read - sometimes, you must be prepared to tell them the truth, even if the truth means delivering more bad news. I believe that is how we gain credibility as bloggers and gain respect amongst our peers (even if it means pissing a few people off in the meantime. Hey, the messenger can get shot sometimes y'know?)

Should credit be extended to anyone regardless of their credit worthiness? 

I am not of the sayang-sayang brigade, Limpeh will curse and fucking swear if I like and most of all, I will not hold back from the truth. This kind of approach will probably get me hate mail whilst Ryan Ong will get fan mail - but I'm not here to try to be Mr Popular, hell no. I'm here to offer solid, pragmatic, useful financial advice to those who wish to hear it and that will sometimes include bad news: I am not going to censor bad news or to try to sugar coat it the way Ryan Ong has. There's so much bullshit out there blaming the banks, blaming the governments, blaming society, blaming foreigners, blaming PRCs, blaming every fucking entity under the sun - it is time to stop all this "blaming everyone else" attitude once and for all. It's fucking stupid. Most of all, it distracts you from the most important task at hand - getting your own finances into order.

Everyone should sit down and do that once in a while and if you haven't done so recently, then it is time to do so. How much do you earn, what are your liabilities, what are your debts, what are your investments, how much money can you expect to earn in a year and based on all of that, what can you realistically afford in terms of getting on the property ladder? If the answer is, "nothing in Singapore for now" - then tough shit, that is the right answer. It is time to accept responsibility for your financial situation rather than blame every fucking entity under the sun.

So - what do you think? Are you trying to get a mortgage? What was your experience like getting a mortgage? Have you managed to get on the property ladder? Leave a message and let's have a discussion, thanks everyone.