Mortgagee sales seem to keep rising for CCR/ luxury condos

Orchard Road properties used to be a sure bet; like rain in December, sales at Christmas, or being told to just change schools if you’re bullied. But the recent spikes in mortgagee sales, along with the coronavirus outbreak, may change your mind about this. Take a look at what’s going on:

Mortgagee sales are rising, and luxury condos are among the worst hit

The number of mortgagee sales been on the rise for the past three consecutive years. 2019 was especially worrying, with 630 mortgagee sales (including non-residential properties). That’s about a 61% jump, from 391 mortgagee sales the year before.

Mortgagee sales of residential units numbered 356 units, up more than 62% from the previous year. In particular, mortgagee sales of condos almost doubled from 139 to 257 listings. And in the prime districts (9, 10, and 11), mortgagee listings rose 233.3% year-on-year in Q1.

Penthouse listings (not necessarily within prime regions) tripled to 68 listings in 2019, from just 23 in 2016.

Why are so many luxury/ CCR properties going under the hammer?

A series of unfortunate events.

According to Knight Frank, it started in 2014 with higher retrenchment rates and interest rates, and a soft rental market.

Bear in mind that, when it comes to luxury or central region properties, a much higher proportion of owners are investors, not owner-occupiers. Some of them are dependent on tenants to cover the huge loan repayments, so a combination of rising interest rates and lower rental income can make their situation unsustainable.

In 2018 to 2019, however, there was a different reason. This time, mortgagee sales seemed to rise with the number of bankruptcy applications and stock market troubles. This was the period in which the Sino-US trade war was escalating, and we saw the bubble burst for tech unicorns (thanks, WeWork).

But something else happened in 2018 to make mortgagee sales rise

In July 2018, the government announced new cooling measures. Two of the big regulations to take note of are:

• Higher Additional Buyers Stamp Duty (ABSD), reaching 20% for foreign buyers
• Lower Loan To Value (LTV) ratios, further restricting the amount of financing for buyers

For owner of luxury properties, these two regulations made it almost impossible to sell; even when weak rental rates or vacancies turned their assets into liabilities.

---

2021 Update: In December 2021, another round of cooling measures were rolled out. The main ones are:

• Higher ABSD: 12% to 17% for Singapore Citizens buying their 2nd residential property and 15% to 25% for Singapore Citizens buying their 3rd and subsequent residential properties
• Tighter Total Debt Servicing Ratio (TDSR): 60% to 55%
• Tighter LTV limit for HDB flats: 90% to 85%

2022 Update: Another round of cooling measures hit the market (yes, again), which includes:

• Higher medium-term interest rate floor for bank and HDB housing loan eligibility
• Tighter LTV limit for HDB flats: 85% to 80%
• 15-month wait for private property owners (below 55 years old) buying non-subsidised HDB resale flat

---

Consider that a “typical” 2-bedder condo in Orchard averages around S$3.2 million in 2022. A Singaporean investor trying to purchase it as second property will need to pay over half a million (S$544,000) for the ABSD alone, while a foreigner will need to pay a whopping S$800,000 in taxes.

For true luxury units or penthouses at S$8 million or higher, well… some buyers probably figured it was cheaper to fund a coup and take over their own small country.

Even if someone were willing to pay the tax (because they don’t understand how money works or something), financing the purchase becomes a problem. The LTV ratios were reduced, so most borrowers – even first time home buyers – were faced with an added 5% down payment. Given the monstrous amounts involved, 5% is enough to make prospective buyers walk.

As such, we had a situation where some high-end property owners urgently needed to sell, but couldn’t find a buyer in the situation. This contributed to a higher rate of mortgagee sales.

Here’s the bad news: Nothing this year seems likely to help

Let’s look at what’s changed:

• Lower LTV limits? Nope, LTV limits are still there.
• Lower ABSD? Nope, ABSD is even higher, in fact.
• Stronger rental market? Meh, it’s up 3.3% from last year, but still down around 15% from the last peak in 2013 (the year before the mortgagee sales started rising). Also, a lot of those leases were signed before the coronavirus outbreak, and we’re less optimistic going forward.
• The wider economy? Haha, no. Unless you mean it could maybe be worse.

So what has changed?

Oh right, we’ve banned travel from China due to the virus; so now we’ve reduced the number of Chinese buyers, who were the majority of buyers of CCR properties.

Does this mean luxury or CCR properties are bad investments?

It’s a reminder that they can be, if you lack holding power.

Developers have largely angled their offerings in a way that addresses the situation; we saw The M and Midtown Bay, for instance, coming in at low quantums (under S$1 million for some units at The M).

And CCR or luxury properties can still be viable, if you can ride out the short term issues. In February 2020, for example, CCR properties led condo rental rates, rising 5.1% (other regions rose between 2.4 to 3%).

The key is that you have to be able to ride out downturns: don’t buy if you’re almost wholly dependent on rental income, or if you can’t hold out for more than a few months. Remember that property, especially high-end properties, can take longer to sell off if you need to liquidate the asset.

---

Would you consider buying a luxury property for investment? Let us know in the comments section below.

If this article was helpful, 99.co recommends 6-step guide to buying a property on mortgagee sale and Properties being auctioned: 47.4% (137) of mortgagee listings in 2021 were residential properties.