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Goh Eng Yeow
Markets Correspondent
Defusing a potential housing bubble
August 31, 2009 Monday, 02:54 PM
Goh Eng Yeow asks if banks should tighten lending guidelines now.
IT MAKES sense to ask ourselves if the current terms extended by our banks for home loans are too generous. If I recall correctly, these guidelines were relaxed, along with the scrapping of other anti-speculation measures like the capital gains tax on property sales profits, to fight the then scary free-fall in home prices after the bursting of the dotcom bubble bust in 2000. But the loose monetary policy now practised by the US Federal Reserve to fight falling prices in the United States has the effect of depressing interest rates elsewhere in the world, where economic conditions are not similar to the US. Given the risk of bursting a rather big bubble in our housing market, one has to ask if it is still sensible to stick to the same guidelines which were used to combat our own deflationary downward spiral in home prices. Will we be sowing our own seeds of destruction by doing so? Banks will, of course, say that they have a sophisticated risk management system to screen borrowers to ensure that such a similar disaster like the US sub-prime crisis does not take place here. Examples extended by bigger and more well-established global lenders offer no consolation. In Britain, HBOS had recklessly lent on the UK mortgage market and this forced it into a shot-gun marriage with Lloyds Bank late last year, as the global credit crunch took a turn for the worst. The merger succeeded in dragging Lloyds into the morass as well, and it had to be rescued by the UK government. It is also interesting to delve into some of the strings attached by the banks here to ensure they get their money back. Last week, I had a good laugh as my lawyer friend regaled me with the tales of the measures taken by the banks to lend themselves comfort on the creditworthiness of their borrowers. She had a couple of cases where the bank had insisted on a third person giving an “open guarantee” to the home loan offered to the young couple buying the flat. This string was attached because the bank was fearful that, given the size of the loan, the monthly mortgage payment might stall if either or both of the couple should lose his/her job. “In the past, it was usually the father, the mother or the in-law. But now, I see an unmarried sister or brother standing in as guarantor for the loan as well,” she said. I wonder if the guarantor knows what he is getting into. He probably signs on the bottomline, as a gesture of goodwill towards his sibling who is getting married – and he is not anticipating that he will make any payment at all. But he has made an open guarantee and he is liable for any further future borrowings if his married sibling takes up a further loan on the flat. It certainly sets the stage for future family discord. On a more serious note, there was this observation made by a friend who used to work in Dubai whose building boom has come to a screeching halt because of the global credit crunch. Each day, he said that there were 4000 to 5000 people leaving Dubai as the jobs market dried up. What some foreigners did was simply throw their car/house keys at the airport, as they caught the next plane out of the city. With his observation comes this question: Are foreigners getting the same generous access to home loans as Singaporeans? There is hardly any hold over them if Singapore hits an economic bump and they simply flee back to their home country. Will the banks then end up becoming unwilling owners of their condos and HDB flats? This morning, I had a Cai Jin column published on the same subject asking if we will end up suffering a subprime style crisis because of the way that the cheap credit is fuelling our housing boom. One reader took issue with me for saying that in some countries such as China, home-owners have to make full cash-payment of their houses, claiming that many first time buyers there could get loans from the Chinese banks. China is a huge country, and his observation may only hold true for a few big Chinese cities, and a very small segment of the population. Suppose that just 1 per cent of the Chinese population successfully get a housing loan, this will work out to 12 million people. But this detracts from my argument that banks in Singapore are about the most generous in the world in requiring borrowers to fork out only 10 per cent down payment in order to qualify for a home loan. I have another example to offer: Last year, a friend of mine went across the crossway to Johor Bahru to open a current account at the branch where he already maintained a savings account for many years. To his surprise, he was asked to get a guarantor – and that was just for opening a checking account. He was not even applying for a loan. Tags: banking, housing, property, singapore 
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I suggest the bank valuation should be based on actual project cost ( land, building, variation, finance, etcs) plus est 10% for developer's profit instead of current speculative prices. This will not only eliminate the property from bubbles but also give a better predictable property prices.
Any upside of the property prices will be on the demand and supply of the land which can be controlled and transparent instead of current practices.
looks like hk shares the same problem as spore when it comes to mortgages......
Hong Kong's resurgent property market
Commentary: Are too-good-to-be-true mortgage deals a red flag?
HONG KONG (MarketWatch) -- When it comes to property bubbles, the story is never quite the same, even if the end result is a familiar, captivating surge in the prices of bricks and mortar.
In Hong Kong, dinner-party talk, or more likely restaurant-table talk, has moved from the price of property to the price of money. Banks are now almost shoveling it out of the door for property loans.
With banks awash with liquidity and facing cutthroat mortgage competition, the result is some extremely cheap loans. The latest trend involves mortgages based on the Hong Kong interbank offered rate, which has fallen to the floor, given the weight of money in the interbank market. The one month Hibor last week was just 0.079%.
Hibor mortgages under 1% are now common, and one bank was offering Hibor plus 0% for the first three years and a cap of prime (around 5%) minus 2.5% if the interbank rate starts moving up again. And forget about arrangement fees, some of these deals also have a cash rebate on the mortgage loan amount of 0.5%.
Not surprisingly Hong Kong has seen a marked rebound in transactions and property prices. According to the Centa-City Leading Index, home prices in the secondary market have jumped 24.7% so far this year.
There is little concern that this is purely a liquidity-based recovery and there is a growing disconnect with the real economy.
There are few signs of a rebound in the job market, and the economy is still under pressure. Last week, it was revealed the total value of Hong Kong retail sales fell 5.5% on year in July to 22.8 billion Hong Kong dollars ($2.94 billion), although the rate of decline is slowing. More money is coming into Hong Kong, but tourists and their spending have not.
One reason for the banks' aggressive lending is the limited prospect for loan growth in the real economy -- many corporates are still seeking to deleverage.
Meanwhile, buyers are tempted to do something with their money, given record-low deposit rates. And with the equity market in consolidation phase, hard assets are looking more attractive.
Low rental yields would usually give buyers pause for thought, but not with money this cheap. If ever a situation was set up for reckless financial decision-making, it looks to be now.
Another unusual feature of this rebound in property is that unfashionable Kowloon has usurped Hong Kong Island's upscale Mid-levels on as the location with the highest number of top-price transactions. Sales data monitored by Ricacorp Properties' research department show that five of the 10 top-priced units sold in the city in the last three months were in Kowloon apartment blocks. These are mainly centered around the development on top of the Kowloon MTR station on a piece of reclaimed land.
For example, one popular building there, the 'Sorento,' comes with a minimum price of $10,956 per square foot.
One explanation is clever marketing together with the sweetener of cheap money. The sales pitch is that the deserted waste ground between the Kowloon train station and the industrial container ports is set to become a magnificent West Kowloon cultural district. Perhaps the reportedly large proportion of mainland Chinese buyers is willing to take this promise at face value, that the Hong Kong government can really conjure up a cultural district.
If you consider the government still has yet to agree on how to redevelop the old Kai Tak airport site abandoned 12 years ago -- any cultural center might take a while. As it stands, the project hasn't gotten off the drawing board, with controversy over whether it will end up as just another luxury property development.
The bigger picture is that money is coming into Hong Kong based on a belief that the currency will eventually have to re-peg higher. How soon this will happen, we do not know, but to be prepared, you would want to have Hong Kong dollar assets, not Hong Kong dollar liabilities.
That's less of an issue if you are borrowing in the same currency, but what happens to asset prices when we have an eventual re-adjustment in the exchange rate? The current argument is that asset prices in Hong Kong rise as the US dollar falls and pricing adjustments are transmitted through the real economy. The reverse could well be true if the dollar peg rises to the level of the yuan, and property prices will take the strain.
One missing link in the property recovery this time around is that local developers' have still to get their checkbooks out to buy land and replenish land banks. Just now, they seem to be only selling, not buying, and are adept at timing the property cycle.
The concern is this time, it is not subprime "NINJA" mortgages, but the message is the same: It is too good a deal to turn down. At the end of the day, the price of the asset and affordability must matter, not just the price of money.
In the economics of development of a country, when the government has a huge land bank and more than 80 per cent of the popultion are housed in public housing, the authorities will not led prices down. They will intervene by managing the supply and demand factor to keep prices up not down. Dampening property and land prices will create pressure on the goverment from the 80%. It will erode value of properties and therefore value of assset and worth.
The 80% will not be happy. The government can be voted out of office if the 80% are unhappy.
bank should not ask for a guarantor if they want to offer bank loan to home buyers who may not have enough mean to service the loan. The aggreement is between the seller/buyer and the bank. It is very unfair to the guarantor.
the concept of "open guarantor" should be scrapped!!
There are two ways Singapore can defuse the property bubble - make it difficult or expensive to have a loan, or invite more foreigners who will move into the surplus space.
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