Last Wednesday Federal Reserve announced a quarter-point rate hike as the industry has expected. This is the second approved raise by the central bank this year. There will still be a third round most likely in September.
Why rate hike is not a big concern
But who cares about the raise of a quarter point?
Banks don’t need any excuse to raise interest rate. Mortgage payers may already be used to the banks sending them occasional mail on revised interest rates and increased installments, which are made effective next month, immediately, or backdated a month ago.
How we wish saving rates can also be raised as frequently as lending rates!
Unlike the seasonal reductions of ERP rates by LTA during school holidays, unfortunately mortgage installments will never be revised downwards (not even temporarily) when Fed lowers interest rates.
But does that bother homebuyers and mortgagors?
Well, even with a 0.25 percent rate hike, borrowers are paying an increment of under 200 bucks. This is negligible for most owners and landlords. Interest rates are still low in Singapore’s 50 years of history.
Why you should ignore GDP and unemployment rate
Last week the Ministry of Manpower (MOM) released the latest Q1 employment figures that show the lowest number of layoffs in more than a year. An economist immediately commented that this “provides a less negative signal and also coincides with tentative improvements in domestic demand”.
There are at least two official numbers announced by governments that you can conveniently ignore.
Jim Rogers once told Newsmax TV in an exclusive interview that he does not pay attention to “that sort of thing” (GDP figures announced by governments in different countries) for a few reasons:
– The numbers are backward looking;
– They are always revised;
– Every government has different methodologies; and
– Most governments have no clue so they just make up the numbers.
I can’t agree with him more, especially when we see governments adjust that percentage up and down all the time – the same way hawkers can’t stop flip-flopping to make roti prata.
2. Unemployment rate
It is not difficult for governments to make their labor market look good. The magic of unemployment rate is that it only counts those who are actively looking for a job, but excludes those who are “underemployed” or “economically inactive”.
The unemployed is defined as people currently not working and actively looking for work. Underemployed are people who are now working part-time while looking for a full time job. Economically inactive are “discouraged workers” who have already stopped or have given up looking for a job.
Unemployment rate low in Singapore?
Although the MOM numbers show fewer layoffs in Q1, long-term unemployment rate for residents has increased 0.8 percent. Long-term unemployed is defined as unemployed Singapore residents who are not working and actively looking for work for 25 weeks or longer.
Also, residents’ rate of re- entry into jobs after unemployed for 6 months in the first quarter is lower than in the previous quarter. This is worst for PMETs (professionals, managers, executives and technicians). The mismatch of skills and jobs for PMETs continues to be a problem.
The unemployment rate also excludes non-residents in the country.
In other countries, people who lost their jobs are still staying in the countries and are counted as unemployed.
In Singapore, foreigners on employment pass or work permit who lost their jobs or whose contracts were not renewed will have to leave the country. There is no way that they can impact our unemployment rate.
How layoffs kill the rental market
The fact is: Those unemployed foreigners who are asked to go home are the most in-demand tenants in Singapore’s soft rental market.
Vacancy rate has been hovering above 8 percent for the past year. It doesn’t help that the government continues to restrict the import of foreigners and limit the approval of PRs.
In a country with home ownership as high as 90.9 percent, where to find so many locals to fill up the empty homes, when developers can’t stop acquiring new sites and launching new projects?
That’s why it doesn’t matter how the media boosts about the recovery of the property market with encouraging sales volume and record land-bidding by developers. Rental rates of private residential units will continue to slide. Vacancy rate for completed private residential units will remain high.
CNBC published a recent article on “Singapore’s residential property market is sending mixed signals. This is what they mean”.
A landlord lamented that, in a tenant’s market he is forced to reduce rental in every renewal, and he cannot see the end of the tunnel.
Under a low-interest environment, the net return of 2 to 3 percent from a rental property may look attractive relative to other types of investment. The risk factor here is not rate hike, but the oversupply of rental units and shortage of ready tenants.
How layoffs kill the resale market
The biggest risk of mortgage payers is not rate hike too, nor oversupply or even crash of property prices. As long as they have holding power, owners can choose to ignore the bad news, continue to stay in their property or rent it out, and “invest for the long-term”.
The biggest nightmare of mortgage payers is layoffs or underemployed. And that’s exactly the time when banks go after them to top up the difference of their outstanding loan and the current market value of their property. And that’s exactly the time homebuyers realize that they have overcommitted.
The 2013 Japanese TV drama Hanzawa Naoki said it best.
“Banks will lend you umbrellas on a sunny day, but they will take them back when it is pouring.”
After the last financial crisis, governments try to solve their economic problems by printing more money. It works like magic to increase money supply, increase capital and restore prosperity.
But when the music stops, people suddenly realize that they have been buying assets that they can’t really afford to, and they have been paying debts with cheap money all this while.
Allow me to quote Marc Faber’s words here:
“So if you want to boost equity prices, or asset prices, print that much money. But as I just tried to explain, you don’t create wealth in a nation by boosting asset prices. You create wealth through employment and capital investment in factories, in infrastructure, in education, and in research and development.”
The property game doesn’t kill the cash-rich. The cash-rich don’t bother about layoffs or economic recession. The properties they acquired don’t even come with a mortgage.
The property game only kills the house-rich cash-poor – those who save just enough for the down payment; those who barely pass the TDSR test last time; those who can just nicely pay off their housing loan; and those who bought under deferred payment betting on a market recovery.
In any society at any time, the house-rich cash-poor always outnumber the cash-rich.
How do you find out who they are? Remember what Warren Buffet said?
“Only when the tide goes out do you discover who’s been swimming naked.”