Wednesday, September 10, 2008

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Singapore Property Market: Is there sufficient government regulation to deter a subprime crisis

Americans have been blaming their government for the subprime crisis and have been calling for greater government regulations in the mortgage market. Recently, the US government has literally been cornered to bailout the two irresponsible giant lenders, Freddie Mac and Fannie Mae.

Back here, the Singapore government has repeatedly stated that it'd not bail out any financial institutions. But then again, could the repercussions of any such collapse in the financial sector be so detrimental to our economy that our government may just be cornered into a bailout, just as it has happened to the US government? Are our banks even thinking of that?

There's concern among Singaporeans that the Singapore property market is too laden with debts fuelled by easy credits (the Deferred Payment Scheme, DPS). Undoubtedly, the Singapore goverment has been reputed for its tough stance. Undoubtedly too, the Singapore government has also acted.

In a bid to curb excessive speculation, the Government scrapped the DPS in October 2007. But since then, banks including OCBC and UOB have rolled out similar schemes in the form of the interest absorption scheme (IAS) and the zero-instalment scheme. Under the new schemes, buyers have to sign up for a bank loan for the property. Once the credit worthiness — based on factors including income level, credit history and repayment ability — is established, the buyer pays nothing more until the TOP is issued. Under the IAS, the developer pays the interest to the banks during that period. To this, Chesterton International associate director Colin Tan said: “The question is, how strict are the banks when they assess credit worthiness? The banks in the United States behaved irresponsibly; what is there to stop Singapore banks from behaving the same way?”

If depending on banks' self-regulation is insufficinet to deter a subprime style crisis in Singapore, should there not be more government regulation in this respect? For instance, government could raise the downpayment for property buyers who already own at least one property. This will not only reduce bank liability in the event of a mortgage default, it will also reduce the steep competition that first-time home buyers are facing from investors and especially, speculators out to make quick money out of them.

The current insurance to depositors of $20,000, or even if the insurance is increased to 100% of the deposit as someone has suggested, does not tackle the root of the problem. As we have learned from the US subprime mortgage crisis, insurance may not be of any good when a financial crisis, which originates from the reckless operations of banks, erupts. There should be government regulation to ensure that banks here are indeed lending in a responsible manner. Lenders must be required to meet the highest standard of ethical code with regard to protecting the money of their depositors.

May also want to read:
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
When to Buy, When Not to by
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life
HDB Resales: West Sees Highest Price Increase


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Anonymous said...

THE Monetary Authority of Singapore (MAS) joined its global counterparts in acting to reassure jittery markets following the collapse of United States investment bank Lehman Brothers.
“Singapore’s domestic money and foreign exchange markets have generally functioned in an orderly fashion today. Interest rates in Singapore remain stable. No extraordinary measures have been needed. Nonetheless, MAS stands ready to inject additional liquidity if the situation so warrants,” the authority said in a statement yesterday.
“Financial institutions in Singapore are functioning normally. The three local banks, DBS, OCBC and UOB remain well-capitalised and have disclosed earlier today that they have insignificant exposures to Lehman. They have also enhanced their riskmanagement measures given the uncertain market conditions,” it added. It also said it will remain in close contact with the financial institutions here and with central banks and regulators elsewhere.
“MAS continues to closely monitor developments in the global financial markets and their impact on financial stability,” the authority said.
The US Federal Reserve pumped US$50 billion ($71 billion) into the US financial system to help ease credit stresses. This is in addition to its regular market operations to inject US$20 billion into the system slated for the day.
The European Central Bank injected 70 billion euros ($142 billion) into eurozone money markets, more than double its Monday injection of 30 billion euros. The Bank of Japan injected 2.5 trillion yen($34 billion), into money markets and said it willcontinue to strive to ensure smooth settlement of funds and maintain stability in financial markets.
South Korea’s central bank, meanwhile, said it was intensifying its monitoring of financial markets. The Bank of Korea would provide extra foreigncurrency liquidity if needed via the swap market to “calm nerves of market participants,” it said.

Anonymous said...

Are Singaporeans aware that some of the banks and finance companies or shareholders are very active in the property business. Any comments if there is conflict of interests or unfair cartel in promoting such activities?

Anonymous said...

It's ultimately up to individuals to exercise financial prudence. Unfortunately naive public are often gullible to all the "greed" selling.

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