2nd MasterYourFinance.com Gathering - 24 Jan 11

[alvin]

Dennis shared about the recent property measures implemented by the government as well as some of the impacts to the market during the 2nd MasterYourFinance.com gathering:

Seller stamp duty has increased from 2% to 16% for first year, 12% within 2 years, 8% within 3 years, and 4% within 4 years. Compared to Hong Kong at 15%. This is worse than capital gain tax because for the latter, you pay tax only when you made money from the sale. Whereas, seller’s stamp duty forces you to pay as long as you made a sale, regardless is it is a profitable transaction.

Impact #1

In his opinion, all the speculation in the property market has been eliminated as property price need to go up 22% in one year to break even.

Why 22%? Here’s how it adds up:

#1 Buyer stamp duty - 1% on S$180,000, 2% on next S$180,000, and 3% thereafter. Or roughly about 2.5%.

#2 Seller stamp duty - 16%

#3 Legal fee - Bank pays but if you sell the property within one year, you have to pay back the fees to the bank for redeeming the loan early.

#4 Property agent commission - 2%

#5 Housing loan interest - 1.5% (for one year)

Impact #2

Middle class also eliminated because if you own a home with outstanding loan, you would now need to put down 40% down payment and finance only 60% for second property. If you buy through business, maximum financing is 50%. This takes effect from 14 Jan onwards. So for a $1m property, previously with 70% financing, you need to put down $300k. Now with 60% financing, you need to down pay $400k, easily another $100k additional. For someone who save about $15k a year, it would delay property buying by about 7 years. On the contrary, a rich guy who owns 3 properties fully paid, he borrow up to 80%. Life is going to be tough for the middle class in the future.

In actual fact, the government has no choice but implementing these measures to prevent hot money from flowing into Singapore from China and Hong Kong. Currently, Hong Kong’s maximum financing is 50% for property price above HK$14m. For China, foreigners cannot buy properties and local Chinese can only buy 2 properties. If the rich can get better financing in SG at 70%, the rich will invest heavily in Singapore and buy up properties.

Futher steps to cool property market if required

MAS launched a consultation paper, suggesting equity loan capping at 50%. For example, you have an existing property worth $1m with $200k outstanding loan. Under previous rules, you can apply equity loan, up to 500k addition, to make the total loan to 70%. The new rule may just cap it at $400k in this example. A more serious measure is to forbid you from using this equity loan as downpayment for next property.

All these are likely to be temporary measures, it should be lifted when the property market cools down.

What property can you invest in now?

Currently, only landed property is a worthwhile residential property to invest in. This is due to supply and demand. The number of landed properties are less than 70,000 in Singapore. With 1.5m new residents, and assuming 10% are rich = 150,000, it is easily 2 times the supply. This has not take into consideration of the existing 5m population, assuming they have no interest in landed properties.

Invest in stocks

Stock market typically has 3 phases. 1st phase is after a market crash, and economy usually doing very badly, which was from Mar 09 to end 2009. 2nd phase is last year 2010. Each phase would have correction but only after the last phase, market would crash. One correction happened on May 10 where STI came down from 3100 to 2700. Current correction is normal. It is likely that investors would panic when they do not have experience.

The last phase have not started for Singapore, it is likely only when STI hit above 3,300. If you ask 3 experienced investors, all will have different views. With 18 years of experience, the index would only move up slightly. Even if it moves up to 3900, it is only a 20% increase. US has already started. China has not started too. Singapore can be described as “no spine”, always taking direction from US, China and Europe. All 3 markets have to go up in tandem before Singapore would go up.

When to get out?

Penny stocks with fundamentals will rise and when penny stocks without fundamentals go up in price, it is a sign to get out. Currently STI is about 15 times PE and be careful when it reach 17. Dividend yield would drop below 3% for STI. There would also be high price to net asset value, and banks would be trading 150% - 200% NAV. One should not panic until the 50-day moving average cuts below the 200-day moving average. As long as it is above, the trend is intact.

Most importantly, you have to ask yourself if you are wrong, will you be financially okay? Hence, do not put all your money in stocks.

Dennis has split his portfolio into stocks, gold, silver, property, land banking, wine investment, UK traded endowment fund and cash. Depending on the economic condition, he may adjust the position accordingly. For example, before deflation, he would have more cash on hand to pick up cheap stocks. Of note, the reason why he bought UK traded endowment is due to the 90% cash value guarantee by UK government’s Financial Investment Compensation Scheme, it would apply even if the insurance company collapsed.

Many would have felt the effect of inflation. But the actual fact is not that the commodities are going up but USD is being devalued. Nonetheless, the world will not let USD collapsed as we know many countries hold US treasury bonds and would not want to be paid back in a currency that has no value. US plays the money game the best by pressuring China to raise Renminbi. If China raises RMB too much, many factories would close down due to less exports. It would be like the Japan in 1980s, who was almost on the verge of overtaking US. Likewise, Japan was encouraged to raise Yen and it resulted in a deflation for a decade.

At the end of the day, are you prepared? When things unfold, will you be a economic sacrifice or will you be reaping from the opportunities? Luck is where preparation meets opportunity.

[Thanks to Hon Ve who made the recording available]