Property Market Cycles: 2015 Will Be A Year of Reckoning Part 2

Part 2 of my posting is this:

Property investing will be more difficult post GFC.

The world's leaders have seen the devastating effects of a property bubble burst. Asia saw it in 1997. The western world ex Japan and Australia saw it in 2008 - 2014.

Most countries, e.g. Singapore, implemented something called the Total Debt Service Ratio or TDSR, which dictates that mortgage payment cannot be over a certain percentage of borrowers' income. In addition, Singapore increased buyer and seller's stamp duties.

I believe the TDSR is a prudent ruling as it incorporates all forms of household debts e.g. unsecured loans, auto loans, credit cards, as a percentage of income.

Although Hong Kong, Malaysia and China implemented other forms of measures, such as capping the max LTV, but not TDSR, they are closely watching the effectiveness of Singapore's measures.

In the UK, the MMR has had a similar effect. Like Singapore, it assumes the mortgage payments are based on an average interest over the last 10 years!

Here's the trillion dollar observation: If the MMR / TDSR is implemented by most governments worldwide, property prices will be linked to wage rises or wealth of households! No more will we see run away property prices like in 2003 - 2006, or in 2013 in the UK.

The only exceptions are:

1. when buyers pay full cash. The TDSR or MMR will have little impact on reining in property prices.

2. When buyers take on less debt, less LTV, and more cash, prices will be able to run more.

The volatility of property prices in the UK, Singapore and other countries that strictly enforce the TDSR / MMR / watchamightcallit will rise at a pace of 3 - 6% per year.

What will happen in 2015?

Interest rates will start to rise from Malaysia, New Zealand, followed by the UK, then Singapore and the US in the latter part of 2015. Australia is likely to hike rates too.

For countries like Singapore and Malaysia where there is oversupply. The effects can be devastating. Rents will fall and owners be stressed to pay off mortgages.

For countries like the UK where there are still acute shortages, it will slow down appreciation and more will be forced to rent. The rapid rise in rental will partially offset the rise in mortgage payments.

For countries like the US and Europe, property prices will rise unabated as rental yields are still way above borrowing costs...
 

Property Market Cycles: 2015 Will Be A Year of Reckoning

The boom and bust of real estate cycles seem to be tamed. That's because post GFC, governments realise how much havoc a burst property bubble can cause. Unlike stocks, properties are often the biggest ticket item for any household. A typical property usually cost around 2x of an American household's annual income, and as much as 18x a Chinese household's annual income. Most buyers need mortgages to buy a home. This means that banks' mortgage policy is a big determinant of house prices.

Let me state the biggest factors of a housing cycle:

1. Availability of mortgages. The TDSR in Singapore and Mortgage Market Review (MMR) in the UK have successfully curbed house price inflation.

2. Borrowing costs. If rates rise beyond rental yield, prices tend to stop growing as it will be cheaper to rent than to buy.

3. Employment creation. Jobs growth spur population growth, which in turn spurs household formation.

4. Supply factors. How liberal are local governments in giving permits?

In London, the MMR has caused asking prices to be reduced. MMR currently restricts loans that are > 4.5x of a household's income. If a typical London household earns around GBP50k, most banks will not be comfortable lending beyond GBP225k. This means most of zones 1 to 3 are priced beyond the reach of most Londoners.

As a result, London's house price appreciation will follow what Singapore went through between 2011 - 2013, slow growth. House price appreciation will follow wage rise since one will find it difficult to borrow > 4.5 x of a household's income.