Recently, I watched a documentary online about the global financial crisis: https://www.youtube.com/watch?v=VQzEWeGJLP0
It not that I knew nothing about the global financial crisis in 2008, in fact, my first job as a “personal financial consultant” in a bank was met with so much regulations and customer distrust that I almost quit my job within months of joining. I had a lot to do and understand from the aftermath of a crisis. That’s how I started and once the crisis was forgotten, greed crept back in, in the form of property investments.
Fast forward to 2015, I am tasked to research on the factors which may create a financial crisis. East Asia was my target area. It was no surprise that I started my research on Singapore, only because my other group members are from HK, Taiwan and China. We each targeted our respective countries.
I shall not bore you down with theories and details of my research. Rather, I shall describe the situation in excerpts and in layman terms why the next financial crisis will happen in Singapore soon.
The government grants easy access and cheap credit to banks during the global financial crisis in 2008. These banks must find a way to profiteer from the liquidity flux. Therefore, they started to grant loans easily to consumers comprising of businesses and individuals. The economy was spurred to activity, jobs were created and GDP rose. Consumer demand rose as a result and rallied the retail property market. Consumers started to take advantage of the hike in housing demand due to an influx of foreign workers, to speculate prices. First movers benefited from the price speculation while the government reaped generous profits from land sales, stamp duties and other increased demand for essential and other services. Asset bubbles were created to unsustainable levels, prices and inflation skyrocketed. The government thus stepped in to regulate the market. Many individuals were stuck with gigantic loan obligations as they are unable to sell off their depreciating investments. They are faced with rising cost of borrowing and property taxes. The future is bleak. A huge correction is expected. Its impact will be devastating to Singaporeans. The crisis is unfolding as the meltdown occurs in phases. Whatever foundations we have built and/or achieved in the last 5 years will be extremely fragile, i.e. sitting on a thin ice. I believe the government is suppressing some indicators and bad news as well. Government linked companies which form the core economy may struggle or are currently struggling as demand shrunk and costs escalate. The situation will only get worse because it is apparent that no concrete measures are taken to alleviate the fundamental problems. A full-blown crisis is expected after the next general election when interest rates hit dangerous levels, i.e. 3 – 5%. The crux of the matter is how much the government is willing to do to help those who have lost their savings, jobs and houses? How much reserves are there to bail out the economy? There are no answers and guarantees to the above questions. I don’t wish for a nosedive.
How it happened?
Easy access to credit
Back in 2009 – 2011, banks were flushed with cheap credit, i.e. the SIBOR (Singapore Interbank Offered Rate) was very low. Top executives from local banks were bragging on their newfound ‘power.’ What they meant was that they could lend more money to consumers and earn more interest income and more. These consumers comprise of businesses such as property developers, companies seeking to do an IPO, and as well as individuals seeking loans to buy properties. By lending money to these consumers, they suddenly become ‘powerful’ or wealthy. Why? Their buying power increased.
Do note that the access to cheap credit was not limited to Singapore, many East Asian countries benefitted because in part, the US decided on various quantitative easing measures, offering cheap credit to bail out its economy. Inadvertently, some of these funds flowed into East Asia.
Attractive rental yields coupled with increased demand for housing
And so the vicious cycle started, individuals realized that rental yields minus costs were very attractive. For example, John purchased a $1 million 2 or 3-bedroom property (back in the mid-2000s to 2009) bordering the CBD. He realized he could rent it out at $5000 or more. A one bedroom condominium could easily fetch $4000 in the central regions. His monthly instalments were about $2,500 per month. And so he earned a passive income of $2,500 per month, $30,000 per annum plus gains in property values (i.e. 20-30%). Many tenants were high earning expatriates. In those times, the government opened its floodgates to foreign talents and there was a temporary lack of housing options as occupancy rates were very high. Many individuals amassed abnormal profits by taking advantage of the profit making scheme at the expense of tenants.
Soon, many people jumped on the chance to earn a passive income. New developments were sold out within days or even in a single day for some small developments. Developers began to launch more projects and price them high due to the insane demand while increasing their profit margins. Realizing the demand, URA decided to jump in the bandwagon by releasing more land for sale. Competitive bidding drove up land prices (good for URA) and eventually when projects were launched, prices went up higher than ever. In some cases, they command a premium (higher than prevailing prices) simply because buyers will get a brand new unit, with better facilities and more beautiful surroundings.
Point of exaggeration- Asset bubble
Initially, the prospect of earning a passive income through property investments was very good. Developers, investment holding companies, property agents, individuals and even the government were attempting to profit from the demand over supply phenomena. Entrepreneurs started to publish books on their ‘rags to riches’ experiences and ‘secrets’ on property investments, thus influencing the masses to buy properties themselves, either with them or through them. They were probably the first movers.
It was probably the 2nd movers who will be taking a hit soon. Property agents were bragging on their own forays at the property market and smoking out their customers by saying “Property prices are expected to go up, rental demand will be there, loans are cheap. You will profit from the purchase soon enough.”
Bankers and mortgage brokers on the other hand would claim, “Loans are cheap and will probably continue to be cheap. Look at the past rates, it has been low for quite some time from 2009 till now. We are not expecting a rate hike anytime soon.”
The overall signal was ‘buy, buy and buy!’ Those who didn’t buy stand to lose out because inflation was catching up with their cash deposits. Soon, buyers from Indonesia, China and Malaysia etc were flying in to make an investment. Why were they here? Properties in China, Indonesia, Malaysia etc were also going up, but the investments were not as attractive as what you get in Singapore. In China, most if not all properties are 70 years leasehold. Property prices in Indonesia were very volatile and prices had already increased three times just a few years ago. Singapore is land scarce, unlike other countries, its safe and secure, therefore a proposition not to be missed. In addition, it was also easy to obtain loans in Singapore. All you need to do was to show you have deposits > $100,000 in Singapore, or get your local banker to write a letter to the bank saying you have lots of money in your domicile country.
False hype and unscrupulous sales tactics
Then you have the false hype created by property agencies and developers. Property agents would persuade their clients to quickly put in their cheques just before the launch date because developers were giving generous pre-launch discounts, furniture vouchers etc and by the time the project was launched, most if not all units would be sold by then. Well… technically all units are sold during launch date. Property agents were explicitly told to communicate that message to the clients who didn’t buy, so as to drum up the next buying hype. Behold, after some time, clients would get a call from their agents again claiming that new units are available at phase 2 launch! In reality, developers who corroborated with the marketing agencies were artificially limiting supply i.e. 100 out of 300 units would be released during phase 1, another 100 in phase 2 etc. In some cases, the number of units released would depend on the number of bookings or cheques given. Marketing agencies such as Huttons also created the impression where most if not all bookings had to go through a hyped-up ‘ballot.’ A ballot occurs when 2 or more buyers had intentions to buy the same unit. Property agents (not buyers) would crowd the whole showroom and cheer loudly as a group when one of its agents won the bid (for his buyer). They cheer because the agent earned his commission while the group leader earned his overriding commission, other agents were giving support. Customers watching outside would think there was really a high demand. That happened even when there was no demand or when there was only 1 booking. Why? That’s because when the bidder (customer) wins his bid, he thinks he is lucky and that there is competition. He is likely to keep his end of the bargain by signing the sales and purchase agreement later. That’s insider information. These agencies are very smart by not getting their hands dirty on their unscrupulous sales tactics. I don’t think there are any documents depicting their sales tactics available. The top executives are very secretive about it. I hope some whistle-blower could review more details on it.
Cushioning a potential meltdown
When I resigned from the bank, I had anticipated that many individuals will get their hands burnt. They would soon realise that rental yields are not a guarantee. Now, there is an oversupply of housing and demand curbed by the government. Loans for investment properties were limited to 60% and below, purchase by speculators, foreigners and locals as well were curbed by additional buyer’s and seller’s stamp duties. The government calls them ‘cooling’ measures. Why is the government doing this?
- Political implications – First-time buyers are feeling the pinch while commercial tenants are passing down their high rents in their goods and services sold to customers. Both groups form the bulk of the citizen core. Many citizens, especially the younger generation are already affected by the high prices and their life plans delayed because of that.
- Protecting their assets – Most of us would have known the first point. However, if you read between the lines, you may realize something else. Most of the essential services (Government linked companies) and assets are now privatized, which started during the 1990s. The question is who now owns them? The government would definitely care more for these privatised assets and services. It because these services cannot fail, as individuals in the government have vested interests in them (as directors and shareholders). Directly and indirectly, they are impacted by the resultant asset bubbles. Perhaps they have already reaped enough profits and pulled out before the rest who are not linked to them.
The second point argument is weak because the situation described is to macro in scale and difficult to grasp. Let me put it in this way, in a casino, the house always win, eventually. Who started the easy access to credit? Who is the first seller? Who made and changed the rules? Who has the largest market share? The answer is: The government and their cronies, the richest in Singapore.
Who are the losers? (other than the first movers)
- Consumers – tenants are passing their high rents to their customers. i.e. Petrol prices are not coming down as much as expected. Prices of products, food and groceries are going up and up. Inflation still have some time to settle.
- Individuals including first time buyers are facing a depreciation of their assets they paid so much for during the asset bubble.
- Individuals who invested too much in properties are now facing a rapid contraction in their asset values and facing an increased cost of borrowing including increased property taxes. Many who could not service their loans had their properties foreclosed by the banks. Those who bought when the seller’s stamp duties were imposed had to pay a hefty price to the government for disposing its investment. (Winner: Government)
- Misinformed individuals – They were coaxed to join in the bandwagon and now they are stuck in the investment with little or no rental income, depreciating values, unable to sell and increased costs of borrowing and taxes. (Winner: Banks linked with the government)
- Private developers – Developers are holding a lot of unsold units and undeveloped land. Some may have overpaid for the piece of land sold to them. There are rules stipulating when a certain project has to be completed and sold. A lot of them are expected to be completed in 2015 thereafter. What’s going to happen if they can’t sell off and breakeven? Are we going to witness a bankruptcy soon? Perhaps, the rich government linked companies may acquire them and bail out the development.
- Employees employed in this industry – Property agents becoming taxi drivers or insurance agents. Loan brokers, specialists and conveyance lawyers etc. may find themselves out of business and work soon.
Will a financial crisis take place in Singapore? Actually the process has already begun. News media are selective in their indicators and suppressive in aggravated information. But, it isn’t a crisis yet. Demand may return if the government retract its demand curb but will again suffer in votes. Bank lending rates are not at unsustainable levels yet. The question is, how much reserves are available when the crisis happens and how much the government is willing to do to help those who have lost their savings, jobs and houses? My take is that, a full blown crisis will occur right after the next election by 2016.