Fewer Homes Worth Less Than Remaining Loans As Prices Rise

Source : The Straits Times, Dec 4, 2007

Owners no longer in negative equity may be tempted to sell and cash in

THE number of home owners in negative equity - where the property is worth less than the loan taken to buy it - has been slashed due to soaring real estate prices.

Four years ago, about 13.7 per cent of owners with home loans were in negative equity but that has now fallen to just 2.5 per cent, said the Monetary Authority of Singapore (MAS).

The proportion a year earlier was 5.1 per cent.

In terms of the total value of outstanding home loans, only 2.4 per cent were in negative equity in September - down from 4.7 per cent a year ago and 14.1 per cent in 2003.

Property experts tip that the significant shift into 'positive equity' will tempt some owners, particularly investors, to sell and cash in.

Owner-occupiers may refinance - taking out a new mortgage at a lower rate - while others will wait for prices to rise even more before selling.

The MAS figures, contained in its latest Financial Stability Review, came from a survey of six banks, which account for almost the entire home loan market.

OCBC Bank's head of consumer secured lending, Mr Gregory Chan, said: 'In line with the healthy economic growth, we observe that home loans taken on properties bought in the mid-1990s have been steadily recovering from their negative equity positions since 2004.

'We have also noted an increased trend of consumers selling their properties for a profit.'

The number of requests for loan refinancing has also gone up in the past three months.A local bank executive believes positive equity is one of the reasons for this.

Home owners who wanted to sell their properties while in negative equity would have had to pay the bank the difference between the outstanding mortgage and the sale price. But those who held on may now be willing to sell, said property consultants.

'Singaporeans are quite averse to selling things - especially big-ticket items - at a loss,' said Mr Nicholas Mak of property consultancy Knight Frank.

Mr Eric Cheng, executive director of property agency HSR, recalled one owner who bought a Mandarin Gardens unit for $950,000 in 1996, only to see its value drop to about $600,000 around 2001.

After holding out for more than a decade, he finally managed to sell his unit for $1.08 million earlier this year.

For such sellers who have had the distressing experience of being in negative equity, cashing out with a profit at the earliest chance is a must. 'They don't want to experience another slump, which may last for another eight to 10 years,' said Mr Cheng.

Owners might also be tempted to get out while the going is good, given recent government steps to cool the market, said a banker. Stricter collective sale rules, hikes in development fees and the axing of deferred payments would moderate price rises.

But there will be others who will hang on, waiting for home prices to rise further.

Mr Geoffrey Ying of financial advisory firm New Independent said: 'It's human psychology: since they have waited so long, what's a few more months or years?'

The MAS also said that the banking system's overall property exposure has gone up further as the boom spreads to the mass market. While the rise in banks' property exposure has been driven mainly by loans to property-related firms, loans to individual investors have also risen of late.