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Leverage up and buy investment properties now?

Thursday, March 8, 2012

UPDATE (December 2016):
I sounded the alarm 4 years ago.

"Many who bought their properties three to four years ago are settling for rents that don't cover their mortgage payment..."
Mortgagee listings this year expected to reach or surpass the 237 recorded in 2015, which exceeded the 236 in 2008 during the global financial crisis. A mortgagee's sale occurs when an owner defaults on the mortgage.
Source:
http://www.straitstimes.com/business/property/more-properties-could-be-up-for-auction-if-interest-rates-bite (8 Dec 16)
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8 March 2012
Today, I stumbled upon an interesting if disturbing bit of information. "Online loan" is the hottest in a list of keywords being searched for in Yahoo Singapore! For whatever reasons, Singaporeans are leveraging up or looking to it, it seems.


With the economy almost at full employment, it is harder to imagine people borrowing because they are in dire straits. Then why? They could be borrowing to fund purchases of consumption goods or to put into investments.

I also continue to read articles and see advertisements telling people how they could own real estate with little or no cash. How is this possible?

The low interest rate environment is here to stay for the next couple of years, with what is happening in the USA, Eurozone and Japan. As Dr. Marc Faber said, a low interest rate environment encourages people to take risks. Is this a bad thing?


I have been told by many that a judicious amount of leveraging could magnify the returns from my investments.

So, with zero gearing in my personal balance sheet now, am I a stick in the mud when it comes to leveraging?

I do understand the benefits of leveraging and, indeed, without it, I would not have been able to make money from real estate investments. However, I would leverage sparingly and would try not to take the biggest possible loan or the longest repayment period, given a choice.

On the other hand, savvy investors who know how to exploit low interest rates would probably benefit a lot more. The fear is always in overdoing it. Overdoing it?

Yes, too much of a good thing is probably bad. I am talking about overleveraging, of course.

A simple understanding of overleveraging is a situation when people are borrowing money, hoping to make money but do not have enough capital assets to cover any likely future losses.


The Singapore government is prudent in capping the loan to value limit at 60% for a second mortgage. In the event of a crash in the property market, it is unlikely that property values would decline by more than 40%.

However, some people have purportedly found ways of going around this ruling. Indeed, from their claims, they have probably found ways around any ruling. If we were to do a search online, we would find websites and blogs with such claims. To find out more, however, we would have to pay to attend related seminars.

I would caution that there are reasons for why the cooling measures are here. Whether the reasons are good or not would depend on where we stand.

However, it is obvious to me that the government is sending a clear message that they want property prices in Singapore to lower in the next couple of years, not that they need to do much more to achieve this.

Given the rising vacancy and lowering rentals in the last few months, how would things look when record numbers of condominums are completed over the next few years?







Over the next 2-3 years, supply of completed new units is set to surge as the government’s current efforts to address the undersupplied HDB and DBSS markets bear fruit and as the bumper supply of land parcels for private housing in the government land sale programme is developed. We estimate that an average of 33,434 units of housing could enter into the market annually between 2012-2015 or 3.5x the average over 2004-2010. This compares with an average household formation of 18,000-26,000 over the past few years.


The current low interest rate environment and low vacancy levels are supportive of rents and the positive rental carry makes property investments attractive. However, with the large incoming supply over the next 2-3 years, vacancy rates are expected to trend up and this would exert pressure on rents and yields, resulting in a drag on prices.

Source: DBS Vickers.



Betting against the government and basic principles of economics, buying more investment properties now, does not seem like a savvy thing to do. Overleveraging would make this worse.

Related posts:
1. Should we be staying invested or in cash?
2. Selling a private property just got harder.
3. Buying a private property as a owner-occupier. Think like an investor.
4. New or resale property?
5. Be a real estate owner the easy way.

Be a plumber or be unemployed?

Wednesday, March 7, 2012

I read an article in The Straits Times today on how a 50 year old Chinese plumber makes RMB10,000 a month clearing drains in Wuhan, Hubei, China. This is about S$2,000 and about 5 times more than what a fresh graduate in China is able to command as an office executive.



The plumber has saved enough money to buy a car and pay off his mortgage, feats which Chinese office executives are envious of. So, could we expect more graduates to become plumbers in China? Most unlikely.


"Over a quarter of new college graduates are avoiding more physical work as electricians, plumbers, and drivers in favor of office jobs, according to the Labor Ministry, despite average starting salaries less than half of what’s on offer elsewhere."

It was reported that fresh graduates in China would rather remain unemployed than to take up a job that involves menial labour. A fresh graduate, after six months of being jobless, admitted that he could get a job as a blue-collar worker which would pay well but he would rather not do it. Why? It would not sound good when he tells people what he does.

Now, I wonder if we gave the plumber a fancy title, would that help? Sanitation Specialist? Does it sound better?


Anyway, this case is not exceptional as a survey found that 6 in 10 graduates in China would prefer to be a white collar executive making RMB 3,000 a month instead of a blue color worker making RMB 5,000 a month.

I don't think this situation is unique to China either. It is probably the same anywhere.

Is a society more advanced when its people are more concerned about class than financial well being? Class could take many forms, of course, and not just in the form of job titles.

What about the place of work and the dress code? Is working in the CBD and wearing a tie and jacket at work more prestigious than working in a warehousing district and wearing jeans and t-shirt at work? What if the latter were to pay twice as much as the former?

Should we care about how people look at us or how our bank account looks?

Related post:
A movie: The Iron Lady.

SGX: Heavy selling.

SGX Centre Two

SGX's share price could go as low as $6.30 in time. This is the neckline of a reverse head and shoulders pattern which formed from November 2011 to January 2012.



However, both the rising 50d and 100d MAs should provide some support in case of further price weakness. Would they be strong enough to prevent a more drastic decline in price? Your guess is as good as mine.

If I were interested in getting in on the long side, I would pay attention to the 100d MA. See how a trendline connecting the lows of December 2011 and January 2012 seems to approximate its position? Should be a stronger support than the 50d MA and if it should go, $6.30 is the next support.


Sembcorp and SembMarine.

Tuesday, March 6, 2012

SembCorp's share price broke through the 20dMA as if it didn't exist. Could we see the rising 50dMA tested for support eventually? It is now at $4.70.



SembMarine's share price gapped down dramatically on the back of extremely high volume. It would not surprise me if the 50dMA should be tested for support in the next few sessions. It is now at $4.74. If the selling pressure is strong enough, we could see that giving way too. $4.36 in time? Possibly.





Tea with AK71: My briefcase.

Sunday, March 4, 2012

When I first started work as an adult, I spent almost $200 buying a leather briefcase. I saw it in a mail order pamphlet, thought it looked nice and the price rather reasonable. It lasted some two years before giving way. So, did I buy a new briefcase? No.


One of my vendors gave me a briefcase made of fabric. It was much lighter than the leather briefcase I had and it was free! I was very pleased with that briefcase and used it with pride until it too gave way a few years later.


My third briefcase was also made of fabric. Again, it was free! Wow! That was a free bag from a periodical I subscribed to. I believe it was Asiaweek. I don't see this periodical anymore. Could be defunct now.

Since the demise of the leather briefcase I first bought as a working adult, I have never bought another briefcase. Every single one was free since.


Over the years, I would collect free briefcases. Collect? Yes, they were free from merchants, banks or malls when certain conditions were met. In recent years, I also received two briefcases as presents from friends, a leather one and a fabric one.

My current briefcase is my favourite, a very lightweight fabric bag that has lasted me four years but it has finally given way. It has torn but I want to continue using it for a while more.

Free bag from United Colors of Benetton.

After years of faithful service, it is fraying.
This was a free bag from United Colors of Benetton. Yes, it is branded!


The bag was given free to my sister for purchasing a certain minimum amount from them. She didn't want it. So, I took it!


This was probably 8 years or so ago. I can't be sure but it was a long time ago. I think the shop was in Centrepoint.


Well, nothing lasts forever really, not even a diamond, scientifically speaking. I would have to retire this bag one day and choose a replacement from my ready stock of free briefcases at home. ;p

Related post:
Money management: Needs and wants.


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