Property price indices are different from the many other price indices you may come across.
In indices like the stock price indices, household income, rental index and core consumer index, the main component is cash or equity. Not much borrowing is involved.
Property Price Indices’ Components
Property price indices, however, are much more complex. They comprise two components. One is equity, similar to what is found in the other indices. The other is debt or borrowing, which can make up a large part of the index.
The debt component (mortgage in the case of property) doesn’t move very much. So while property prices may drop, mortgage costs will hardly move. And may very well increase.
This can be bad news for the property owner.
Statistics on mortgage loans show that people borrow between 40% to 50% of their home value. So if their home value falls while their borrowings remain about the same, their net wealth would have dropped a lot.
Your Property’s Value
And if you have put down less cash in your home, more of your property’s value would have vanished when prices drop.
After the market’s peak in 2013’s third quarter, the URA PPI dropped by 7.8%. If your Loan to Value is 42.5%, your equity prices would have come down by 7.8%. But if your Loan to Value is 80%, your equity prices would have plunged by 39%!
This is the case for those who bought properties recently just before the TDSR.
With LTVs of between 50% and 80%, and an almost new loan, their equity would have fallen by 30% to 75%.
So when you study property price indices, it is this real drop in equity that should be taken into consideration, not the property price alone.