KL Properties: Pass the Buck to Malaysian Banks!

I was considering some condos in KL recently. The proposition is very attractive: No money down, 110% financing. The price of the condo can be RM560k for a 1000 sq ft unit, freehold. The bank lends you 600k. 40k excess is for you to pay for renovation, and service mortgages. It is indeed very attractive because if there is no downpayment, the IRR can be theoretically infinite if prices moves up by even 10%!

But here're the problems:
1. Over supply of KL properties in the next 5 years! The population of KL is around 1.7m. For the state of Selangor the population is around 5.4m. KL's population grew at around 1.5% per annum in the last 5 years. So what's the increase in population annually? 25,500. On average, there are around 4 people per household. So annual increase in demand is only 6,375. In the luxury segment alone (defined as above RM500 psf), around 5k - 6k of new condos will be completed annually. Mid tier and social housing will account for another 10k. Total supply is 15 - 16k!

2. Based on point 1, I believe rental will continue to fall in greater KL, not hold steady. KL's gross yield used to be 8%. It is now around 6%. It may fall to 5.5% in next few years. Borrowing cost of 4.2% may be high to most Singaporeans, but it is the lowest in decades. So the spread is likely to be only 1.3%. This is worse than Singapore's current spread of 1.7% (borrowing cost of 1.5% and average yield of 3.2%). When interest rates start to rise from 2015, I think there will be a lot of forced selling in KL.

3. There is no transparency of transaction anywhere in Malaysia! This is my biggest problem. A sales person in Iskandar recently chided me for not buying a condo. He said that he sold it for 500k when he previously wanted to sell me for 350k in the earlier phase. I asked to look at the Sales and Purchase Agreement and he said that it was confidential! Of course it is! But when I asked him to show me the contract with the names of the buyer concealed, he refused too! Frankly, even if he showed me the contract, he could have given a 20% discount on the SPA price so even if it showed 500k, it could actually be 400k! Everybody tells me that prices in Iskandar and KL are rising, based on iProperty's advertisement. But those are asking prices! The bid-ask spread could be very wide! Agents could easily manipulate and create a perception that prices are indeed asking. Unlike in most developed countries, I am unable to check caveats lodged and their prices! In the UK and US, I can check the date of the transaction and the price for every house/apartment, right down to the exact unit and the exact floor! Singapore should move towards that level for transparency! In UK, no developer is allowed to give discounts on the declared price so perhaps Singapore should enforce that too! Otherwise it is no point gathering data on transacted prices. I believe prices in most Core Central Region's new projects have already fallen by 10 -20% after discounts, but the property price index showed that prices continued to inch up!

4. Secondary liquidity is untested. I do not know how easy it is to sell your units on the resale market. I suspect that prices tend to rise slowly as an off plan unit approaches TOP, but start to depreciate after TOP. If your unit is 3 years old, you may have to price is at around 10% below the new launches nearby. But if it is over 10 years old, depending on how well the condo is maintained, it may be 20 - 40% cheaper than new launches!

5. Title deed may never be transferred to you! Many developers fail to transfer title to you after TOP, even if you did not take a loan! The legality of this ownership is in doubt in this case. This may mean that the developer has not paid off all its loans to the banks.

6. Nowadays, developers require you to take a bank loan before you can buy. In the past, this is not required and many buyers default on their purchase just before TOP, especially when prices fell. Now, the buck is passed to the banks. With a 110% financing, what would happen to the banks if prices start to tank? It could be a repeat of the Asian crisis again. This was exactly what happened to Spanish banks in the current crisis.

Stay Away From Gold / Silver, Correction of Stocks May Last Longer

http://musingsonwallstreet.blogspot.sg/2012/12/gold-and-silver-in-consolidation-phase.html

Refer to my post above. I mentioned that gold and silver are not going anywhere at least for the next few months. I was right. There is a great shift from investment grade and high yield bonds to high dividend stocks at the moment. This shift started in Oct 2011 and has continued until today. It will continue until interest rates start to creep upwards and close the gap with dividend yields of stocks. When that occurs, which I suspect will be around 2014, earnings need to recover in order for the rally to sustain. Otherwise, stocks will face a major correction like in Oct 2011 to bring valuations down to attractive levels again. But if earnings recover strongly, there will be another great shift from dividend stocks to growth stocks.

In a situation where investors are still skittish about recovery, and inflation is benign (unemployment in the western world still above 7% for the US and above 10% for the EU), gold is ignored. I believe commodity related stocks will stage a multi-year rally, stretching up to early 2014.

The correction of stock markets started on 28 Jan 2013. Since then, the S&P500 continued to trend upwards but Asia ex Japan stocks stayed sideways. I think this is not over yet. There will be another leg down before buying opportunities present itself.

6 Simple Steps to Wealth

By Aktive Learning | MoneyMatters.sg – Wed, Feb 6, 2013 2:47 PM SGT

By Brian Halim (guest contributor)

Many believe there is a great secret to becoming wealthy. Few realize that the simple basics are all you need to build wealth. The “secret” to wealth is not much of a secret. A variety of simple concepts and actions can be applied to achieve prosperity. Follow the following six steps and you will be on your way to building your wealth.

1. Spend less than you earn
The number one rule of personal finance is this: You cannot spend more than what you earn. You must live within your means, and take care that you never outspend your income.

2. Reduce Debt
Pay down your debt, and you free up resources that can be used to improve your net worth. If you are leveraging on your loan, repay your loans diligently. Reduce the amount of interest you pay, and instead use that money to your advantage.

(my comments: pay off the debts with the highest interest rates first. For example, credit card interest in Singapore is 24%, overdraft interest ranges from 0% to 15%. I would keep my home mortgage because interest is around 1% to 1.5% and if you rent out your property, you can get between 3 to 4%. Hence there's a positive carry. Secured overdraft against your investment is also very cheap, around 1% - 2%. This is a useful form of cash too and allows you to invest without locking up your capital fully).

3. Grow Income
If you want more, you need to earn more. Look for ways to grow your income. Maximize the lifetime earnings of your career as well as seek non-career options to profit like part-time jobs. Staying overtime in an office that does not pay you extra will not help you, unless it will lead to a promotion.

(many Singaporeans think that studying hard, getting good results and getting a good job is the best way to achieve financial freedom. But that's only half the story. What you need is to take courses in investing, take a Chartered Financial Analyst program, pay thousands to learn from the best investment coaches. Next, you need to invest in real estate as well as stocks, bonds, i.e. a diversified portfolio. Your stable job is a means to get mortgages to invest. My internal rate of return from investing in properties is around 20 to 50% per annum. For financial assets, due to the lack of leverage, I achieve between 10 - 20% per annum. That speeds up my process towards financial freedom).

4. Save for the Future
Your emergency fund can protect you against financial setbacks or unforeseen emergencies. Be prepared and stay calm.

(My take is that you need to keep an amount of cash equal to no more than 6 months of your average expenditure. Anything more will drag on your returns and be unnecessarily cautious.)

5. Invest in Yourself
Wealth also depends on your human capital. Invest in yourself by getting an education, and/or developing a skill. It does not necessarily need to be a degree. All you need is a marketable skill, or a knowledge base that can help you improve your finances.

(Refer to my recommendations in point 3)

6. Play Good Defense
Be sure to avoid the worst finance mistakes that people make. They can derail your gains and even ruin all of the hard work you put in to grow your net worth.
When reading the above actions, it is easy to dismiss them. If it were so easy, everyone would be wealthy. The steps that lead to wealth are simple concepts. Applying these concepts is much harder.

(You cannot throw caution to the wind and invest in only stocks. You need some short dated bonds, good bond funds, and dividend stocks as a defence against things going wrong.)

3 Building Blocks of Wealth: Discipline, Patience, and Persistence
In addition to the steps above, you also need to develop three qualities to ensure maximize the chances that you will achieve wealth.

1. Discipline
Discipline requires a measure of self-control in expenditure. Rather than buying everything you want, prioritize and purchase only what is important to you. This will help get rid of debt and build your savings.

Earning money requires discipline. Growing your income means that you have to get up early and do extra work. Occasionally, you might have to complete tasks you find unpleasant. Knowledge and skills too are acquired only after you exercise the discipline to study and to practice them.

(I still drive a 8 year old beaten up Honda Accord. My favourite car is of cause a Ferarri but hey, I'm married and there's no need to impress anyone :-) I still love to travel, but now I combine my travels with my searches for overseas investments. I get to make more friends like that, learn more about the city and spend less money shopping and eating).

2. Patience
In today’s world, we are bombarded with promises of instant gratification. We want that expensive car now. You can have your vacation with a credit card. A 60-inch television can be yours if you qualify for in-store financing. The inability to wait and save up the money for what we want leads to debt and financial insecurity.

Results require time. A good emergency fund takes months, or even years, to build. Dollar-cost averaging in your investment portfolio requires decades of patience.

(My advice: buy one property a year. If prices of real estate collapse, buy double, or even triple the amount. If prices go up too much, buy smaller units, or buy off plan properties that allow you to own assets with little down payment. The time it takes to complete will allow you to hopefully allow you to skip the downturn and make a small profit when it TOP.

Do not trade shares too much. Look at fundamentals, and technicals. Do dollar cost averaging if you have no knack for financial investments).

3. Persistence
Persistence is the ability to keep with your wealth-building efforts. It is easy to give up when you do not see quick results, or when you see your neighbors enjoying their over-leveraged lifestyles.
However, in the long run, those neighbors are likely to have very little wealth, since most of the goods they enjoy have been bought with debt. It is hard to see that when everyone around you is having fun while you follow a more practical course. But stay the course.

Take action now. There will be many temptations along the way. It is up to you to decide which path to take. Follow the simple concepts of building wealth with discipline, patience, persistence, and you will achieve financial freedom.

(The time to act is NOW. There's no short cut to building your wealth. You need to do a lot of research, talk to a lot of people, read a lot of books and attend many courses).

The concepts behind wealth are that simple, but it takes hard work to put them into practice.

By guest contributor Brian Halim, a professional accountant who blogs at A Path to Forever Financial Freedom. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.

Stock Markets Correcting Again!

Looking at a couple of indicators, I suspect that stock markets are correcting again. The paradox of using technical analysis is this: if you want indicators to tell you the turning points while near the top of the charts, then be prepared for a lot of false alarm. But if you want to be very sure, you need to wait for confirmation first and by the time it happens, stocks could have fallen by over 10% by then.

28 Jan 2012 is the date when AUDUSD made a dead cross on the weekly chart. We had about 1.5 weeks to make all the necessary rebalancing. Right now I'm almost all out of equities.

Singapore's Population Must Grow to 7 Million, I Fully Support This Policy

Many Singaporeans complain about the government's plan to grow the population to 6.9 million by 2030. If you amortise the 1.6 million growth over 17 years, it's like 94,118 increase per year. Our population growth has been at around 100 - 150k from 1996 - 2010, so it's actually a slow down of population growth. If our population were to grow at roughly 100k per year, and if we assume 3 people per household, we will need 33,333 new homes per annum.

I agree that the infrastructure is straining under the population boom. The government could have done more to anticipate this. In fact it was the fault of various ministries that they did not communicate with each other. The Ministry of Manpower failed to coordinate with HDB and URA to plan for the influx of immigration between 2003 - 2012, causing real estate prices to shoot out of control.

But what if we reject this notion of a 6.9m or 7m population target? We will become another Japan with three lost decades. The demographics will be such that over 25% of the population in Singapore will be over 65. Workforce will shrink, taxes will rise. We will then either have to raise retirement age to 75 or we will have to raise taxes because there will be fewer people working and paying taxes. Worst, our real estate prices, from residential to commercial to offices, will fall! Every one has to wake up to the economic reality of a demographic collapse! Singaporeans may suffer from falling living standards and our wealth will be eroded. Look, everybody is angry over the high Gini coefficient of 0.48. The wage gap between the top 10 percentile and bottom 10 is abysmal. But by not increasing our population, either through immigration or by increasing birth rate, we the wage gap will narrow. But it will not narrow because the poor experience higher wages, but because there will be fewer richer people!

We have to ask ourselves whether we want to be a socialist Europe, where many people are on welfare, and the rich are leaving in droves! Taxes are very high in Europe due to strong social safety net. But it disincentivises you to work, especially if you're entrepreneural, intelligent, and hard working. So if you're blessed with the traits I mentioned above, you would leave the country for another place with lower taxes, that welcomes you. That's what's happening in Europe. We cannot head that way!

What the government needs to do is to look through the various sectors and decide how many foreign talent is required for each sector. It must ensure there is cultural, racial and gender inclusion in work place. There must be preference for local talent in the PMET segment. Only if a talent cannot be found, or hired at a reasonable price, can the employer then hire non Singaporeans. This will ensure that citizens will always be taken care of first and be fairly treated. There are many MNCs in Singapore that hire only people from one nationality, and that's not Singaporeans. It's as if the Ministry of Manpower has fallen asleep. This hands off approach cannot continue.

As for the retirees, they should be encouraged to move to the Iskandar region so to enjoy a slower life style, cheaper cost of living as well as the amenities of Singapore. This will keep the working population large as a proportion of total population. However, this is a very political issue which I am unsure if Malaysia and Singapore can come to an understanding. But I am aware that many clients are already planning to retire in Malaysia and Thailand, by buying homes in KL, Iskandar and Bangkok.

So other than tweaking the immigration policy to ensure justice and more protection of citizens, the population must grow. There is no turning back. We cannot turn into a Japan and be stubborn or myopic about it.