The current COVID-19 situation has all of us stuck in a rut and confused. Everyone is affected by this situation and the people that are greatly affected are those that are recently retrenched or made to take no-pay leave during this period. There are many uncertainties during this period and with no end present to this situation, all that we can do is wait and see when this period will recover.
Here is what we can’t predict in the coming months
- How long will the COVID-19 situation last?
- Can the government effectively implement to control the spread of new local and imported cases?
- What about our neighbors that are outside our borders?
- How will this situation affect the current labor market in Singapore?
Now that I have listed down some of the most common concerns that Singaporeans might be thinking of, we can effectively tackle them with approaches that are measured and rectify our current situation so as to make the coming months easier on your budget.
In regards to your financial situation right now, the most important issue that you should be tackling is your current cash flow. I have mentioned in a previous article on how cash flow is very important in regards to the BRRR technique of property investing. Likewise, we should take a similar approach to how we manage our finances in regards to other investments. One should be familiar with what are the interest rates for their outstanding loans.
Most Singaporeans assets are being locked in their homes, and your money should work as hard as you do. The financially savvy will take this opportunity, leveraging on the current state of the property market to alleviate some financial constraints, or to work it to their advantage!
In order to explain how these scenarios can work out, let us analyze the previous economic downturn and their effect on the property market.
HDB PSF and Market Volume in 1997 and 2008 Financial Crisis
For the HDB market in both financial crises, the volume has recovered relatively quickly, around a period of 3 months. The huge increase in PSF during the global financial crisis is contributed by the reduced supply of Build-To-Order HDB units in the early 2000s and the influx of foreigners which might have resulted in Singaporeans and Permanent Residents opting for Resale flats instead.
Contributing to the sharp increase in prices are due to bankruptcies and mortgagee sales, which resulted in displaced homeowners downgrading to HDB flats as these are the only type of public housing protected from Official Assignees.
In addition, the en-bloc craze in 2007 resulted in an increase in HDB Resale buyers paying in full cash too!
Private PSF and Market Volume in 1997 and 2008 Financial Crisis
The Core Central Region properties tend to be corrected by a larger extent as most of the units here are non-owner occupied. Most of these units, therefore, have riskier “investment money” and most likely will be pulled out in the case of financial crises like these.
Summary of Both Financial Crises
➤ Recovery took 9 months to 1.5 years
➤ OCR has the highest resilience; correcting the least averagely 20%
➤ RCR corrected averagely by 31%
➤ CCR corrected averagely by 43%
As Singapore has an extremely high homeownership rate, which is at 91% as of 2018, focusing your investment in owner-occupied districts will ensure that it will be less susceptible to market swings.
Here is What We Can Do
To elaborate on my infographic further, equity loans or term loans means that your property is used as collateral by the banks, so as to provide you with a loan. This is a good option to reduce interest payments on other high-interest loans.
This is not without risk, as the use of your property is collateral for the banks, it is important to always make repayments on time.
Failure to meet these datelines will cause your property to be taken by the bank. CPF can not be used to pay off your loan and therefore you will need to ensure that you still have substantial cashflow to tide you over during these difficult times.
Refinancing is also an option, in regards to reducing your monthly loan quantum, speak with your banker to renegotiate on your repayment terms.
Source: blog.moneysmart.sg
In regards to a TDSR waiver, this is set in place recently for the time being due to the COVID-19 situation. If you are retired, you can use your Children’s name as a borrower so that the banks can use their income level to assess the amount of equity loan given.
Opportunities to Seize Currently
- Cash-out Prior To Deeper Correction
Use this chance to sell your current home and rent a similar space based on your family requirements for the next 1-2 years. While the market is still in correction territory, look for another home which has undervalued at the moment. Upon market recovery, you will experience a substantial capital gain if in which you can decide to sell this property.
- Equity Loans to be used in less risky investments
Alternatively, you can use an equity loan on your existing property and use it as an investment into fixed deposits which currently range from 1.45%-1.75% per annum or consider the use of CPF interest rates at up to 3.5% per annum. Both are relatively risk-free in terms of earning interest.
After a period of 1-2 years when the property prices correct further, invest in an undervalued property with your funds gained from your selected investment vehicle. Once the market recovers, you will see the fruits of your labor.
When to Start?
Now that we have discussed the potential value which can be extracted from your properties, the timing in which you enter the market will be one of the concerns that you might have. Like for example, what would happen should there be a further market correction of 10%.
In the following infographic, it will explain that the timing in which you implement the strategies mentioned do not matter as much.
The difference in gross profit of $30k over the return of equity (i.e. $900,000) is a small sum. Remember that cash flow is equally as important in comparison to capital gains. Take into consideration the time in the rental market have substantially provided for $60,000 over the course of two additional years.
This, in turn, helped in the resultant “capital loss” of $100,000. However, is it truly a loss if there was no further correction until $800,000? Timing the market may even result in loss of opportunities which previously had made people who invested in the previous financial crisis a lot of money.
These strategies all link back to the refinancing portion of the BRRR strategy. My article covers the basics in which the strategy entails, but I highly recommend that you conduct your own research into the subject matter to gain a more comprehensive understanding. Ground yourself in these fundamentals to withstand real estate uncertainties, as the BRRR strategy has worked for many people all over the world!
Are you having difficulty in understanding your current financial situation and will like my opinion? Contact me at Joshua.loo@orangetee.com or +65 96329840! Let me assist you!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.
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