Is it a good time for property investment?
With the global pandemic sweeping across over 150 countries around the world, many industries have come to a stand-still to stop the spread. As supply chains are disrupted and workers retrenched, it comes at no surprise that many experts are forecasting a negative outlook of the economy for months to come, or even years. Taking this into consideration, the Federal Reserve Open Market Community (FOMC) has voted to ‘cut rates’, and this results in interest rates falling. Prior to the cut, the Fed has been steadily increasing interest rates from 2015 onwards as shown below.
Fed rates increasing steadily from 2015 onwards
Falling interest rates for mortgages
The Fed’s move is good news to the Singaporean mortgage holders that have taken up, or eyeing the Singapore Interbank Offered Rate (SIBOR) pegged loans, as the SIBOR closely mirrors the Fed’s rate. SIBOR loans are mortgage loans that include 2 components – one being the bank’s spread (what the bank wants to charge), plus the prevailing SIBOR rate. With the SIBOR-pegged floating rates dropping drastically over the past few months, the total payable interest will fall accordingly.
A quick comparison of mortgage loans would show that mortgage loans with the lowest interest rates currently are mostly SIBOR loans. As such, it could be a great time for prospective buyers to hold off their purchases previously to make the jump in order to take advantage of the low SIBOR rates and pay an overall amount for their property. For homeowners who have previously taken up a Fixed Home Rate (FHR) loan, it would be wise to refinance it to a SIBOR loan for the time being.
Period (How often your SIBOR rate renews)
However, do keep a lookout for loans that are flexible with their terms, such as shorter lock-in periods, early repayment conditions or the ability to convert to other loans. While it is uncertain as to whether the SIBOR rates will decrease further in the near future, there is the possibility that the rates will increase drastically should the ongoing recession end earlier than expected.
As a cautionary note, before you take on floating rate loan schemes, do ensure that the lock-in periods are short enough for you to readjust your loan packages if required. While it might seem plausible to select a floating rate loan package for the low interest rates, in the event that the SIBOR rates were to rise sooner than expected, you will probably have to bear the high interest rates and end up paying more than you should if you were to sign up for the fixed interest rate package.
Furthermore, after your long lock-in period has ended, you will probably be left with the option of refinancing if the floating rates are too high to bear. Refinancing to a new bank or interest rate package comes with conveyancing fees, and there might not be legal subsidies available to absorb part of the cost you are required to pay for switching bank interest packages. You might end up paying more than you should have saved for the sake of achieving lower interest rates. Hence, it is important to do sufficient research about any floating rate loan scheme before applying for it.
Decrease in housing prices
As Covid-19 and the Circuit Breaker continues on, most of Singapore’s population are heeding to the “stay at home” orders issued by the government, leading to a huge dip in retail footfall as traveling is limited to just buying groceries and necessities. Even as the measure gradually ceases, it is highly likely that consumers will cut back on their spending due to job uncertainty in the workforce. It is to no surprise that Singapore’s economy has begun to take a hit, with the Ministry of Trade and Industry (MTI) revising its 2020 GDP forecast downwards to “-7.0% to -4.0%”. The property market is not spared from this downturn, with real estate statistics for 1st Quarter 2020 reports revealing that prices of properties across private housing have fallen 1.2% on average. Analysts have provided a grim prediction for the whole year – a drop of up to 8% in the private housing market.
From this, we can draw a similarity to the SARS outbreak in 2003, another pandemic that our young city-state has faced. Contrary to what many may think, according to URA reports there were still property transactions going on even during this trying period. However, what is interesting to note is the profitability of reselling the properties bought during the SARS outbreak. A staggering 86% of homeowners sold their units for a profit within a five year time period from SARS, with an average of $331,000 in profits.
This effectively signals that during a pandemic, one may take advantage of the dip in real estate prices and potentially make a profit in the future. As such, if you are currently keen on property investment, and on top of that have a strong financial standing amidst Covid-19, it might be your time to enter the market any day now.
Private property price dipped the most
Amongst the different regions of properties, those in the Core Central Regions (CCR) has taken the biggest hit, likely due to Covid-19. As proven by 1Q2020 Statistics Release by URA, properties in the CCR has decreased by 2.2%, whereas properties in the Rest of Central Region (RCR) has fallen by 0.5%, and Outside Central Region (OCR) by only 0.4%. Many of the properties in this region are purchased by investors looking to rent out their units to affluent expatriates and foreigners. With the pandemic sweeping across the globe, travel restrictions have been put in place and companies fluster to cut costs. Many of these tenants would have either been relocated to a cheaper location in South East Asia (i.e. Malaysia, Thailand etc.) in a bid to save costs or have returned to their home country to stay with their family during this period since they are unable to travel to and fro. With the drop in the number of tenants, potentially for the subsequent months as well, landlords will be quick to offload these units to liquidate them instead.
This leaves behind the possibility of being able to snag up a coveted property in the CCR at a fair price, which is less likely to happen before Covid-19. If you are looking to engage in property investment, the CCR is a good place to start.
Public housing prices still holding up
Interestingly, the prices of public housing, on the other hand, have not seen any fluctuations. The prices of HDB resale flats have stayed unchanged for the first three months of 2020, and this is following the previous two-quarters of price increase in 2019. Experts have speculated that this trend will continue on for the months to come, as HDB resale flats are usually for own stay purposes and not for property investment. This results in less volatile price changes in the HDB resale market.
Though the prices have remained largely stagnant in 2020, this might not necessarily mean that these resale flats have held their value. With Singapore’s government introducing a slew of policy changes in 2019 to mitigate the cost of purchasing a HDB resale flat, such as enhancing housing grants and increasing income ceiling for eligible buyers, this should have contributed to an increase in demand and price growth for the flats. This indicates that there is a possibility of Covid-19 hindering the major price growth in HDB resale flats, and therefore the positive effects of the policy changes have been nullified.
If you are looking to buy a HDB resale flat for property investment purposes, it might be wise to keep a lookout for potential units that you are keen on and track the pricing trends. Once the market starts to recover from the recession, it would be time to make your purchase as there might be an increase in price due to a higher demand derived from the government’s measures.
Purchasing the right property requires tons of time, research and patience. If you are looking to rush into property investment just to make a profit, chances are you might make a loss instead. Take your time to consider all the factors – price, type of loan, location etc. before you commit. It might be a buyer’s market during and post Covid-19, so once you have done the necessary work, you can consider making a purchase to take advantage of the situation.
If you have any additional queries or need professional advice in helping you make your decision, feel free to contact us to discuss your needs.