Saturday, September 4, 2010

Property Cooling Measures - Weaker Hands Lose Out

After reading through the past week's The Edge as well as Business Times, I came to a conclusion that leveraged property investments observe the same rules as leveraged equity investments - the weaker hand always lose. The weaker hand refers to investors without the holding power. 

In the case of stocks, the individual might be utilizing margin facilities or "contra-ing". Things are fine when prices do not fall too much or better still, rising. But when stocks fall sharply, those long and leveraged, with have to sell at a loss and even risk financial ruin. For those with the money to hold on to their purchases, by settling with cash or topping up their margin accounts, things are slightly better.

What has happened is that the Singapore Government, through the Ministry of National Development, announced a slew of measures on Monday, aimed at cooling the property market. Without going through the measures in detail, it suffice to say that these calibrated measures are aimed at weeding out "specuvestors" - a new term I learned while combing through property market commentaries. For instance, the minimum occupation period has been increased while the loan-to-value ratio has been decreased.

Prima facie, those who are living in a private property with borrowed money, while renting out their fully-paid HDBs (most presumably to PRs who need a place) to enjoy the rental yield, will be the first to be purged. As noted by newspaper editorials, they would have to sell their private property to maintain ownership of the HDBs. Likewise in a stock market crash, these specuvestors would very likely cash out their positions at a loss.

The lesson learnt here is that stick to stocks and bonds (CPF SA?) while not being leveraged if you want to build you wealth without having nightmares. The game of borrowing to stay in private property, while paying it off with the rental income from the HDB flat, has just increased a difficulty level.

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