No one likes to catch a falling knife.
The
private residential price index has fallen for seven consecutive
quarters. With the Government still keeping the cooling measures in place, it seems that there is no end in sight. But at the same time, interest rates are starting to creep up. It is really double whammy for the market.
The
chart below compares the change in 3-month Sibor rates versus the
change in private property prices. 2Q 2009 was the quarter the property market
recovered. It is clear that the change in property prices is on a
downtrend ever since. While the 3-month Sibor rates were steady for some
quarters, it does show an increasing trend since 2010. It means that
the relationship between the two are inverse. ie. when one goes up, the
other goes down.
Change in Sibor Rates versus Change in Private Property Prices
Source: Real Property Advisory / URA / Money Smart
This is worrying for some buyers as it means they have to fork out more in monthly installments if prices remain stable. But if the fall in prices is large enough to offset the increase in monthly installments, it means that buyers would be better off entering the market.
Let's carry out a hypothetical example.
Assuming a buyer buys a $1 million resale property and takes a loan of $800,000 for 25 years at 1.5% (this is the interest rate before the property market declined in 4Q 2013), he will have to pay $3,199 per month.
If he holds out and makes the purchase in 2Q 2015, based on URA private residential price index, the property price would have fallen about 6% to $940,000. He needs only to take a loan of $752,000. However interest rate has gone up to 2% in 2Q 2015. He would have to pay $3,187 per month which is not much different.
This mean that a decline in prices of 1.2% would be offset by an increase in interest rate of 0.1%.
So is the buyer better off by delaying his purchase? Yes. While the monthly installment is not much different, the savings from less upfront cash and taxes is a lot. Even if the property is tenanted, the net cash flow (rental less mortgage payments) is unlikely to be much more than the savings in cash and taxes.
However if the seller is willing to accept an offer of 10 to 20% below the latest transacted prices of comparable properties, the deal is worth taking a second look.
