Tuesday, 9 October 2012

Round 6 - Will it work this time?

Interestingly, after my post on 25 Sep 12, the government came up with the 6th round of cooling measure.

The two measures are as follows:
  1. Mortgage tenures limited to 35 years.
  2. Lower loan to values on loans over 30 years.
In my opinion, i think MAS (or the government) will continue to watch the market closely and do whatever it takes to cool the market in order to avoid a property bubble.

A graphical view of the cooling measures from the Morgan Stanley report.

The new measures are pretty interesting because it seeks to stop people from buying their 2nd or 3rd investment properties. It is trying to 'curb' the demand. Below is the graphical view of the "decision making tree" of the latest measure from Kim Eng.

I will not rule or further government measures should the prices continue to spiral out of control. However, the latest measure would probably weed out older investors (people aged 45 or more) and investors who are unable to afford the monthly mortgage due to a shorter tenure. It makes it difficult for "yield arbitrage" to take place through a shorter tenure and a higher down payment of 40%. 

Let's talk about how a yield arbitrage works. Let's say i bought a property for $2m and the value has increased to $3m in the last 2 years. I then tell the bank to lend me $1m at 1% and I use the $1m to buy a fully paid property to rent it out for a 4% yield. In this instance, i have a yield arbitrate of 3%.  I was contemplating such a 'trade' earlier this year but decide against it eventually.  Figures provided for hypothetical case. 

Will Round 6 finally work and forced a correction in the property market? Kim Eng seems to think so and believed the latest measures will tip the segment closer to a 10% correction by end 2013... hmm... not too far from the 13% predicted by Morgan Stanley?.

Do share with me if you have originally intended to buy a second property but this latest measure has finally put you off? Or if you are a first time buyer, is this the final measure which you are waiting for? Happy property investing.
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