ST : Max out your housing loan? Think again

May 1, 2010

Max out your housing loan? Think again

You may end up paying off your mortgage well into your twilight years

By Tan Hui Yee

BURIED in the latest Housing Board (HDB) Sample Household Survey is a startling fact about the financial status of Singapore's older generation: 10.7 per cent of elderly households living in HDB flats, as well as 32.3 per cent of their 'future elderly' counterparts, are still paying off their mortgages.

Between 3 per cent and 5 per cent of these households have problems just meeting their daily expenses.

This is the first time the five-yearly survey has looked into the outstanding mortgages of the elderly, who are aged 65 and above, and 'future elderly', who are aged from 55 to 64.

While the survey's authors note that the number of struggling flat owners is small, 'continuous monitoring is necessary to ensure that the well-being of imminent cohorts of the elderly is not compromised by overspending on their housing purchase'.

It is not clear if these financial stragglers were weighed down by recent recessions or if they are home owners who took on heftier mortgages than they could afford during previous property bubbles. But they warrant a closer look in the light of an International Monetary Fund (IMF) report last week flagging possible property bubbles in Asia.

Housing prices in Singapore, Hong Kong, South Korea and mainland China have recovered quickly from the 2008 to 2009 financial crisis and in some cases, have climbed past 2008 peaks, said the IMF. Anti-speculation measures slowed the increase of private property prices here to 5.6 per cent in the first quarter, and that of resale HDB flats to 2.8 per cent. But they have not stopped climbing. As the IMF notes, many people in Asia 'may have been buying in the expectation of price appreciation, rather than simply for dwelling purposes'.

This belief that prices will continue to rise is strong in Singapore, where the economic outlook is turning rosy. More significantly, it is also underpinned by several assumptions, chief of which is that a growing population and the Republic's land scarcity will nudge prices up. Some believe that property is more stable than various investment instruments as the Government will always intervene to shore up prices.

These assumptions lead some people to spend more on housing than they can afford. Yet none of the assumptions is totally true; all come with caveats.

In the long term, a small land supply will always push property prices but land size is not an insurmountable barrier. Development densities can always be raised to allow more homes to be built on the same plot of land.

Meanwhile, the idea that a booming population will push prices up seems logical but the reality is rather more complex. As economist Kim Kyung-Hwan, a visiting professor at the Singapore Management University, points out: The impact of population - or even income growth - on housing prices depends also on how fast housing supply can keep up. Housing prices can rise even without population growth if there simply are not enough new homes.

And the converse can happen as well. It is possible for real prices to stay level despite an influx of migrants if enough new homes are built. Supply of new private homes all but shrivelled up in the depths of the 2008 to 2009 downturn, creating what housing consultants called pent-up demand, which pushed prices up when new projects appeared.

Supply and demand issues aside, many buyers pledge their faith in property because they think it is a 'safe' investment. With the sub-prime crisis having taken the shine off financial markets, bricks and mortar now seem to be a better store of value.

But that depends on the timeframe. National University of Singapore Associate Professor Yu Shi Ming says property makes sense as a hedge against inflation only over 10 or 20 years. 'People don't plan to hold their property for so long any more,' he says. Within a shorter timeframe, how 'safe' property really is depends on the attitude of buyers.

Fundsupermart general manager Wong Sui Jau states plainly that many do not associate as much risk with property as they should. Property tends to be purchased with loans, and leverage raises the risk of any investment. Someone putting down $200,000 in cash and borrowing $800,000 to buy a $1 million property could stand to lose his entire capital if its value drops by just 20 per cent.

The believer could wait for the market to recover, but he would still have to make monthly loan repayments. Floating interest rates could raise the monthly bill uncomfortably high, especially if he took a bigger loan than he could afford.

At this point, the issue of government intervention comes in. Believers reason that property investment is safe because the Government will always step in to shore up prices to protect people's savings.

It is no secret that HDB flats are stores of retirement savings for many heartlanders. Older flat owners these days can rent out their flat, downgrade to a smaller one or even sell back a remaining lease to finance retirement expenses. The last two options are dependent on the value of the flat: if it drops, their incomes shrink accordingly.

While it makes sense for the Government to keep speculation and volatility in check, it is a stretch to expect significant intervention to shore up prices when economic fundamentals are weak. This is especially so since one of the Government's chief mandates is to keep prices accessible to cater to new home seekers.

It may be hard to imagine in a booming market that what goes up can come down. And believers, after all, are known to be short on memory and long on optimism.

But now, more than ever, would be a good time to redo sums and readjust expectations to avoid overspending on housing. After all, no one wants to be paying off a mortgage late into his 60s.

tanhy@sph.com.sg