Singapore's Property and Loan Market (not sub-prime prone)

As mentioned many times in the news, the America's sub-prime are caused by falling property value and increasing loan defaulters.

A recap of sub-prime
During better times (not long ago):
- Banks were providing high loan (up to 100% Loan to Value) against properties to home buyers
- Interest rates during the initial years was low
- Economy was doing well

The Meltdown (largely, in late Year 2006 onwards)
- Property value reach the peak and starts falling
- Loan to Valuation exits property value (loan being more than 100% of property value now)
- High interest sets in
- Borrowers starts to have problem paying
- Borrowers turns to other credit facilities, eg, credit cards
- All else fails, borrowers default on loan
- Value of property falls further (low demand, high supply)
- Other financial business faced the crunch together with home loans

Singapore's Property Loan
How Singapore deviate from such a loophole, has much to thank to the Monetary Authority. Property loan regulation disallow high loans such as 100% Loan to Valuation (LTV). Up to Year 2005, banks are only willing to provide 80% LTV and starts to relax towards 90% LTV in early 2006.

During the late 1990s, property prices was at an all time high (eg, $2,000psf in prime districts). During the triple economy downturn (Asian Currency Crisis, 911 and SARS) in Asia, especially Singapore, the same property's value fell to a low of around $1,200psf). Demand for property in 2003 and 2004 was at an all time low, with almost very little buyers against many sellers (who couldn't hold on any further).

The economy started recovering in Yr 2004, with Gross Domestic Product growth over Yr 2003 being 12.8% (source : http://www.singstat.gov.sg/pubn/reference/yos/statsT-income.pdf). Demand for property started recovering in Yr 2005 with value stablizing in Yr 2004.

Property value saw a steep climb since late 2006 with many en-bloc exercises spreading from East Coast. En-bloc exercises reached prime District areas (such as Orchard Road, Newton, etc) in Year 2006 till August 2007. Some property's value climbed 150%, e.g, The Sail was launch at about $700psf region and peaked at about $1,800psf, The Icon was launch at about $600psf and reached beyond $1,500psf.

The government scrapped the Deferred Payment Scheme for new developments recently (early November). This can work to stop the runaway by average speculators who are keen to jump into the bandwagon. Ever since, property's value and transaction has stablized.

Had Singapore's banking sector not had strong and sounding regulation, with strict lending policies, our tiny economy may face the same downfall of Sub-prime.

Credit Assessment
In order to obtain property loan, banks usually look at the borrower's Debt Servicing Ratio (DSR). As a general rule of thumb, the DSR shouldn't be more than 50% of the combined Gross Income. The 50% takes into account, all loans including property and car mortgage.

Banks also looks at the individual's past credit report. Any bad credit rating could mean that the individual may face a rejection in his application. Banks also are concern of any litigation the individual may have.

These are just some indicators before banks gives an approval for loan application.

As individuals, we should learn to be financially stable. Good financial sense may not make everyone richer, but it can help us be less poor. Good financial sense includes knowing how to stretch our dollar, setting aside a part of our income to investment, not be drawn to spend unnecessary, planning our finances, etc.