Tuesday, 5 July 2011

From cheap money to expensive loan

From cheap money to expensive loan

I went to the bank last Friday.  The 2-year interest rate was going down even though the short term (3 months) one remained unchanged as compared to the month of June. I actually expect it to go up so that at least it shows the economy is improving and the demand for money is steady going up.

However, the money becomes cheaper but how come people still cannot afford an affordable house? The price that a buyer of HDB flat pays is First World pricing and naturally, it is an expensive property and hence, expensive loan. Affordable HDB flats in fact may not be so affordable after all.

Affordable loan?

If you are buying a property, you really need to be aware of this trend. You may enjoy cheap money now and pay little interest and a sudden turn of economy will let you end up having an expensive loan.  And you will end up like Greece facing a personal debt crisis.   

I always think that there are some lessons to be learned from the Greece debt crisis even as an individual.

BBC has a quick report and analysis on ‘What went wrong with Greece?’ BBC has divided the reasons and developments of Greece debt crisis into 7 simple sections.  I repeat them in 7 boxes and relate them to the Singapore situation.

Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.

Singapore is one of the First World countries, at least in terms of GDP per capita.  We have achieved high growth.  Foreigners are more than happy to park their money here. Hence, Singapore seems to be full of money supply.  The interest rate is low.  The property that you are buying whether it is a HDB, DBSS flat or private condo, all these are class A property and the banks are willing to lend you money.

You are staying in a First World country and so the property is priced on the First World standard although your income may or may not reach the First World level. 

Just like Greece, the so-called economic reform upgraded Greece to Eurozone. She enjoyed AAA rating and international lenders were willing to lend money to Greece because Greece is in the Euro zone.

As an individual, the government is telling you the job market is good. Besides upgrading your skills and jobs, you can also consider upgrade your property.  It is easy to borrow money to buy property in Singapore.

Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.

Because of so-called affordability supported by CPF payment, the government says the flats are cheap and the value will increase.  So, you can buy cheap and sell high later. 

As the money is cheap, you have extra cash to spend on holiday, new car, and visit expensive restaurants.  Some even visit casinos. 

You also buy more condos even your income may not match your loan repayment ability. But you think the property prices will never go down and people buying HDB, DBSS flats and condos will sure to make money.

The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

There is no guarantee that the economy is always doing well. Not long ago, we experienced the Asian financial crisis and the world financial crisis. 

One day, the world economy turns bad so do Singapore economy.  Some lose jobs or force to reduce pay, bonuses and commissions. But children education expenses, tuition fees, parent maintenance fees, and hospital bills remain there and become more expensive due to inflation.

Your balance sheet looks not OK, but still manage to have more credit cards or borrowing by adjusting your personal data. This is not uncommon as there are some creative accounting arrangements in the market to help you.

In the article “Wall St. Helped to Mask Debt Fueling Europe’s Crisis” from the New York Times, you will find some of these creative accounting.

 

“In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.”

“Gary D. Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage.”


Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

 

Your triple A property still a Singapore property just like Greece still a member of Eurozone.  However, Greece’s situation changed so do you as an individual.

You are getting less income but need to service higher interest payment.  You try to save here and there including paying less tax and expenses.

There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.


You begin to cut down your expenditures and entertain less. Your children, your parents, your girl friends and your other friends feel about it.  

In order to have more income, you need to take on some part time jobs. Some even go on stealing, cheating, etc.  If you have insurance, you may terminate the contracts and get the money out. 

The government cannot help you and you have to help yourself out. In this case, you are different from Greece, your default in loan may be another golden opportunity for others to buy cheap and sell high.

Some are lucky.  Relatives, parents, children and friends are willing to help and provide short-term credit to solve the problem.

The government has already had to access a 110bn euro (£95bn; $146.2bn) bail-out package from the European Union and International Monetary Fund, and now needs a second bail-out.

However, with a depressed property and job market, helps from family members, parents, relatives and friends will disappear.  And you are getting older, have to compete with the younger employees and foreign talents, your income suffer a drop rather than an increase based on seniority. 

You need another loan or financing if you want to keep your property.  But it is harder to come by.  You may have to downgrade and sell your property at a loss.

Eurozone ministers are worried that if Greece were to default it would make it even more difficult for other countries such as Portugal and the Irish Republic to borrow money. 

Singapore has huge reserve to support the Sing Dollars. The government’s finance is healthy and default in loan is out of the questions.   

The government may have to support the property by cutting down the supply and increase credit line by asking HDB and banks not to push too hard on payment.

But there are always some people cannot afford to pay.  They fall into the ‘bad luck’ cycle.  As an individual, the only option may be an application for bankruptcy. 

Because Singapore GINI ratio is one the highest in the world, i.e. the gap between rich and poor is very wide. The lower income group of people will suffer more as they are most likely not able to service the loan and interest payment. 

Unless you don’t buy a house, your luck may be better; especially you have money to wait for the market to fall. However, not many are rich enough to adopt this investment strategy.

For many Singaporeans, if there is no “owing a house” feeling, how can we consider Singapore our home? 

Sleepless nights

National Development Minister Khaw Boon Wan said, “I have been in MND for 5 weeks, and not sleeping well. I am working my guts out to try to calm the market, for the good of all Singaporeans.”

He is having sleepless nights now and may face more sleepless nights in future.  As individual, we should look at our own personal finance and make an affordable decision not to fall into the sleepless nights of unbearable and expensive loan.

But where is the way if HDB keeps on insisting that they are providing affordable housing and ignore the other side of the coin: unaffordable loan?

  

3 comments:

  1. Affordability is subjective. 30 years down the road, the norm could require 2 generations to pay up a mortgage. Then people would be reminiscing the 'good old days' of 30-35 year loans. Such could very well become the reality in the near future.
    Minister Khaw hasn't been sleeping well in the last 5 weeks. But with flats at such prices, there are many more who hasn't slept well in eons...and possibly till 6 feet under!

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