Wednesday, December 14, 2011

Housing debt slavery : How it can occur....

My friend who is an economist was terrfied when he bought a private condo. He and his wife were thrifty penny pinchers whoi paid down the housing loan as fast as possible.  Why was he so fearful? Being an economist he knew a lot of economic history and knew that many things can go wrong when one has a large debt. Somehow these few years, people don't think too much about borrowing  half a million or a million to buy a home - sometimes they do it because others are doing it. Sometimes they think they are okay as long as they stay employed.

15 years ago a friend of mind show me the terrible situation got in with his housing loan. He computed that he paid a total of $200K in instalments but the oustanding loan decreased by only $60K. How is this possible? During the Aisan crisis interest rates went up to 6-8% depending on which bank you got your loan. 8% on a 800K loan is a whopping $64K a year roughly $5K a month on interest alone. Not to mention the depreciation of the property during that time.Interest rates today are artificially low. They may be low for many years but if you look at a window of 2 decades chances are you will hit a duration of extremely high rates.

If you read the story below, it talks about housing loans in Hungary with interest of 13% and 6% in Switzerland. Because Hungarians can borrow from Swiss banks at 6% to buy a home in Hungary, many did so because many others have done so in the past saving plenty plenty of interest. Guess what went wrong for these Hungarians? / the story below. Think twice before taking a loan in a foreign currency.

Another situation that can arrise is negative equity. When the price of the home falls very quickly, the market price of the home can fall below the oustanding loan you have with the bank. When this happens, the banks can ask you to pay down part of your loan immediately so that you get back to positive equity. This clause I believe is found in all housing loan agreements today. It didn't happen in Singapore but  home buyers in Hong Kong got hit by this during the Asian Crisis and were at the mercy of the banks that had the right to  foreclos on the property,

During boom times, there is always this tempting strategy of buying a home then taking loan with a long tenure then servicing the loan with rental income. I've seen a number of people who get into trouble with this strategy - they can afford one condo but buy two thinking the 2nd property can pay for itself via rental income. To get into real trouble buy 3 condos. when you can only afford one. If your timing is perfect perhaps you can get away with it but many people do this during the boom time when poperty prices are high. When rental yields fall, they end up slaving away to hold on to the property.
Austrian Banks Face Hungary ‘Debt Slave’ Revolt

QBy Boris Groendahl and Edith Balazs - Dec 14, 2011 7:01 AM GMT+0800 inShare0More

Business Exchange Buzz up! Digg Print Email Enlarge image

Austrian Banks Facing Payback Balint Porneczi/Bloomberg

Hungarian forint notes. because it may have to inject capital into its banks. Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion.

Hungarian forint notes. because it may have to inject capital into its banks. Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion. Photographer: Balint Porneczi/Bloomberg

When Hungary’s former central bank governor was buying a house two months before Lehman Brothers Holdings Inc. collapsed and the country sought an emergency bailout, he received an offer he couldn’t refuse.

Peter Akos Bod, now an economics professor at Corvinus University in Budapest, was given a choice of mortgages by his bank. The 60 year-old could select a loan in Hungary’s currency, the forint, at 13 percent interest, or one in Swiss francs at less than 6 percent. After crunching the numbers on a spreadsheet, he picked the cheaper franc loan.

“It was rational,” he said of his 2008 decision in an interview in the Hungarian capital. “I put it into a model.”

Three years later, Bod and about one million compatriots who took mortgages in francs are faced with a debt pile that has swelled to 4.9 trillion forint ($22 billion). The currency’s 40 percent slump against the franc has raised repayment costs, pushing mortgage arrears to a two-decade high and prompting Prime Minister Viktor Orban’s government to brand the loans “debt slavery.”

To help homeowners, Orban imposed currency losses on banks including Erste Group Bank AG and Raiffeisen Bank International AG (RBI) that may total 900 million euros ($1.2 billion). Faced with the risk Orban would impose further measures, lenders have offered to accept $2.2 billion of additional losses if the government promised to take no further action. If it doesn’t, banks are threatening they may withdraw from the country.

‘Too Risky’

“Against the backdrop of a potential western European financial crisis, this raises the risk that western lenders will just pull out of Hungary because it’s just too risky, which would be disastrous,” Neil Shearing, senior emerging markets analyst at Capital Economics Ltd. in London, said in an interview. “Hungarian banks are incredibly dependent on their western European parents for short-term credit lines. At the very least it means credit is going to remain very tight.”

Six of Hungary’s seven biggest banks have foreign parents, including Italy’s Intesa Sanpaolo SpA and UniCredit SpA (UCG) and Germany’s BayernLB. Only OTP Bank Nyrt., the country’s largest lender, is still domestically owned.

Almost 18 months after Orban was elected in April 2010, he passed a law allowing Hungarians to repay mortgages denominated in foreign currencies at discount of about 25 percent to today’s exchange rate. As long as a client applies before Dec. 31 and repays the entire loan before Feb. 28, the banks have to make up the difference.

“I paid it back last week,” Bod said. “I’m free of debt slavery,” said the former industry minister. The plan “is easy to explain from a political viewpoint. It’s cheap for the government, expensive for the banks, good for voters.”

Overseas Borrowings

While borrowers in Poland, Romania, Bulgaria and Croatia also took foreign currency loans, Hungary is unique because average household borrowing in overseas currencies is more than six times the region’s average, according to Barclays. In Poland, where more than half of all mortgages are franc- denominated, banks limited them to more affluent customers, and cushioned the franc’s advance against the zloty by cutting rates. Hungarian banks raised rates.

Every redeemed mortgage equates to a loss for the banks. Cristina Marzea, an analyst at Barclays Capital, said in a Nov. 17 report that banks operating in Hungary may lose 12 percent of their combined capital, or about 900 million euros, because of the early repayment plan.

‘Immediate Action’

Lenders responded by suing the government in the Hungarian Constitutional Court and asking the European Union in a Nov. 14 letter to take “urgent and immediate action” against Orban, adding they will need to reassess their commitments in Hungary. Erste and Raiffeisen, which signed the letter, have said they will cut lending in the country.

“Banks are having to make brutal decisions about where they deploy capital at the moment, and if policy makers make life too difficult for European banks, as in Hungary, then they will more aggressively deleverage in these markets,” Tim Ash, head of emerging markets at Royal Bank of Scotland Group Plc, said in an e-mail. It’s “obviously bad for credit and growth.”

Demand for franc mortgages rose from 2003, when Hungary’s government stopped subsidizing forint home loans. Foreign banks filled the gap, using their parent’s access to euros and francs to undercut OTP. (OTP) The profitability of the country’s banking industry soared, with return on equity jumping to between 20 percent and 30 percent annually from 2003 to 2007. When the government started to cut spending in 2006, Hungarians took out more loans secured on their homes to finance consumption.

Dual Monarchy

By June 30, Austrian banks had lent $42 billion to Hungarian borrowers, Italians $23 billion and Germans $21 billion, according to the Bank for International Settlements.

Orban’s bank policies have especially irked neighboring Austria, which until 1918 was Hungary’s partner in the Dual Monarchy of the Hapsburg empire and which re-engaged with the region through its banks after communism collapsed in 1989.

Austria’s central bank Governor Ewald Nowotny in October described the Hungarian law as “brutal” as well as legally unworkable and “economically nonsensical.” Nowotny last month ordered the country’s lenders to limit new loans in eastern Europe to make their business “more sustainable.”

When Erste (EBS) set aside an extra 450 million euros for Hungarian bad debt in the third quarter, Chief Executive Officer Andreas Treichl pointedly referred to “irrational populist measures in EU countries” and predicted that Hungary’s government would “continue to take action that will not be positive for the Hungarian banking system.”

‘Biggest Event Risk’

Moody’s Investors Service last week said that Austrian banks’ exposure to the central and eastern European region is “the single biggest event risk for the sovereign.” Austrian banks are also the biggest lenders in the broader eastern European region. Standard & Poor’s said Dec. 5 it may downgrade Austria, one of the six remaining euro area countries rated AAA, because it may have to inject capital into its banks.

Hungary’s banking association last month proposed a plan of its own that would include further losses for the banks of as much as $2.2 billion.

“What we want in exchange is that the government accepts the package we submitted in its entirety and there won’t be new regulations on this issue for two years,” Daniel Gyuris, deputy head of the association, said in a Dec. 5 interview.

The banks may yet be helped by Hungary’s move this week to tap the International Monetary Fund for as much as 20 billion euros of aid after spurning its advice last year. The EU and the European Central Bank have already criticized the debt-repayment plan and the program may form part of Hungary’s negotiations with the IMF. The IMF’s mission chief to Hungary, Christoph Rosenberg, declined to comment on policy issues relating to the country when contacted by e-mail.

“Any further attempts to unilaterally restructure foreign currency debt is off the cards,” said Capital Economics’s Shearing. “I can’t see how the IMF would sanction that. Any restructuring will have to be approved by the banks and the government.”

To contact the reporters on this story: Boris Groendahl in Vienna at; Edith Balazs in Budapest at

To contact the editors responsible for this story: Edward Evans at;


Anonymous said...

Singapore is different lah. We have so many millionaires (including foreigners of course) in the country, and this number is growing every year.

And some of the foreigners who bought Singapore property paid it all with cash in the millions, you know.

Of course those Singaporeans who can barely afford condos and take big loans to buy, even at low interest, are stupid. But I believe they are a minority, so it is not really an issue.

Just like the 40% minority who voted against PAP are not really an issue for PAP.

Whatever the issues, we must look at the overall big picture, so as to see things in perspective.

Anonymous said...

Always spend within your means including buying investment property. Better still buy properties during the down cycle n u will have less chances of sweating thru the decline in your property value.

Anonymous said...

The ass system insists that I cannot buy HDB flats because my income exceeded the fxxking ceiling set by the asses. They want me to buy private and take a big mortgage which I don't think I can afford. It is so scary.

I want to buy within my means but the asses said cannot. Really assholes.

Anonymous said...

You got it wrong.
It's called Asset Enhancement.

Anonymous said...

Wow. What talking u?
U really should steer clear of stuff that u are clueless about and stick to promoting LGBT ideals...

Have faith! said...

There is no problem because interest rates are guarnteed to be below 1% by US Fed till 2013.

Even after 2013, if rates should go higher, how much higher?.. not likely to be above 2%.

World leaders are freaking scared of losing control and will keep rates very low for very long time..

Bewteen inflation and deflation, they seem to prefer inflation.
They will avoid deflation at all costs.. even if it means 0% like Japan.

So, do not spread fear..

I believe rates will be kept below 3% for at least the next 10 years.. there is too much liquidity in the whole system and the minute rates go up, the banks will have trouble paying.. they are essentially bankrupt already!

Its not the same as 1980s and 1996.

Musicwhiz said...

I think it's a timely warning, Lucky. Of course, no one will bother because everyone thinks that "This Time It's Different".

Guess only time will tell if you're gonna be right!

Anonymous said...

These days, many young singaporean couples find themselves by virtue of the government's system having to take loans of $300 000 for 30 years.

Now, this doesn't augur well for young Singaporeans. However, the opening of the floodgates to allow PR couples to purchase PUBLIC housing has caused many yougn singaporeans to be forced to get a resale flat as they want to get marry and settle down and have a child and start a family. But to do this means singaporeans have to SUBMIT to waiting for a BTO to be ready in 4 years, assuming a good ballot number was allocated to them during the BTO ballot process.

Many can't wait and confused. On the one hand, the government wants singaporeans to reproduce; then why is the policy of having to wait out for 4 years to get the house key for BTO DEFEATS and contradicts this aim. It's counterproductive! It's that clear. It's a stupid timeline and a stupid policy. Why does the government interests itself more with optimising land to force articial demand?

It is not a problem at all for PR couples to take on half a million dollars in loan because they have it all figured out. They are paying low monthly repayment, so that they could save as much of their Sing wages. And when they are tired, they'll see their resale flat and cash in the profits and move over to malaysia.

But all this puts the singaporean couple at serious risk of paying for the exorbitant prices!

Our government is now the real problem! It's a poor manager of the welfare of the people of Singapore.

Anonymous said...

You are wrong. Property investment is the best way to make money among other investments. All investments have risk. No risk no return. Do you know how HK Lee K Shing makes his money to be the richest in Asia? Do you think his plastic flower factory can do it? How do Ronald Trump make his billions? Property investment is still the king of all investment. Your argument is wrong. But, investment timing is important. Invest wisely and you will make it.

Anonymous said...

"Our government is now the real problem! It's a poor manager of the welfare of the people of Singapore."
Anon 15/12/11 03:39

But 60% do not see it this way, from the way they vote.

Is this another problem? Or is it due to other problems?

If so, you can see there are many other problems, not just government is the problem.

Not so simple, right?

Anonymous said...

This is called stagflation.

Even in deep recession, there is high inflation.

Of course ordinary people who are the majoirty, will suffer the most.

But who cares, as long as the government can still be re-elected and the streets are peaceful.

Anonymous said...

GE 2016 target.
Increase Opposition votes to 51%.

40% votes = 6 Opposition MPs.
80% votes = 12 Opposition MPs.

Don't worry about freak election results.
PAP will still form the next government.

Just make sure you vote Opposition to spur the "Party Against People" to work harder for Singaporeans.

Luckier than you... said...


Just about everyone, from Merkel to Paul Krugman to El Erian ( Pimco)..
it is different becos:

A) Every country in the world co-ordinated their actions

B) China is the new factor that has affected world economics

C) The speed and connectivity around the world has increased

D)People own more than they ever had: phones,TVs,cars,clothes,food

There will be no collaspe.
There will be pain but life goes on
There will ALWAYS be poor people
There will ALWAYS be rich people
There will ALWAYS be a market

Do not underestimate human capabilities to adapt and solve issues.

Bunch of gloomy people.. so bloody negative.. sound more and more like the gahmen.. always:

" must tighten belt"
" we must prepare for the downturn"
" we will lose out if..."

Anonymous said...

Bear alert!!!

Stock market is approaching the edge of cliff.

You can thank me this time next week.
Remember. You heard it first from me.
Before your private bankers and financial advisors told you.

This is a public service message.

Anonymous said...

Beware of being ingrates as you badger and bludgeon the property market.

Much of your wealth and quality of life have been credited to our vibrant and prosperous housing market.

Much of our spending power comes from real estate.

Will the fourth generation, calling for a suicidal reversal in value of properties or pressuring the govt to adapt measures that will incapacitate our market and derail our economy, bring us down?

Will the fourth generation squander the wealth of the land which the first generation has painstakingly build?

If they do plunder the land, it is because of their shortsightedness and foolishness

Anonymous said...

The wealth of a nation should come from the enterprise, innovation and ingenuity of its citizens.
This is a foundation of stone.
This is real meritocracy.

Not from its property.
This is a foundation of sand.
This is plutocracy.

Anonymous said...

Did it?

If you don't get your political system right, the wolves will have you for breakfast,lunch,dinner and supper.

Anonymous said...

This is plutocracy.
Anon 15/12/11 13:29

Plutocracy is rule by the wealthy, or power provided by wealth.

But who provided the power to the PAP?

60% majority voters, right?

So are these 60% wealthy?

If so, good lah, majority are wealthy.

Anonymous said...

HDB = Housing Debt Burden.

Anonymous said...

timely reminder to the young people in singapore. do not try to play the property game because a lot of people think they can time roughly when the property market is in up-cycle or down-cycle. Be realistic, if you are really so smart, you would have been a millionaire many times over. borrowing monies can lead to bankruptcy, so never overreach.

Jamesneo said...

reply to have faith: yes the interest rate might stay low for a bit longer due to the irrational market not understanding that they are collecting too low an interest rate. Eventually the bond vigilantes will start to stop buying the bond. The government can do two things at that point: direct monetization by buying the bond themselves by printing the money without sterilization but this will lead to high inflationary pressure which will compound the problem and eventually lead to hyperinflation if they buy all the bonds.

Or the treasury will cave in and forced to start increasing the interest rate. That was how in Uk for example that the gilt reached 15% interest rate( a stagflationary nightmare)

You should know that singapore do not set the interest rate as our sibor are affected by the US interest rate. When the interest rate rise eventually probably after 2014, a multidecade rise in interest rate is likely to follow. So anyone foolish to specualate or buy house at the top will be in great pain for the next two decade.

Anonymous said...

better to be burdened by housing loan, which is manageable if you live within your means and with some luck and grace, than to be burdened by your daughters turning tricks/pros to pay for school fees like in UK now.

Anonymous said...

@ ANON 13.39

"But who provided the power to the PAP?
60% majority voters, right?"


Gerrymandering provided the power to PAP.


Anonymous said...

State news, through their state approved property spokespersons , categorically proclaimed that in 2012, there will be a price correction of 10 to 15 %.

Foreigners(stamp duty nullified) and all local speculators should be happy.

But why settle for a mere 10 to 15%? Wish for the worse here and enjoy 50% price drop or more lol

Anonymous said...

Have you sold your property already?

Laugh to the bank soon

Anonymous said...

To Jamesneo:

Yes, you are right.
The main point is that 'Have Faith' is correct to say that interest rates will remain very low for at least the next 3 years.

Beyond that, it will not get any higher either.. based on exactly what you presented: that the Governments of the world do not have much room to wriggle.

They fear deflation more than anything else. They do not even fear the collaspe of the Euro!

Why?.. because the world demographics has changed.
There are more people with more money than ever before. ( although unevenly )

Property will not collaspe.
Stock market will fluctuate.

But this is normal.

Anonymous said...

The govt will make it collapse to win votes from the younger generation.

Anonymous said...

win votes? more like perpetuate speculative market so the rich can be richer at the xpense of innocent lives.

Anonymous said...

lucky, i have to correct you here... There's no need to worry about Europe crisis as well as US. There won't be another asian currency crisis simply because China and India minted boatload of millionaires during QE1 and QE2 who are smart enough to keep real hard assets. we're not talking about paper millionnaires here... and you know about that survey done in china right? how all those fat cats want to run away as soon as possible from their home country. Same will spread to india's millionaires in no time. Guess what... Singapore is one of the most preferred destinations to immigrate right after Canada and Australia. At least here PAP had some brains to prop up SG currency you get the picture? so for those waiting for that property crash or miracle to load up don't even hope. HDB prices will keep climbing just as private property and 3 local banks are awash with enough liquidity from these rich immigrants to keep interest rates low.


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Anonymous said...

They acquired land and built houses which were sold to individuals and that is it. Individuals bought one or few units waiting for prices to go up. It is like a gamble.

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