09/08/2024
๐ง๐ต๐ฒ ๐๐ป๐๐ถ๐๐ถ๐ฏ๐น๐ฒ ๐ฃ๐ฟ๐ผ๐ฝ๐ฒ๐ฟ๐๐ ๐๐ข๐ข๐๐๐ก๐ ๐ ๐๐๐ฆ๐จ๐ฅ๐ ...
Usually when we talk about property cooling measures, we tend to think about the onerous Additional Buyer Stamp Duty (ABSD) which makes it almost impossible to buy a 2nd property.
Due to the ABSD, most HDB owners find it extremely illogical and expensive to keep their HDB and buy a condo. In the past, this was something many HDB owners would consider because they see HDB as an asset which is affordable, liveable and can potentially earn a high rental yield.
But ABSD is a one-time cost. Buyers only pay it during the purchase.
๐ช๐ต๐ฎ๐ ๐ถ๐ ๐ฎ๐ป ๐ฒ๐พ๐๐ฎ๐น๐น๐, ๐ถ๐ณ ๐ป๐ผ๐ ๐บ๐ผ๐ฟ๐ฒ ๐ฝ๐ผ๐๐ฒ๐ป๐ ๐ฐ๐ผ๐ผ๐น๐ถ๐ป๐ด ๐บ๐ฒ๐ฎ๐๐๐ฟ๐ฒ?
๐๐ช๐จ๐ฉ ๐ช๐ฏ๐ต๐ฆ๐ณ๐ฆ๐ด๐ต ๐ณ๐ข๐ต๐ฆ๐ด.
Consider a Singapore citizen buying his 2nd property at $1.6m and paying 20% or $320,000 in ABSD.
Assuming the interest rate is moderately high at 4%. The buyer takes a 75% loan or $1.2m over 25 years.
๐ ๐ฎ๐ธ๐ฒ ๐ฎ ๐ด๐๐ฒ๐๐ ๐ต๐ผ๐ ๐บ๐๐ฐ๐ต ๐๐ต๐ฒ ๐ถ๐ป๐๐ฒ๐ฟ๐ฒ๐๐ ๐๐ผ๐๐น๐ฑ ๐ฐ๐ผ๐๐?
$700,000!
Yes, over the next 25 years, the buyer will pay a total of about $700,000 in interest cost. ๐๐ฉ๐ช๐ด ๐ช๐ด ๐ฎ๐ฐ๐ณ๐ฆ ๐ต๐ฉ๐ข๐ฏ ๐ฅ๐ฐ๐ถ๐ฃ๐ญ๐ฆ ๐ต๐ฉ๐ฆ ๐๐๐๐ ๐ข๐ฎ๐ฐ๐ถ๐ฏ๐ต!
Home loans are structured in a way that you pay the most interest at the start of the loan. This is fantastic for the banks but extremely painful for us. A huge chunk of our monthly repayment goes towards paying interest, leaving our principal largely unchanged even after the first few years.
You probably recall the good old days when your home loan was only 0.75%. It was actually not that long ago. Property financing was extremely cheap. Buyers didnโt feel the pinch. It was part of the reason that fueled the property market growth.
From January 2022, interest rate started to climb rapidly. In the next 18 months, it would climb 5%.
Notwithstanding the property cooling measures rolled out in December 2021, September 2022 and April 2023, the slow down in the property market since 2023 was also partly due to the high interest rates.
Our bank interest rates follow the U.S. Federal Reserve rates closely. They have maintained the federal funds rate at a 23-year high of 5.25%-5.50% for the 8th consecutive meeting in July 2024. We have been over 5% for the last 1 year.
However, the good news is, the high interest rates may be coming down soon.
[๐๐ฆ๐ฆ ๐ช๐ฎ๐ข๐จ๐ฆ]
Look at the federal funds rate chart since 1972. Since 1990, notice that every time the interest rate rapidly surged upwards (red arrows), it only stayed a while before it came down. This is understandable. Corporate companies, small businesses and home owners cannot sustain the high interest cost. If interest rates do not come down, there will be a risk of the economy crashing.
In the Business Times report on 29 July 2024, all indicators seem to point to lower interest rates in the next 6 to 12 months.
[๐๐ฆ๐ฆ ๐ช๐ฎ๐ข๐จ๐ฆ]
With the Fed almost confirming a rate cut, we should prepare for interest rates to start coming down soon. Once interest rates drop below 2.5%, banks may start reducing their TDSR stress test rates too. Currently, some banks are still using the 4.8% TDSR stress test rate (previously 3.5% before the interest rate hike).
When TDSR stress test rates are reduced back to 3.5%, a household income of $20,000 will see their loan eligibility increase from $2m to $2.3m.
Assuming they are taking a 75% loan, their affordability would have just gone up by $400,000!
For example, instead of a $2.6m property, this buyer can now afford to buy a $3m property.
Nothing has changed. Only a lowering of the stress test interest rates.
๐๐บ๐ฎ๐ด๐ถ๐ป๐ฒ ๐ต๐ผ๐ ๐๐ต๐ฒ ๐บ๐ฎ๐ฟ๐ธ๐ฒ๐ ๐๐ถ๐น๐น ๐ฟ๐ฒ๐ฎ๐ฐ๐ ๐ถ๐ณ ๐ฎ๐น๐น ๐ฏ๐๐๐ฒ๐ฟ๐ ๐๐๐ฑ๐ฑ๐ฒ๐ป๐น๐ ๐ต๐ฎ๐๐ฒ ๐ฎ๐ป ๐ฒ๐
๐๐ฟ๐ฎ ๐ณ๐ฒ๐ ๐ต๐๐ป๐ฑ๐ฟ๐ฒ๐ฑ ๐๐ต๐ผ๐๐๐ฎ๐ป๐ฑ ๐ฑ๐ผ๐น๐น๐ฎ๐ฟ๐ ๐๐ผ ๐ฝ๐๐บ๐ฝ ๐ถ๐ป๐๐ผ ๐๐ต๐ฒ ๐บ๐ฎ๐ฟ๐ธ๐ฒ๐.
