If you’ve been following the property news, you may have been puzzled by how private home sales are rising. In August 2020, for instance, private home sales managed to reach an 11-month high, despite the Covid-19 situation.

The situation has even prompted URA to restrict the re-issuing of Options To Purchase (OTPs), out of concern that it may be inflating sales numbers. It can be hard to believe that, in the midst of a Covid-19 downturn, many Singaporeans are still buying private homes.

Aspiring property investors - property transactions 11-months high

Home sales hit 11-months high (Source from Straits Times)

In fact, the sale of private homes is being sustained by HDB upgraders.

As DBS has pointed out, private home buyers today are primarily Singaporean, with upgraders expected to make up the bulk of them. This is not a recent phenomenon however – as early as 2019, upgraders were already the main drivers of new condo sales.

The reason is quite simple: starting from this year, about 20,000 flats are expected to reach their Minimum Occupation Period (MOP) annually. This is when resale flats can be put up for sale on the open market. Combined with growing worries about lease decay, and around seven years of weak appreciation for resale flats, it’s unsurprising that more and more Singaporeans seek to upgrade.

However, this leaves many asking an important question: is this a safe move given the Covid-19 situation?

understanding the risk involved

It is important to understand the risk involved

Let’s begin by understanding the risks involved

  • Income stability is the biggest factor
  • A bigger risk to investors than pure home owners
  • Short to mid-term drops in property value
  • Direct health risks

1. Income stability is the biggest factor

The main concern is the impact of Covid-19 on our jobs. The risk is that we may lose our source of income, or that we may have to settle for jobs that pay less. This is a very real concern, and one that upgraders must keep in mind.

Given the nature of the situation, upgraders should ensure they can meet three conditions:

  • You should only upgrade if you have a savings fund, which can comfortably cover six months of your expenses. These expenses include servicing your home loan. In an absolute worst-case scenario, six months is sufficient time to market and sell your home without resorting to a “fire sale” or mortgagee sale.
  • You should not proceed if the monthly home loan repayment – plus your other expenses – would exceed 30 per cent of your monthly income. This is regardless of the fact that the Total Debt Servicing Ratio (TDSR) only imposes a cap at 60 per cent.

(PS: If you’re buying an Executive Condominium, you still need to meet the Mortgage Servicing Ratio, which caps your loan repayment to 30 per cent of your monthly income anyway. Take your cue from the government experts; 30 per cent is a prudent debt ratio).

  • You should not proceed with upgrading unless you have covered other key bases, such as proper health insurance, first paying down all your high interest credit card debt, etc.

In fact, it’s preferable that you pay down other debts – such as car loans or outstanding personal loans – 12 months prior to applying for a home loan. Not doing so will add to your debt servicing ratios and worsen your credit score, which can cause your loan application to get rejected anyway.

These are good measures to follow before upgrading at any time; but it’s even more important given the Covid-19 situation.

Low mortgage rates

Low mortgage rates has been kept low

As a helpful upside, home loan interest rates are rock bottom, which helps affordability at this time.

Home loan interest rates from banks are at 1.3 per cent per annum; this is half of the HDB Concessionary Loan Rate. This makes a significant difference in how much you pay each month.

For example, say you were to take a loan of $800,000, for 25 years. In 2018 to mid-2019, you would have paid around two per cent per annum; this amounts to $3,391 per month.

The same loan, at 1.3 per cent today, is only about $3,125 per month.

(But note that, when you take a home loan, the bank will calculate your TDSR limit based on an interest rate of 3.5 per cent, regardless of the actual market rate. This is just to be safe, and ensure you can handle higher payments if you have to).

2. A bigger risk to investors than pure home owners

If you’re thinking of buying a pure investment property (i.e. a second property just to rent it out), this is frankly a higher risk prospect at the moment.

Singapore’s property market is unique, in that we don’t have an even mix of renters and home owners. Approximately 92 per cent of Singaporeans own their homes, which means our rental market is heavily dependent on foreigners.

However, Covid-19 is likely to reduce this flow of foreign tenants. Apart from the most obvious reasons (like travel restrictions), we should consider how companies will react to contracting economic growth. This year, Singapore has seen one of the worst contractions in GDP on record; and other countries are not faring much better.

In such times, companies will cut costs. Many will seek to employ locals in place of expensive expatriates (some good news for us at least!) Among companies that must rely on foreigners, they are likely to shrink housing allowance, and give out less generous “expat packages”.

However, this is not as big a risk to genuine home owners, who are not intending to rent out their property anyway. In fact, it can even work in your favour: you won’t be competing with investors when upgrading your home, and the downturn compels developers to price competitively.

3. Short to mid-term drops in property value

There is a risk that property values may fall in the near or mid-term, if Covid-19 starts to bite deeper into the economy. This can cause property prices to dip further.

It’s a common belief among market watchers that, in Singapore real estate, property prices tend to dip six months after the stock market does so. As the dip in the stock market seems to have occurred, we may well see the property market follow (if the theory holds true).

However, property is not like stocks – it is a long-term commitment, where most buyers are looking at periods like 10 or 15 years. For genuine home buyers, they tend to hold on to the property for even longer than that; perhaps even passing it to the children two or three decades later.

As such, there shouldn’t be too much concern about how property prices may dip in, say, the next two or three years.

4. Direct health risks

This refers to situations such as – touch wood – the sole borrower getting Coronavirus and passing on. I should point out that private home owners can purchase Mortgage Reducing Term Assurance (MRTA) for relatively cheap; in the event that you pass away, or are permanently disabled, MRTA will pay off the remainder of your home loan.

If you have an HDB property, including an EC, you’re required to pay for a Home Protection Scheme (HPS) that fulfils the same role anyway.

All this being said, is it safe to upgrade at this time?

Common sense has to apply in some areas: if you work in an industry that’s directly affected – such as aviation or tourism – then yes, this is probably the wrong time for you to commit to a much bigger home loan. Be patient, save up, and wait for the storm to pass – there’s no point rushing to upgrade, only to have to downgrade shortly after.

Likewise, those in higher-risk financial scenarios (e.g. you run a small start-up that’s just gotten off the ground) should rethink upgrading at this time.

Banks are also cautious about how they give out loans in the current climate. Use this to your advantage, and don’t treat them as adversaries: if the bank feels a loan amount is too high a risk for you, there’s a good chance they’re right. Take a smaller loan for a more manageable property, or wait and save up.

For everyone else, I would re-iterate the points I made above: (1) pay down your other debts first, (2) build a savings fund of six months of your expenses, (3) be properly insured, and (4) don’t take on a loan that exceeds 30 per cent of your monthly income.

If you have more specific concerns, such as questions on what you can safely afford, feel free to drop me a message. I can help you to work out what is or isn’t affordable, and whether you’re in the right position to upgrade.