SIBOR Rate Hike 2015

SIBOR, short for Singapore Interbank Offered Rate, is a term that many property owners who take up bank loans are familiar with. For the uninitiated, it is the rate that banks lend to each other and is determined by the Association of Banks in Singapore (ABS). And for many consumers, it is the rate that their housing loans are pegged to.

Since the beginnning of this year, SIBOR has shot up sharply. The 3 months SIBOR has been consistently around 0.4% since November 2010 but is now more than 1%. That is an increase of more than 0.6% over a short-time span of 9 months. A whooping 150% increase in percentage terms!

It is known that interest rates will not stay low forever. It is however puzzling why rates move up this much this fast. The start of Singapore's interest rate spike appears to coincide with the US Federal Reserve's statement about a gradual increase in interest rates around late 2015. To-date, US's interest rate has not been increased.

SIBOR shot up even before the US's interest rate starts to move. It is almost inexplicable. The only reason I can think of is that banks are profit-driven commercial entities. The increase in the net interest income of DBS, OCBC and UOB for both Q1 and Q2 this year appears to validate this. Perhaps MAS should have greater oversight with regards to the pricing of SIBOR.

Drop a note below if the increasing SIBOR is affecting you! Or if you happen to be from ABS, do share of any better reason for this interest rate trend.

Home Loan Rates in 2015

After nearly 6 years pumping in US$4.5 trillion into bond purchases, Janet Yellen, chief of the US Federal Reserve, recently announced that the Federal Reserve is going to stop its bond-buying program in November.

How is this going to impact Singapore home loan rates in 2015? Not much. The Federal Reserve has in the same statement, reiterated its commitment to keep interest rates low for a considerable time. “Considerable time” is subjective. Based on the Federal Reserve's track record and reasonableness, my two cents is that US interest rates are not likely to move much in the coming year. Singapore's parallels ─ SIBOR and SOR ─ will tend to follow suit.

For new home loan packages however, SIBOR and SOR are just one part of the equation. The other part depends on inter-bank competition. When it comes to housing loan packages, local financial institutions have been pretty muted this year. My best guess is that a deviant bank will probably rock the boat in 2015 and spice things up. Hopefully for the better!

Pitfalls of Buying a Malaysia Property

Having helped Singapore mortgage customers take up housing loans for coming 10 years as well as personally completing a couple of local property transactions, I was lulled into thinking that buying a property anywhere is a simple, straighforward process. Oh boy, am I wrong. Here are the things that I learnt when buying a Malaysia property.

Conveyancing Lawyer

Your choice of conveyancing lawyer is of utmost importance as the Malaysia property sales and purchase process is extremely tedious. That impression is firmly imprinted in my mind as no Singapore conveyancing lawyer has ever asked me for help in chasing the bank or the seller. Plus I did not have to help my own conveyancing lawyer calculate the completion date.

Perhaps the cry for help truly stems from the complexity of a Malaysia property transaction. Unlike Singapore property transactions where completion of the transaction falls on one single day, in Malaysia, the mortgage lender has to first disburse part of the buyer's loan to fully clear the seller's loan, followed by the buyer paying the balance in cash, then for the seller to take a couple of weeks to finish their paperwork before the seller completes his or her end of the bargain

Conveyancing legal charges is fixed in Malaysia (around 4 times the price of a normal Singapore lawyer), but some lawyers may offer to give you a hush-hush discount. Do not go for the cheaper lawyers at the expense of competency. Imagine have to put in writing every little thing with your lawyer and at the end of the day, your lawyer still messes up. You do not want to be in a situation where you have to protect yourself against your lawyer when your lawyer should be the one protecting you. And in Malaysia, the buyer actually pays the legal fees before the work is done, leaving buyers no leverage against these wayward lawyers. Suing your own conveyancing lawyer is going to be a waste of time and resources so pick your lawyer wisely.

Under Construction or Just Completed Projects

A buyer has to bear in mind when it comes to properties that are under construction, the significantly higher risk of a developer taking a protracted period or worst case, never completing the property development.

The Malaysia housing development regulations tend to be less stringent, which may lead to an actual completed unit deviating from the floorplan at the time of purchase. The reputation of the developer is of utmost importance when it comes to purchasing uncompleted properties.

For properties that are recently completed, make sure that the Certificate of Fitness (CF) has been obtained. While the Malaysia government is relaxed about the CF, a development without CF cannot be insured for fire and the owner also cannot sell the property until CF has been obtained.

Home Loan

The key factors to considering a home loan are interest rates, loan amount and loan tenure. Banks operating in Malaysia can offer higher loan amounts in ringgit and longer loan tenures. You may also want to consider Malaysia banks operating in Singapore, which can offer Singapore dollar home loans at significantly lower interest rates, but of a lower loan quantum and tenure.

Pay particular attention to the loan amount if you are to take up an SGD loan. In my Letter of Offer from RHB Singapore, Page 1 states an absolute loan amount of S$1,095,000. Page 2 states a loan of 70% of the purchase price or valuation, whichever is lower. 70% of the price in ringgit is RM2,514,400. However, based on an exchange rate of S$1 : RM2.55, RM2,514,400 works out to be S$986,039. The difference in these 2 figures is more than S$100,000. If in doubt clarify from the bank and have that put down in writing. I personally clarified with my banker and she confirmed verbally that it's the higher number but subsequently reneged on her word. Trying to reason with the bank when such cases happen may also be fruitless so putting things down in writing is paramount. In my case, RHB's position is that there is no ambiguity in her Letter of Offer. Enough said.

The numerous Singapore property cooling measures is an impetus for local property investors to park their money overseas. As long as we bear the above in mind, buying a property in Malaysia can still be a straightforward process.

How Diversified Should You Be?

Diversification is a popular theme espoused by financial advisors. As long as there is a geographical or business sector not included in your portfolio, you'll tend to hear them sharing axioms such as “you shouldn't put all your eggs in one basket” and “diversify to reduce your risk”.

But does diversification surely reduce risk? I am sometimes left scratching my head when asked to diversify into an area where I am not invested in, for the simple reason that I am not invested in it: it does not make sense to diversify into risky areas for higher returns when I can obtain a similarly high returns at less risk. It is equally mind-boggling when bankers advise parking money in financial instruments that is going to give returns lower than the inflation rate. This “diversifying for the sake of diversity” approach is sadly rampant these days.

However, if diversifying can reduce risk while maintaining or even enhancing returns, then it is definitely a great idea to do so! Diversification though, is a really vague phrase, I've grown to realise. Some people thinks that diversification means having a portfolio covering almost every investment out there. Others think holding around 5 different shares is diversified enough.

Due to the intrinsic nature of diversification, being a concept in the dynamic investment discipline, and the difficulty in quantifying investment risk, it is not possible for it to have a fixed quantifiable yardstick. How should we diversify in this case?

These guiding principles are my two-cents:

• Bearing in mind short-term market volatility, pick investments where the risk versus reward is at least comparable to those in your portfolio.
• Based on the above guideline, have as large a variety of investments as you can safely monitor. The size of your portfolio is limited by your time.
• Do not diversify for the sake of diversity.

If you have any thoughts or questions, do share below. Here's wishing everyone a prosperous and bountiful year ahead!

Lesson from China Minzhong

Around two months ago, I researched on this S-chip - China Minzhong. The financials looked sound, the price was right and and I believed that there is a decent chance that a major shareholder of China Minzhong, Indofood, will offer to buy over the company within the year. However, I didn't want to invest long term in an S-chip after all the S-chip accounting irregularities that happened in the past several years. “Nevermind, I'll just buy and hold till year end. If the takeover does not happen by then, I'll sell my shares, hopefully at a profit or worse comes to worse, bear a small loss. Cannot be so suay to hold China Minzhong for a few months and something drastic happen to the company during this time, right?”, I told myself. And so I happily went aheard with the purchase.

Now some of you may find the name China Minzhong familiar or may even have followed the saga that unfolded late last month. The company was attacked by a US short selling company called Glaucus Research. Glaucus issued a report alleging accounting irregularities. Straight after the report, China Minzhong's share price plunged almost 50% within 3 hours after the stock market opened for trading. The stock was suspended shortly after. Little did I expect that so soon after my purchase, China Minzhong is accused of accounting irregularies and my shares' value is halved in the blink of an eye.

Fortunately, the suspension was lifted a week after, with Indofood making a conditional offer on China Minzhong shares. I sold the shares shortly after the suspension was lifted. Even though the trade yielded a profit, it did not erase the lesson learnt. Bad news can happen anytime. If I am not willing to hold a share long term, it's best to not invest in it.

How does MAS's New Debt Servicing Framework Affect You?

MAS's new debt servicing framework essentially stipulates the minimum standards of how financial institutions calculate the Total Debt Servicing Ratio (TDSR) and plugs loopholes that existed previously. Here's a summary of the key details.

• TDSR to be computed based on an interest rate of 3.5%.
  • Previously, the rate that each financial institution used can be quite different. For example, Bank of China used their prevailing housing loan rate, which is below 1.5% for the longest time, while a couple of banks based their TDSR computation on interest rates of more than 4%.
   
• TDSR to be computed based on the income-weighted average age of the borrowers.
  • Most banks used to take the average age of borrowers without factoring in any income difference between the borrowers. Others, like OCBC, simply compute the TDSR based on the younger borrower's age.
   
• A haircut of at least 30% to be applied to all variable income (e.g. commissions, bonuses) and rental income.
  • All financial institutions did not apply any haircut on bonuses while the majority apply a 30% haircut on commissions and rental income.
   
• TDSR threshold should not exceed 60%.
  • Most financial institutions' TDSR threshold is 50%. A couple of banks allowed a TDSR threshold of 60% if borrowers met certain criteria.
   
• Borrowers must now be be mortgagors
  • Unlike HDB housing loans, private property loans did not use to have this restriction.
   
• Guarantors for borrowers who do not meet the TDSR threshold must now be brought in as co-borrowers
  • The housing loan that a guarantor is supporting does not contribute towards his or her housing loan quota (2^nd property loan financing is currently at a loan-to-value of 50% or lower).

How does this MAS framework affect the man in the street?

• For single borrowers or joint borrowers around the same age, they can now borrow slightly less than they could have, assuming these folks know where to look previously. Those who do not know or care to find the bank offering the highest loan may actually obtain a marginally higher housing loan than before.

The new framework impacts the following groups of borrowers most.

• Joint borrowers where a big age gap exists between the borrowers, and the older borrower is earning significantly more than the younger borrower (e.g. father and son)
• Self-employed
• Commission earners like insurance and real estate agents
• Employees where around 35% or more of their annual pay is derived from bonuses

Risk and Returns

Risk commensurate with returns is a common notion among many people in the financial industry, be it financial planners or retail investors. The higher the risk, the higher the potential returns and vice-versa. However, whenever a banker or financial advisor tells me something along this line, I can't help cringing. From my experience, such statements are at best generalisations. I am suspicious that such sweeping declarations are introduced by the financial industry to mitigate adverse performance. My personal experience may not be accurate though, so I decided to investigate further. Here's the gist.

Looking at the US stock market, there are naturally a good number of risky companies that reaped great returns for investors over the long run. One of the most noteworthy is Concur Technologies. During the tech bubble crash in 2001, the share price of Concur Technologies plummeted but subsequently rebounded spectacularly.

Concur Technologies share price Dec 1999 ≈ $29

Concur Technologies share price March 2001 ≈ $0.31

Concur Technologies share price Dec 2010 ≈ $54.13

On the other hand, safe stocks, such as Microsoft, Apple and Walmart, can also yield fantastic returns over a 10 to 20-year period.

Walmart share price Jan 1980 ≈ $0.11

Walmart share price Jan 1990 ≈ $5.90

Walmart share price Oct 1999 ≈ $69.12

There are many more such examples so it is fair to say that safe stocks can also achieve great returns. The question is, are risky shares more likely to give higher returns than low-risk ones? I can't definitively answer this question as the data is blurry here. One cannot really tell exactly when a high-risk stock becomes low-risk or vice-versa. Think Enron, Lehman Brothers, Goldman Sach etc. However, bearing in mind the number of clearly risky company versus low-risk company going bust every year, I am inclined to believe that the average preformance of low-risk shares tend to be better than risky ones.

Coming back to Singapore, if I were to invest in a property in a low-risk area, it naturally has to be at or around Orchard Road. A riskier area would perhaps be Woodlands. Rewinding back to the 2^nd half of 2009, if I were to invest in buy a HDB flat in Woodlands, my flat in the 2^nd half of 2012 would easily be 25% - 40% higher than what I bought it at. Prices for top-end Orchard Road condominiums, such as Orchard Residences or Scotts Square, have however stayed flat over the same period.

On the other hand, there are some investments where additional risk may indeed correspond to additional returns. Wharton finance professor Gary Gorton and K. Geert Rouwenhorst, finance professor at the Yale School of Management, in their paper titled, "Facts and Fantasies about Commodity Futures”, found that investments in the futures index would have performed far better than investments in commodities bought on the spot market. From July 1959 to December 2004, compounding returns averaged 9.98% a year for the futures investment, versus 7.66% for an investment in the spot market.

What is clear is that higher risk does not necessarily equate to a better chance of higher returns. My two cents: each investment should be inspected on its own merits. In the long run, a great investment will largely depend on the fundamentals of the specific investment and timing (basically the price you buy and sell the investment at).