Dec 20, 2008

Singapore's Very Own Subprime Crisis in the Making?

Some people will accuse me of being alarmist. But that's how I see it right now. It all follows from the data that the URA released last Friday:

ST Dec 20, 2008
10,450 on DPS
Cash-strapped buyers may sell low if they can't get sufficient loans
By Joyce Teo

PRICES in the the already fragile property market could be battered even more from next year if some of the 10,450 homes bought on deferred payment are dumped by cash-strapped buyers.

The danger is that when final payments are due at completion stage, buyers faced with falling values may just sell at fire-sale levels, putting even more pressure on prices.

And a key reason for buyers to dump units is that in today's tight credit markets, risk-averse banks will demand that buyers put in more of their own cash before they will agree to lending the balance.

Take a flat that was bought for $1 million with a deposit of $100,000. The buyer must provide $900,000 on completion but if prices have fallen too far, the bank will not come to the party with a loan for the full amount. So the buyer either dips into his own pocket or cuts his losses and sells - likely into a falling market.

The numbers, revealed for the first time by the Urban Redevelopment Authority (URA) yesterday, are sobering.

Two-thirds of the 10,450 uncompleted homes will come on stream in the next two years - 4,560 in 2009 and 2,540 in 2010.

They were sold from 2005 to this year. That includes a period when many properties were being snapped up by eager buyers with little regard for price.

Deferred payment was introduced during the Asian financial crisis to boost the market, but scrapped late last year. It was blamed for encouraging speculation, as buyers could secure a property for little cash down and then flip it for a profit before a brick had been laid.

Down payments are 10 to 20 per cent with the rest deferred until completion a few years down the track.

To make things worse, the URA said that the 10,450 new homes include sub-sale units. They were likely bought at even higher prices from speculators, who had already flipped the units for a profit.

The figures also show that the homes are spread far and wide - about 4,000 each in the core central and city-fringe areas and the rest in the suburbs.

..... Responding to the news, the Real Estate Developers' Association of Singapore said the figures released by the URA underscored the popularity of the scheme.

It maintained that the scheme was beneficial to the market and reminded buyers that although they can sell their units to other buyers on the market, they cannot easily repudiate sales contracts and return the homes they bought to developers.

Conditions are afoot, for a perfect storm. The general economy is worsening, making would-be property buyers very cautious. The financial crisis has also reportedly caused local banks to scale back on lending (and that includes housing loans). Also, a large number of homes (including non-DPS homes) are scheduled for completion next year and will flood the market simultaneously.

Don't forget the Foreign Factor too. In recent years, rental rates in Singapore have been propped up by the large number of foreigners working and living here. In fact approximately one out of five residents in Singapore is not a citizen. If the unemployment rates go up, many of these foreigners will give up their rented homes and return to their home countries.

And if you look at the stock market's performance in the past 1.5 years, you know that many Singaporeans must have lost a lot of their wealth there.

There we have it - bad economy; unwilling banks; oversupply of new homes; a shrinking tenant population; big-time losses in the stock market ... and the DPS issue.

I can't see how this can work out well. (Unless you're planning to buy a property, of course).


Mercia said...

Which is exactly the advice that some people have be dispensing to people. It's a good time shop around for commercial rentals and buy residential properties. Prices are most definitely going to slump in the next year or two, and given Singapore's export-driven economy and extremely poor domestic consumption, unless the government of Singapore is willing to spend a lot of money funding projects (only a temporary measure effective in the short term), the Singapore economy is quite screwed.

Anonymous said...

hi mr wang, i'm not exactly sure the term sub-prime is appropriate here. sub-prime refers to lending to people with poor credit ratings or people who have few assets and/or income streams.

while property prices may slump as a result of the "perfect storm" so to speak, i don't think it will be sub-prime since our banks don't make such loans (for property purchases and other uses) as far as i know

Anonymous said...

There is still some degree of subprime here although not as serious as in the US. Basically here the banks will lent you if you have an income that fits their criteria and they perceived it as stable. I remember an article last year where a young engineer with a high 5 figure annual salary has a total outstanding loan of $1.2 million because he borrowed more to buy a 2nd property for investment. And he said no problem getting approval!

But now the situation has changed drastically and that may make many jobs unstable. That's where there may be trouble.

Anonymous said...

DPS buyers who buy a house but can't complete the sale upon TOP may well be said to be subprime.

Anonymous said...

Hmmm, good time for flippers to inject some liquidity into market, ya?


ArtBoon said...

see today on line report

Chew Ern said...


Prime loans are rapidly becoming sub-prime. Just ask those working (or formerly working) in the financial sector.

I know of private bankers who bought several high end properties in past 2 years, many on DPS. They are prime borrowers then, but with their current and projected income, they are already sub-prime.

Anonymous said...

Dear Mr Wang, I'm quite surprised so many readers made comments that show they still do not understand what exactly is the sub-prime crisis that affected America. Your present article certainly doesn't help either.

The sub-prime loans is only one-tenth of the problem, the rest of the 90% problem had been hidden from us until their crisis exploded. What was this 90% of the problem that became a crisis?

All the sub-prime loans were repackaged by the lenders (banks) and resold to other investors. Investors readily gave up their cash to the banks and took on the risks from these bad loans. So the banks shed the risks and thus were able to recycle the process, giving out more and more bad loans. The crisis occurred because the losses from the bad loans are now borne by not just the lenders, but by all the retail investors and fund managers who bought over the risks from the banks. This was the big thing that was hidden from us until the sub-prime crisis exploded.

None of these is happening to the housing loans in Singapore. The banks have not sold to us the loans that they took on. In Singapore, we are facing only one-tenth of the problem. The rest of the 90% is non-existent here.

No doubt, we all agree that property prices will drop, that flippers will face losses. But to call it a sub-prime crisis and associate it with the U.S. sub-prime crisis is disingenuous.

Anonymous said...

Not every DPS is a defaulter. Most buyers have the power to hold. Flippers who have any sense would have exited the market by now or in the process of exiting. Also the difference between this property crisis and the one a decade ago is the influx of foreign money into the country since then. So prices will not be heading for a dramatic plunge.

Anonymous said...

I share my sentiments with Robert L. There's no subprime crisis to speak of here. Just very bad financial decisions made by individuals, which incidentally shouldn't come as a surprise as it has always preceded every market downturn, when the market are topping out spectacularly, when people get high on optimism.

There are definitely people who are going to get their hands burned, or even bankrupt. But I foresee the damage would be contained, and would be very much on an individual level.

As for home loans that are already granted, if the homeowners can't pay, the bank will just force sell the property and get back, if not all, at least part of the money. As far as I know, banks take into consideration the force-sale value of the property with relation to the loan amount requested, before they eventually grant the loan. Even if property prices were to go down drastically, they are not going to lose as much as what we see in the US subprime crisis. I am, of course, basing this on how my former employer approach housing loans. I can't speak for other banks, but as far as my former employer is concerned, they have been very strict with housing loan since mid-2007. Debt servicing ratio strictly 40%, investment property financing strictly 70% max, and if the loan amount is big, or if the borrowers have more than one investment property serviced by housing loan, the bank will usually request for the borrowers to pledge a sum of fixed deposit with the bank, usually equivalent to one year loan repayment.

As for future demand for these properties, well ... let's just say that there are always bargain hunters out there. I have seen, since end of last year, folks who are placing huge amount of money in FDs on short tenures (usually 3 months renewal), awaiting opportunities in the property market. Even back then, they were already eyeing on these properties sold on DPS. Logic tells you that there will be people who can't pay at TOP. Interestingly, these folks are usually people in their 40s and 50s, and who have money to pay off the property in full.

As for rental potential in the future, it's hard to tell for now. While it's true that expats may lose their jobs here, there are also an increasing number of expats moving to this part of the world as the perception is, Asia is the next financial hub of the future. Some European banks are shifting, in a major way, part of their operations here. I do not think we have the sufficient labour force to provide for these companies, and chances are, they will have to deploy some of their staff here, as well as employing from the region, usually China, India, and increasingly, the Philippines and Vietnam. So from what I see, it is likely that demand for rented homes will continue, except landlords won't be able to charge as much as they did last year. But it would definitely be enough to cover monthly loan repayments for most cases.

Crisis? Probably. We should be more mentally prepared for people dropping off buildings, or in recent years, hopping off train platforms. But massive writedowns by banks, I don't think so.

Anonymous said...

The Singapore situation is different from the US. In Singapore I don't see banks repackaging their mortgage loans into some creative products and so on. I don't see banks lending to customers who have no source of income.
The worst that can happen in the case of Singapore is the buyer lost his job and therefore forced to sell. So long as he has got his job and is able to service the mortgage loan, I don't see any reason why the bank should hold back especially when the buyer has paid 20% of the deposit.

Gilbert Koh aka Mr Wang said...
This comment has been removed by the author.
Gilbert Koh aka Mr Wang said...

I used the term "subprime" a bit loosely. Of course the Singapore situation is not quite the same - and that's precisely BECAUSE the banks here have NOT lent to the DPS flippers. Needless to say, it follows that that won't be any repackaged debt (in the form of CLOs or CDOs) blowing up.

The doomsday scenario I'm envisaging is more along the following lines:

(1) DPS flippers fail to pay;

(2) Developers sueing flippers is largely a useless exercise, because the flippers really can't pay. You can make the defaulting flippers bankrupt, but that doesn't help much;

(3) Developers try to sell the homes to other buyers, but there aren't enough buyers, because (a) banks have already tightened up on lending; and (b) the recession causes potential buyers to hold back;

(4) In any case, becase of the developers' collective massive attempt to offload these homes, the entire property market sinks collectively (ie not just these new homes, but also older homes that have been around for some time);

(5) Unable to sell their unwanted homes, the developers can't pay the construction firms, which have already expended their resources during the construction phase. The construction firms rapidly go bust due to cash flow problems (and due to lack of liquidity, the banks aren't willing to extend a lifeline here either);

(6) Next, since the developers are unable to sell the homes, the developers themselves are unable to get the cash they need, to repay their term loans to the banks (these are the term loans which the developers would have taken from the banks, in order to purchase the land)

(7) So next, the developers go bust. Don't forget that many of these developers would have had to borrow very large amounts from the banks, in order to purchase the land at inflated en bloc prices

(8) The banks have a mortgage over the land. After the developers go bust, the banks enforce their mortgage. However, by now the land itself has fallen sharply in value, because the property market itself has collapsed.

(9) The banks therefore suffer large losses. Not because of the non-existent loans which they never made to the DPS flippers, but because of the loans which they had made to the developers.

(10) Banks suffering large losses ---> the rest follows.

If my scenario comes true, then the analogy to the US is as follows:

the Deferred Payment Scheme is like the CDOs in the US.

The CDOs allowed banks to take the credit risk of the property buyers, and then transfer that risk to other financial investors.

Here the DPS allowed the developers to take the credit risk of the flippers, and then transfer that risk to the banks.

In other words, the banks lent money to the developers to buy the land, on the assumption that the developers would be able to repay, when the developers sold the homes. Meanwhile the developers sold the homes to the property buyers, on the assumption that the property buyers would be able to eventually pay the full price on TOP. As for the property buyers, the flippers among them bought the properties on the assumption that they would be able to flip on time.

When that last assumption fails, all the other assumptions break down too.

And that's how you get the collapse of everything, essentially.

Chenghao said...

Hey guys , i think this is a good url explani sub prime

in short , banks loan to people who can't / can barely afford to pay for their loans and use their home as a collateral.

Will DPS lead to SG sub-prime?

afaik , our banks used to be able to lend up to 90% , now only up to 80 % , on a case to case basis and definitely do not sublet out mortgage loans

our population is @ 4.8 Mil , projected to go up to 6.5 Mil

The Demand is there

the High Network individuals across the region rose 16.4 % to 20400 last year.

i dun really foresee a subprime in the making

The TOP date of various projects might be pushed back , but this DPS will hit speculators / flippers more then actual buyers out there

Buy sell Rent property 83838884 (pls let me know if can't advertise)

Anonymous said...

Chenghao, I'm not sure whether a subprime situation will or will not happen in Singapore. But I have to say that your argument is not well-substantiated.

For example, you said, "the High Network individuals across the region rose 16.4 % to 20400 last year."

LOL, yes. But that was 2007. In case you didn't notice, we're already at the end of 2008, and the whole of 2007 was basically one long, continuous financial disaster of epic proportions.

At the end of 2007, the STI index was still higher than it had ever been, in any other previous year in its entire history. Just 12 months later, it's hit a 5-year record low. If you take the stock market as a proxy indicator for wealth, well ....

Anonymous said...

Err, sorry, same Anon here. I meant
"the whole of 2008", not "the whole of 2007".

Chenghao said...

Hi anon , here is the link to substantiate

Please explain to me how stock market , a place to raise capital , is an indicator of wealth ?

Gilbert Koh aka Mr Wang said...

Hi Chenghao:

But your link doesn't substantiate your argument. It only shows that in 2007, there were many more HNW individuals than in 2006. No one is disputing that.

Anon's point is that 2008 is the year we need to look at. 2008 is the year that lots of people would have lost a lot of wealth. That includes the ex-HNWs of 2007, many of whom would have heavily lost money in the stock markets.

Even if they had small or no losses in the stock market, you may wish to take note that in the ML article to which you linked, net worth is calculated, among other things, based on assets which would include any property (other than one primary residence).

And since properties have now generally fallen in value since their height in 2007, it means that even if all else stays equal (ie the HNWs individuals still earn the same salaries and bonuses etc and haven't got retrenched), your HNW individuals have become poorer. At least some proportion of them will cease to be HNWs, actually.

Anonymous said...

Come on people, this is Singapore, pride of the world! We have the most competent government money can buy, nothing bad is going to happen.

Merry Xmas and more good years ahead!

Anonymous said...

Hi Mr Wang,

I'm not sure if it is just me, but when I signed for the DPS, I needed to secure a loan before signing the S&P, and NOT when the property TOP.

In other words, I already have the loan from the bank, although the amount is not drawn down. I don't understand how the article even makes sense, unless I'm the only stupid guy who got a loan when signing the S&P.


Anonymous said...

Singapore went thru a really bad housing crisis in the recession of the mid-80's. The negative equity was huge. Many buyers defaulted and the banks carried huge portfolios of mortagee loans. I know of people who owed the CPF $. I was certain that had MAS forced the bank to revalue their portfolios, all the local banks will be in negative equity - bankrupt. The pap government learned from this problem and quietly introduced banking reforms. There are major restrictions on their holding of property. There are strict conditions on the granting of property loans, amongst other measures. I will be very surprised if the pap government allows Singapore to get into another property fiasco again. If they do then they ought to be hanged.

Anonymous said...

Well if the property markets keeps falling before TOP, the banks will need to review their loans and may adjust their margin on drawdown date? So if they had factored in 80% and then the market falls to 70%, then isn't it logical that the bank won't lend that extra 10% and the borrower needs to top up? I don't know..just wondering.. anyone care to enlighten?

Gilbert Koh aka Mr Wang said...
This comment has been removed by the author.
Gilbert Koh aka Mr Wang said...


Your case sounds more like one of the following:

(1) you are actually on the Interest Absorption Scheme (not the Deferred Payment Scheme) and that you only signed your S&P this year; or

(2) you bought a property that was not approved by the URA for the DPS scheme

(3) you belong to the 43% of property buyers who chose to take a bank loan at the time of signing the S&P. The other 57% went on the pure DPS.

Gilbert Koh aka Mr Wang said...

Anon December 22, 2008 5:11 PM:

No, if the bank had agreed on Day 1 to lend you 80% at TOP, the bank wouldn't back out at TOP.

Chenghao said...

My point is we can't have a sub prime crisis simply because subprime crisis similar to US'sas it would mean

1) little or no downpayment being made, and that they were issued to households with low incomes and assets (Banks do credit checks against individuals prior to approving loans and now limit to 80 % on a case by case basis)

2) individuals and with troubled credit histories. When USA house prices began to decline in 2006-07, mortgage delinquencies soared (those with even an unpaid loan will be blacklisted with i think a credit bureau , even if you owe a credit card company 60 SGD, you will be appended onto that list)

3) coupling of securities with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world.

Do we have securities coupled to our mortgage loans ? i not so sure about that but probably not

This DPS would just be a move to limit speculators' capacity who wishes to ride a bull property market in the short run then investors/home makers who are in it for the long haul

Anonymous said...

"1) little or no downpayment being made, and that they were issued to households with low incomes and assets"

Oh, that sounds a bit like DPS to me, LOL.

(Banks do credit checks against individuals prior to approving loans and now limit to 80 % on a case by case basis)

Banks do not check individuals who do not take loans from them. However, under the DPS, such an individual can buy a property even if his entire life savings is just equal to 10% of the purchase price.

"This DPS would just be a move to limit speculators' capacity who wishes to ride a bull property market in the short run then investors/home makers who are in it for the long haul"

Uhhh, are you sure you know what DPS is? DPS was not a move to limit speculators' capacity to speculate. DPS was a move to INCREASE speculators' capacity to speculate.

DPS was introduced around 1998, when the property market was in the doldrums, and it was introduced to make it easier for people to buy properties and speculate. DPS was only abolished late last year (2007)

Xtrocious said...

Just my 2 cents here

I don't think there will be a financial meltdown here...

Firstly, banks have not lent any money to those on DPS scheme who chose not to finance their purchases...

Hence, there's no risk to the banks.

Secondly, banks will only lend money to whose who wants to pick up their purchases at TOP but at the existing (depressed) market valuations...

They will not want to carry any risk of asset devaluation (unless it happens after signing the agreement but then again, as long as the borrower can keep paying his loan off, there is little risk)....

Thirdly, the impact will just be on the property market - a glut of new properties will be coming onstream - and this includes those previously sold under DPS...

Hence calling it a sub-prime issue is not correct...

Having said that, we do have our own version - the HDB buyers should HDB continue with their policy of pricing apartments so high...

Families with S$2,000/monthly income are buying properties in excess of S$100,000...

Dingfeng Quek said...

Hi Mr Wang. In discussing the effects of the recession on the property market, you mentioned that some consumers buy property on debt.

We know that debt is important to develop an asset bubble burst into a full and proper crisis.

Along with many others, I anticipate the possibility of a crisis. However, with the peculiarity of our government, I am left barren of accurate figures and statistics.

If your statements were based on such statistics that you can share with others, I would appreciate that gesture.

ArtBoon said...

when bank finance my property purchase with say 60%-70% loan, then i am buying property on debt.

what is the proportion of people that pay upfront for property? probably very very small.

some consumers buy property on debt.

Anonymous said...

Mr Wang,

A lot of readers here are not understanding how the property industry works.

The part they don't understand is that developers usually borrow money from banks to buy LAND. The developer has to repay this loan, sometime soon after the property construction on this piece of LAND has been completed.

Why at that time? Because around that time, the developer is expecting to receive a lot of money. From who? From all the property buyers who bought CONDO UNITS in the project. These buyers had paid in 10%, 20% of the purchase price of the CONDO UNITS (-not- the LAND) at the start, but upon completion have to pay the developer the remaining 80%, 90% of the purchase price of the condo units.

It is from this source that the developer will be able to repay the bank.

However, where the DPS is concerned, the problem is that many property buyers on the scheme are likely not to be able to pay that 80%, 90%. Why? Because they were never genuine buyers. They were SPECULATORS. They could afford to put in the 10%, 20%, but all they wanted to do is sell the unit for a profit, BEFORE the construction is up (that is, before they are required to pay the remaining 80%, 90%).

Now, what if there are too many DPS buyers? The developer won't be able to get enough money to repay the bank in full (this is the loan originally used to buy the LAND).

Therefore the BANK will suffer losses.

And of course, if the developer doesn't have enough money, it can't pay the construction firm in full either. Therefore the construction firm will also fail to repay its bank borrowings (most construction firms will borrow money from the bank to fund the construction, while it's still going on).

That means more losses for the BANK.

Anonymous said...

hahaha "some consumers buy property on debt"?!!!
geez i wonder who in the world buys property with cash.. not exactly a judicious use of cash eh?
anyways kudos to Mr Wang for this interesting post. Whilst (echoing some other comments above) i don't quite think that it'll be a "crisis" of such epic proportions as the US subprime debacle (no complicated derivatives to worsen the situation) I do think e property market is headed south. Wondering when is a good time to buy.. am stil waiting and waiting (btw i'm in my 20s so Yes, i will finance any purchase i make with debt)