Monday, July 23, 2012

Managing your finances in an artificially low interest rate environment....

UPDATE: Just out this afternoon S'pore's June CPI at 5.3%, FY2012 seen at upper half of 3.5-4.5% forecast. Such high  inflation rates erode the fixed interest savings of Singaporeans making it harder for savers to retire. A commenter suggests that low interest rates are here to stay. While the prevailing  economic conditions support a low interest rate, how long this lasts has to be considered relative to the housing loan tenures of 30-50 years. The global economy may just muddle along but the high stresses we see from the numbers tells us we are in a dynamic situation rather than a stabilized one.
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I was writing this article half way when I heard that UOB has introduced the 50 years mortage[Link]. At the current low interest rate of 1.7% for housing loan, an outstanding loan of $1M can be serviced with just $2.4K a month for 50 years.

"Homeowner Edward Ti, 28, said he would certainly take up a 50-year loan for an investment property. 'I would take a 50-year loan if interest rates are low. I would think that it is more efficient to use the money saved from the monthly mortgages to do something else.'" - Straits Times article.[Link]
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If you can easily service a 20 year mortgage, stretching it to 50 years is not a bad idea under the current low interest rate environment. However, if you're depending on the low rates for affordable instalments, you are asking for trouble. If interest rate rises, say from 1.7% to 5%, your home mortgage payment will balloon from $2.4K a month to $4.5K a month. If you're doing what Edward Ti is doing, you have to be prepared in case interest rates move up. For a businessman with $4M-5M in the bank, instead of paying for a $1M condo in full, he may still want to take out a mortgage because he wants to keep cash for his business that earns a higher return. For a professional risk taker like a businessman, 1.7% interest is very cheap money and should interest rates go up, he can pay down the loan because he has sufficient cash in the bank to do so. The people who should take up these 50 year loans are people who don't really need these loans. The people who shouldn't take up these loans are the ones who need to stretch their mortgages to achieve affordability. The low interest rates and longer term mortgages (20 years and above) are a partial cause of the housing bubbles in US, Spain and Ireland. In Japan at the height of the housing bubble in 1989,  banks were lobbying for 100 year 2-generation loans. 50 year mortgages can easily lead to trouble for those who are counting on low interest rates for affordable instalments. The interest rates we are seeing are artificially low.

Just to give a historical perspective, here is how US 10 year treasury interest rates has changed over time. Unless there are local factors, interest rates around the world follow the sane trend.


Just 13 years ago, interest rates on housing loans were 5%.  You go back further to 30 years ago, housing loans were 10-15%.. As interest rates trended down, debt levels around the world went up - people borrowed to buy homes, businesses borrowed to expand, govts borrowed to fund deficis and consumers borrowed to spend.

One of the reasons global economy has stalled is the large amount of debt that has piled up. Everyone from European govts to American households are highly leveraged, because they need to cut down on their debt levels, they have to cut spending and this causes demand to fall. What central banks are now using various tools (QE1, QE2, LTRO) is to keep interest low so that the debt can be paid down - at least that is one of the reasons for pushing rates down. However, there is no free luuch. Rates stay low because inflation remains moderate and global economy is weak...which means there higher risk of people losing their jobs as unemployment creeps up. If the economy recovers, interest rates are likely to move up. The problem is inflation can show up even if there is no strong recovery in global economy and this may cause interest rates to rise as central banks try to contain inflationary pressures. So the only situation that rates stay low in the next few years is a weak economy without serious inflation concerns. You really shouldn't bet on this...and you shouldn't bet on rates staying low for the longer term. However, given the current low rates, there are ways to optimize your finances.....a little.
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A month ago, an alarm I set on my computer calender rang. My fixed interest mortgage loan which I refinanced 3 years ago was about to expire. I called up the bank to check what would happen. If I do nothing, the interest rate on the loan will be 3.6% floating rate based on a markup of the prime rate (the lowest interest rates the bank charges its best customers). I told them I wanted to refinance. The bank officer told me the outstanding loan was too small (5 figures) and the remain tenure was too short.- I either pay up in full or live with the 3.6% interest rate. I told the bank officer, I was very unhappy the bank was no longer interested in keeping me as a customer and told her to talk to her manager to see if something can be done. A few days later, she called up and told me the best offer they can give me is a fixed rate of 2% for the remaining period of the loan and I had to pay $200 for the refinancing.  I was still unhappy because I knew that banks were offering deals closer to 1.5% for larger loans but she was quite clear it was a "take it or leave it" deal. The last time I refinanced my loan 3 years ago, I was already to pay it back in full either with my savings or CPF funds. The reason why I didn't do it was the low interest rates for mortgage loans. At 2%, I can keep my CPF funds in CPF at an interest of 2.5% and still make 0.5% more by paying off the loan in instalments from my CPF. - so there is no logical reason not to take up the 2% fixed rate offered by the bank.....except maybe something goes wrong in the next few years and the withdrawal rule for CPF changes.
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There are other reasons to do this even if interest rates are slightly higher, say 3%. When you use cash to pay down your housing loan, it is very hard to get the cash out again easily. You have to sell your home or take out a mortgage on your fully paid home - the legal fees, admin fees etc makes it expensive to do so. Facebook billionaire, Zuckerberg, who is in a different league altogether bought a US$5.9M home when he got married recently. Given he has hundreds of millions in cash, you would think that it is pocket change for him to just buy it with cash. His wealth can change by much more than $5.9M in 10 minutes when Facebook stock price changes, Why trouble himself with a minuscule $5.9M mortgage from the bank? Well interest rates are so low, even Zuckerberg took out a mortgage loan - for a billionaire like him with near zero chance of default, the bank offered him 1.05% mortgage loan deal [Zuckerberg's Mortgage Rate is Now 1.05%]. A 1.05% interest is below the inflation rate of 2+% in the US and economist call this a negative real interest. Even Zuckerberg couldn't resist taking up a mortgage loan at this low interest rates.
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When I first took up my mortgage loan, things were quite different. A 5% interest rate for a mortgage was considered a good deal and it was not uncommon for people to pay 6% for their mortgage loans. The first thing I did when I bought my home was to empty all my CPF money to pay down the loan as fast as possible because it didn't make any sense to keep money in the CPF at 2.5% when the bank was charging an interest of 5%. for mortgages.
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Singapore's inflation rate rose to 5.4%[Singapore's inflation rises to 5.4% in April], fixed deposit accounts in DBS are paying 0.125%[DBS Fixed Deposit Rates] and a 1% interest is considered a great deal [OCBC's fixed deposit deals]. Basically what has happened for savers is the buying power of their money has declined 4-5% due to inflation last year due to low interest rates. If nothing changes, their money will keep eroding. The negative real interest rates is supposed to encourage you to spend or bring forward your spending. If you want want to expand your business,  you might as well do it now instead of later because prices are expected to rise due to inflation. Keeping money in the bank is not risk free - your money is eroded by inflation when the interest you're paid is below the inflation rate, there are periods in history during which savers are completely wipe out by high inflation. While there are people who keep savings in bank out of habit not realising the risk, there are legitimate reasons for keeping some money in the bank as savings. You might want keep the savings to buffer against unexpected events - job loss, emergencies etc.  For the risk averse, the negative real interest rate situation is a conundrum because a positive return can only be achieved by taking risk otherwise your money gets eroded by inflation i.e. there is no way to avoid risk for the risk averse!

"In other words, the money that is sitting in your bank account, with its near-zero nominal rates, is shrinking day by day. Even worse, this situation of negative real interest rates could well continue for the coming one to two years.
With the US economy not quite out of the danger zone and the eurozone struggling to ringfence its mountain of sovereign debt, monetary policy is likely to stay very loose. Indeed, the US Federal Reserve — which has kept the federal funds rate near zero since the global financial crisis — has said it would keep rates “exceptionally low” until late 2014, as it sees economic weakness persisting until that time." - Sunita Sue Leng, The Edge[Link]   

Negative real interests rates can persist for quite sometime so what  can a person do about this? If you're living in America, you can purchase something known as TIPS (Treasury Inflation Protected Securities) with part of your money to insulate one part of your wealth against inflation. In Singapore, however, your options are limited. Overcoming the negative real interest rates cannot be done without taking risk. If you buy property, at the current levels which some consider a bubble, you may see heavy losses when property prices fall. Same for stocks. Some investors have gravitated towards high-dividend paying blue chip stocks - this again carries risk of losses should the stock price go down.

The artificially low interest rate environment and negative real interest rates can lead to devastating consequences if one is not careful.  Take the example of property. A speculator looks at the current 1.5% home loans and goes out to buy a $1M, The property can fetch a rent of roughly $3500 a month giving a nominal yield of 3.6%. He figures all he needs to make money is to overcome $15,000 interest every year. He goes and take a 50 year loan. Happily pockets $1,000+ extra he collects in rent over and above his instalment payments. When the real interest rates normalises to positive, the home loan rates will be 5%, he very quickly finds himself in an unhappy situation with money flowing out of his pocket. He now tries to unload the property and there are probably thousands like him and that will pressure property prices downwards.

A very recent example is India which saw negative real interest rates, the Indan govt pushed up interest rates to fight inflation and Indian stocks and property plunged[After Mumbai flats, land prices too nosedive].



Inflation has remained moderate only because the global economy is weak - central banks have printed trillions without runaway inflation occurring as feared by many economists. However, we have seen rising inflation even as the global economy muddles along. There is a real risk of inflation [Quasi-fiscal policies pose inflationary risks, warns IMF paper] even as global growth remains anemic. When central banks shift to contain inflation, interest rates can rise and those who over-leveraged and assumed interest rates remain low will find themselves in trouble.


Property prices in Singapore has risen much more than median income in recent years. This rise is fueled by large foreign influx as well as the expansion of level of housing debt in Singapore. Buyers are persuaded by low interest rates and long loan tenure (now 50 years) to take up a large debt. The long the current situation persists, the more painful the deleveraging becomes when interest rates goes up. For those who want to avoid the pain, avoid the risk of taking too large a loan and don't be seduced by the artificially and historically low interest rates. Plan your finances based on more reasonable assumptions of where interest rates will be several years from now and avoid those super long 35-50 year tenures unless you have more efficient use for the money you already have in the bank.

125 comments:

Anonymous said...

Investments have to be made based on your knowledge of the economy and where u believe where interest rates are heading. For the past 5 years, doomsayers have warned against interest rate rising and advise people against investing in property etc. See what happens? Interest rates has continued to stay low and in fact has fallen lower since 5 years ago. Those who did not invest lose out in the end. The world economy has changed. The western developed countries are printing money and having expansionary monetary policies. Singapore cannot unilaterally increase interest rate. Interest is expected to remain low for the forseeable future. Therefore investment decisions should be based on that assumption. And investment decision should never be based on interest rates alone.If countries allow interest rate to rise, it may also signal global economy is recovering resulting in greater consumer confidence as well which means prices may not crash.

Lucky Tan said...

Anon 11:07,

Yes, doomsayers can be wrong for a long time. The one time they get it right, those who ignore them will be dead.

Ideally interest rate rise slowly as the global economy strengthens, that will provide support for all speculaive risk assets including property. However, what happened in India tells us you can have high inflation and a so-so economy and you have no choice but to raise interest rates.

It is a myth central banks can steer the economy like you steer a car. They won't get to always do what they want and their hand can be forced.

History is not just the last 5 years of rising home prices. History shows us whenever home prices rise too fast vs income, the outcome is nasty. We should at least be cautious.....even if we think the unlikely is not possible

Anonymous said...

"The people who should take up these 50 year loans are people who don't really need these loans. The people who shouldn't take up these loans are the ones who need to stretch their mortgages to achieve affordability."
Lucky Tan

That's why the bank is offering these 50 year loans for the many rich foreigners who come here and don't need such loans.

It is an indication that there are too many rich people in Singapore, so the banks, being business savvy, know there is a market for such loans.

Of course there are silly and financially uneducated Singaporeans, especially those younger ones who are not rich, who thought 50 year loans make things more affordable for them. Of course, although not their target, the banks don't mind them as customer.

Anonymous said...

I am starting to believe that perhaps 60% of Singaporeans are rich.

When the majority are rich, even when the place is overcrowded and there is wide income gap, it will still be very peaceful and stable.

Anonymous said...

Some of the 60% may not be rich yet. But they know that under PAP system, if they are talented, they will be able to become rich.

That's one reason why they vote people even though they are not rich now.

Ng Eng Hou said...

Stretching the loan period from 20 years to 50 years is like a green light asking people to speculate. My reading is once the US economy recovers meaningfully which I estimate should be around 2014-2015. By then, interest rate will have to go up. 2014-2015 is also the time when Singapore's housing supply balloons.

Some people who made in the early few rounds of speculation are waiting to jump in, after seeing that housing prices are still quite sticky, just simply give up and go in again. The longer this low interest rate environment stays, the more, it will suck in many more people to come in, so that when the crunch comes, this next housing slump may be worst than what we saw during the 1997/8 Asia Financial Crisis.

Just have to be careful and don't get carried away by this unsustainably low interest situation.

Kaffein said...

Most young couples and professionals do not understand the kind of debt they will be in when environments change (global crisis, raise in interest rates, etc).

Afterall, think about the not-too-recent US situation when people borrowed to buy their dream house. Yet I can foresee young couples rushing to take up these loans. Have we still not learnt our lesson?

Btw good advice Lucky.

Kaffein

Anonymous said...

"once the economy recovers"
Did it collapse in the first place?

"when rates start to rise"
From a base of 0.2%, how much will a 1000% rise be?

All countries and economies are interconnected and all rates will remain low. Period

Even if they rise, it will be gradual and it can even drop once there are are symptoms of zero growth.

Doom sayers are the ones preventing people from doing the right things.

Anonymous said...

"Some of the 60% may not be rich yet. But they know that under PAP system, if they are talented, they will be able to become rich.

That's one reason why they vote people even though they are not rich now."


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This is an illusion or selling you a dream by those at the top that you can one day make it too. Sure, some do make it, but most (90%) don't. Most of it is luck or who you know; hard work and talent have very little to do with it.

ah lian said...

50 yrs hor, is HALF A CENTURY leh!

But I kinda think youngsters would be keen to take up the loan coz...

Remember how we crave to have our own house when we're in our twenties? Esp when we've started working and are independent and have friends who're not schoolmates and just don't want to stay with parents?

HDB flats are out (unless you got married early) coz singles can only buy when they're 35, while private property are too expensive.

But now, private property are suddenly "affordable"! Even to those who have just started working. It'll be really TEMPTING for them to take up this half-a-century loan.

And Remember how heck care we are in our twenties? I think most won't worry about paying off the loan till they're in their 70s. They may even feel excited about selling off their property and making $! Worst case scenario? if they lost their jobs and had to sell their property, they can move back to stay with their parents. So, no worries, speculate away!

Report from ST in Oct last year: "Private home price rises may have moderated over the past two years but National Development Minister Khaw Boon Wan said on Wednesday that the property cooling measures will stay." Simi property cooling measures? Apparently lifted. Maybe their property developer frens complained?

I have no issues with people speculating with private property. But this half-a-century loan can be used for HDB flats also! How come our "subsidised" public housing is sooooo affordable that citizens NEED half-a-century to pay for them?

When public housing prices sky-rocketed, the gahmen tried to bluff their way out with "$1k can buy flat". And then chided citizens for NOT buying within their means. Hahaha. Now, they'll be able to brag that "$1mil flat also affordable"!!!

Always, the gahmen do v little to actually solve the problems faced by citizens but instead focused all their energy on curbing discontent! Do you notice their speeches are always phrased this way: "We must do more TO CONVINCE the citizens our way is best"? Rather than "We must do more as our way is contrary to citizens' well-being, and in the long run, our country's"?

I'm beginning to think it's better the gahmen DON'T try to solve any problems anymore. Coz they're only making things worse! Since the problems started with their own flawed policies, but they'll NEVER see, much less acknowledge, any flaws, they only end up doing more of the same bad things!

Ghost said...

It is asking for trouble. There's no way interest rate will stay at 1.7% for the next 50 years. A lot of people has the mistaken impression that the longer the loan is, the better it is. That's wrong because we are already at low levels. Even if they rise gradually (and they will rise), it would still be a problem because you are taking a 50 year loan. If you have a problem re-financing a 10-20 years loan, think of the headache you have with a 50 year one!

Anonymous said...

When times is good, you can invest and divest your assets easily with the expected price.
When the time is not in your favour, you will be squeezed to a last drop.
The longer period of mortgage is favour much to the lender than the borrower
Live and invest within your means.
Do not over stretch especially in this prolong period of low interest rate and coupled with the money-printing environment.

Anonymous said...

What happened to Japan in the 1980s where mortgage payment terms were stretched to 100 years to ensure that people can afford their homes cause the housing collapse which till today has not recovered.
If the government does not do anything to control the property prices, we may be the next Japan. Good luck!

Anonymous said...

The problems that Europe faces will take decades to solve. DECADES
The problems that USA faces will also take decades to solve. DECADES

Interest rates WILL REMAIN low because of these problems. The system cannot take rates higher than 4%.. there will be ZERO growth.

Inflation will remain high, above 4%.

That being the case, nobody wants to leave cash in the banks anymore since inflation will erode any earnings.

So, where will you park your savings?.. in commodities, metals, shares or property.

This is the NEW economic situation that we are in. It is real and anyone who says interest rates will go up is not wrong... but it will not go back to 5%.

The people who subscribe to the view of:
"this is dangerous"
"you will be caught"
"you will have problems"

are taking a very prudent view without factoring this new economic situation. The old rules do not work anymore and it will be DECADES before anything will change.

Believe in the financial mess that USA and Europe are in. They are the ones that affect the rates and it will remain low.

Anonymous said...

With bonds interest at less than 1%, I don't see how I can invest and make money.

Or you could try the Eurobonds.

Anonymous said...

Look for corporate bonds, but you will need hard cash of minimum 250,000 to start.

Otherwise, buy LTA or HDB bonds..
ask your broker for prices.
Bonds held to maturity is simple.

Dont worry about the market talk about yields dropping etc.. these are for people who trade in bonds.
You will not trade in them becos you want the coupon regular payments and get your full capital sum back on maturity.

Avoid perpetuals.. they have no maturity dates and that means the company just pays you interest but may never see your capital.

Go for short term bonds below 10 years maturity. When you get the capital sum back you can consider other investments.

Those with CPF, leave it alone if you can. but if you take it out, ask for an amount that is sufficient for 1 year.. leaving the rest behind to earn interest. Whe next year comes, do the same again.

Invest in 2nd hand car.. hold for 1 year and sell.. it will be free use. The price will go up sky high. Watch.

Buy VICOM shares.. it is one of 2 companies that do car checks for cars above 3 years old. monopoly business, sure earn dividends.
Their equipment never change one.. so capital expense is very low.

Anonymous said...

Interesting article. It highlights a major flaw in our economic system which is created by Goh Keng Swee. In the past, he created a economic model which is very similar to the Japanese system where interest rates are kept low to make it cheaper for companies to invest. Done at a time when our economy was still developing, it was very useful and beneficial.

The problem starts when the economy reach a more developed state because the low interest rate strategy lead to asset bubbles like what we saw in the Japanese stock mkt & the Japanese property mkt. When it finally burst, it led to a very long stagnation of the economy.

U may think that incur low rates are due to global factors like QE, etc, but where economies do well like in China & Australia, their interest rates went up to control the asset mkt although rates were coming down in the more economically depressed countries like US & UK. The rates only came down recently in China when property prices started moderating.

Mkt cannot escape fundamentals for too long and the fundamentals in the pty mkt is that we hv a rapidly declining population with a lot of pties that are bought with mostly CPF money which is meant for retirement. I am too scared to predict what happens when median age moved from slightly above 40 to 50 something.

The stock mkt is also sending a very strong signal because pty counters trades at a very signicant discount to liquidation value. If u are very bullish on the physical pty mkt and u $15 bil to spare, u can take capitaland private, sell off slightly more than half of the assets and have the remainder for free because liquidation value is estimated at $5+ per share vs the stock price which in high $2 range

Lye Khuen Way said...

The important take away as mentioned by Lucky is this :
Those who do not need a loan will be happy to go forbthe 50 years deal,
Those who could ill afford the risk involved, but need to stretch, will sign up and probably end up bankrupt in time to come!
Why our local bank can be that enterprising and to me un-ethical really sadden me.
Emulating the Japanese after their Property Bubble with a two generation loan is not a smart move.

Anonymous said...

so you do not advocate shares in dividend growth companies like Dairy Farm, Singtel, Starhub and well managed reits like Frasers Centerpoint Trust and Ascendas REIT? all yielding 5-6%

Anonymous said...

Don't quite agree with the post on 23 jul @ 19:25 on perpetuals. The first perpetual security was by DBS Bank with a yield of 6%. Invested quite a lot into it. Got almost 6 % dividend plus 5% cap gain. They redeem it 10 yrs later.

Maple tree just did a perpetual with indicative of 5.625% yield. Demand was so hot for such good names that there were $4 bil chasing a $600 m issue. Yield drop to 5.125%. Next day traded in the OTC mkt at 1+% higher. If u can get issues like these and make 1% every day for a low risk invt, u will make 300+% on yr capital within a yr. of course u can't get deas like these every day of he yr.

The good name perpetual are usually subscribed by insurance companies and they usually insist of clause after 10 yrs that will motivate the issuer to redeem. In mapletree's case, there is a 1% step up in yield after 10 yrs.

Like stocks of course, there are perpetuals out there which are not worth touching because they are not structured to the investors advantage

Anonymous said...

It is said that the 10 commandments is written in stone.

Well, there is one more: CPF

It has grown to a very complex animal and there are too many interconnections to many other areas.

Therefore, whatever, however, whoever intends to do anything about it will require a long time to unravel it.

Properties being bought with CPF is just that. One can unlock the money with reverse mortgage. No need to wait to sell.

The property market will remain stable and will not have any bubbles.. its so easy to understand why.
Its all controlled by the Gov.

Will they shoot their own foot?

You actually believe that the Gov will allow the market to collapse?
Just like USA & Fed and the banks:

Its too big to fail.

Anonymous said...

In the current Singapore scenario of low interest rate plus high inflation, the best financial strategy is to go into debts. However, make sure that 1. u deploy the funds wisely to earn a good return. 2. u have the ability to pay off the loan whenever the bank call in.

Anonymous said...

Property market maybe over invested. Why do people invest in property? To make money right?

Eventually, they would want to cash out. When do you think this would happen in a massive wave?

If the demand and supply is managed wisely and support resale market, then there is no panic.

I think the threat is in the rental market. With the govt tightening foreign labor, we will have an over supply of property for rent and those who depend on rental to service their mortgages will be in trouble.

Anonymous said...

Singapore pty mkt has collapsed twice before and it is a bit presumptuous to think that the govt is so powerful tt it can control the pty mkt when US, Japan, Ireland & Spain have failed. Should the Euro crisis escalate and employment gets hit, how are the $500k loans (the norm nowadays) going to b serviced. That is perhaps why the stock market is signaling that property prices may fall based on the discount that it is assigning to almost all pty counters

Anonymous said...

"...presumptuous to think that the govt is so powerful tt it can control the pty mkt when US, Japan, Ireland & Spain have failed"
Unlike the other countries, Singapopre allows the use of the CPF to fund the purchases. This is one pillar that is holding up the market.

During the property 'crisis' in 1998 (asian financial thing?) the Gov apporved the use of funds from the CPF special account ( remember?)

Singapore is a small country with only 1 party.. one with vested interests in property.

It will not collapse and neither will there be a bubble.

So many people are involved in this that allowing natural market forces to work would be suicidal.

Its too big to fail.

The USA, UK, Europe the original capitalist countries have shown that "too big to fail" is a concept that is real and they will not allow it to happen.

Singapore, in this instance is in the same situation.. the CPF is too big to fail.

Anonymous said...

Whoa. So optimistic. I hope u r not wrong but maybe my pessimism stems from the fact tt I am old enough to hv been offered a $700 k house in 2003 tt owner bot for $1.5m in 1996. If a pty sells for less than half of purchase price, it is a crash in my book! So much for yr theory tt mkt wldn't crash because Singapore has CPF funds. Mind you, employers CPF contribution was higher back then.

At or near the peak of the cycle, it is always difficult to tell when the turn will come. But at least the HK govt dare to call the current state of their pty mkt a bubble

Anonymous said...

"Investments have to be made based on your knowledge of the economy and where u believe where interest rates are heading. For the past 5 years, doomsayers have warned against interest rate rising and advise people against investing in property etc. See what happens? Interest rates has continued to stay low and in fact has fallen lower since 5 years ago. "


Lucky tan,
you can have very stupid people commenting on your site. The above shows the kind of stupidness only PAP trolls can think of.

Five years ago, PAP can do what its like giving themselves millions dollars rise, insulting the public with twisted logic, saying how affordable very expensive hdb can be. See how currently PAP is increasingly losing in power compare to five years ago ?

How about the important findings that Chris Balding that Singapore government has using creative accounting in coverup the loss of more than hundred of billions ? Five years ago, did you see this report ? The fact that govt continues to ignore chris's research has already concluded one thing, that chris has credibility and proven correct. Our nightmare is just the beginning, and end of PAP is forthcoming. Their desperate attempt in trying to convert as many as foreigners to vote for them can only backfired.

Anonymous said...

According to URA statistics, the base year used is 1990.

Since 1990 property prices have 'crashed' 3x: 1997,2001,2009.
These years dipped below 1990 prices.

Each 'crash' lasted less than 1.5 years before they literally shot up beyond base year 1990.

My point here is: Yes, agreed, crashes will happen, Yet they do not stay crashed for long.

Why?.. because the Gahmen will stimulate it.

Meanwhile many are concerned with people who buy properties and cannot meet the repayments.
Good that other people are concerned with other people.

These people will have to manage their funds. The gahmen has in the past allowed Special account in the CPF to be used, this will help. Some will have to foreclose.

A)Are we THAT concerned with those that have to foreclose?

B)Property here is a very valuable asset and will continue to be so.

C)Crashes do not last for more than 1.5 years

D) You & I are merely waiting, hoping that it DOES CRASH.. then we gleefully pick up the best deals.

Baldings, and whoever can go uncover any bones but the gahmen will not engage. Why? only 2 reasons:

1)It is untrue
2)It is true

In either scenario, the gahmen's silence will allow confidence to be status quo.

Remember that the Lehmen Bro fiasco created low confidence in credit markets. We live in a monetary system where GOLD is no longer used as a reserve.

Confidence is what holds the entire world economy up. Take that away and you & I will have to plant tapioca trees to survive.

And you need property to do that.

Fear mongers have ulterior motives.

Anonymous said...

Interest rates are low is REALILTY, not ARTIFICIAL. In these days of high inflation and low interest rates, it might make sense to borrow (at very low rates less than 1%) to invest in something that at least gives you (i) rental yields of 4% (ii) capital appreciation in line with inflation of 4%. Times have changed and the low interest high inflation environment will stay for quite a while. If you do nothing, you might be worse off. If you can't change them, might as well join them. Individuals like you and me cannot control the market dynamics. We just have to move along. And low interest rates and high inflation is REAL, not artificial.

Anonymous said...

Re: Fear mongers have ulterior motives.

So do fortune tellers.

The Lehman Brother crash was not caused by Fear Mongers, they were caused by people who encourage other people to make bad financial decisions with their property based on the conviction that "property price will always rise!", while conveniently forgetting what happened to Japan (or simply believing that similar thing could not happen to them because they are in the US of A).

Regardless of the state of the economy, there is always such thing as "too much debt".

Anonymous said...

The link below shows a chart going back all the way to 1960

http://www.singaporerealestate.info/property%20price%20index%201960%20to%202010.htm

1990 price is irrelevant when you buy in 2012. If you had bought a pte pty during the last peak in 1995, you would have to wait 15 to 16 yrs until 2010/2011 before you recover your capital. So don't know how u can conclude that a crash last for no more 1.5 yrs.

A safe invt compounding at 5% would hv resulted in a doubling of capital over the same period vs just recouping your capital in property invt.

Those of us who have seen friends go almost bankrupt and are still recovering lost capital from the last crazy property rush, tend to be a little cautious when we see every mother and son talking about property in every coffee shop & hawker centres that we go to.

We have no ulterior motive other than to force younger people to be aware of the risk of buying pty when it has more than doubled. You, on the other hand, may have lots of properties to unload and you have to bang the gong to make sure that prices continue to go up.

It is also very telling that the true blue property gurus like Kwek Leng Beng/Wee Cho Yaw have not been very active in the market acquiring landbanks lately. At the very least, an intelligent investor will pay heed to what the smart money is doing.

Anonymous said...

Anon 24/7/12 12:43

That graph is very telling. Nice sharing!

I have to say that in your scenario, the capital can't even be recouped if expenses like property tax, maintenance fee, insurance, bank interest, and etc. over the 15 years are also taken into account.

Ema S. said...

Dear Lucky Tan, help me out will ya? I have an issue understanding the HDB and the CPF policies. Can you contact me? BTW, i love all your blogs. You have successfully swung my vote around from the last GE. Looking forward to hearing from you.

Anonymous said...

"History is not just the last 5 years of rising home prices. History shows us whenever home prices rise too fast vs income, the outcome is nasty. We should at least be cautious.....even if we think the unlikely is not possible"

Typical kiasu and kiasi Singaporean meme at work.

Anonymous said...

The 50 year loans are introduced because many single foreigners, PRCs, pinoys, etc. and blue-ic PRs in Singapore have a problem now in getting a HDB flat. Most are tired of staying in rented rooms in HDB. They're tying to get a place of their own in these 40 sq. m shoebox condominium apartments. Some of these singles chose these shoeboxes because they don't want their malaysian parents to come and stay with them.

Yes, believe you me. My malaysian PR friends welcome these 50 year loans as they just need to pay little instalments monthly and have more cash in the pocket cos they plan not to stay in singapore throughout these 50 years.

In short, Singaporeans are short-changed.

Anonymous said...

"This is an illusion or selling you a dream by those at the top that you can one day make it too. Sure, some do make it, but most (90%) don't. Most of it is luck or who you know; hard work and talent have very little to do with it."

I agree with the above anon. Singapore is not about meritocracy or talent. Just ask any mat on the streets and they'll tell you how marginalised in terms of the opportunities they are getting...and we're seeing more and more christians in position of authourity in this country. Why is that?

Anonymous said...

Bcos Christians are smart.

Anonymous said...

I agree with Lucky.

And those that think that interest rate, held artificially low, is normal do not understand the cause of the present global financial crisis.

Keeping interest rate artifically low is akin to robbing the savers. The concept of a central bank that controls important thing such as money is fundamentally wrong. It is even uncontitutional. It is corruption between bankers and politicians to its ultimate.

After the present financial crisis unwind, it is extremely likely that a new financial system will arise, not base on fractional reserve system, but base on more sound monetary concept such as resource based. At that point onward, it will not be possible for any human authorities on earth to manipulate imterest rate anymore. Interest rate will take a rate that the market deserve it and not through artificial human intervention that causes more and more bubbles and debts.

However, there are a few ways we will arrive at that point from here and we can only sit back and watch at the moment.

Anonymous said...

Anonymous said...
Bcos Christians are smart.

24/7/12 17:43

Not because they are smart. More so because they are shameless and stupid.

You have to be an idiot, and a moron, to give away your money and labor freely to the man behind the pulpit because he said that the money goes to god and his kingdom
What is this god and kingdom? Only the emperor with no clothes or patrons of IMH can see

Lye Khuen Way said...

Among my cohort, there is a view that UOB must have been 'tasked' to offer this crazy 50 years mortage so that in the very likily event of the property bubble collapse, there not need be too many "run road" or suicides as the 50 years option would be a lesser evil for those already over-stretched.

The bench mark of a family yearly income x 5 has been lost these days, especially when ministers had insisted thst HDB are affordable.

A Rolls-Royce is also affordable, given a 50 years loan at super low interest rate, no?

Anonymous said...

No. The 50 year loan is for foreigners and not Singaporeans as the government faced a lot of rejections from PRs to switch to citizenship. The next option was to draw them in to stay longer with a longer loan. This is also futile, really. The key thing is to get these foreigners to give birth and not Singaporeans. This is also futile.

Anonymous said...

Christians are smart? Yeah, right. And unicorns and sky Gods still exist in the 21st of science and teachnology. I find the most hypocritical folks have always been christians.

Anonymous said...

Caution. Prudence.

Words that are meaningless to young hot blooded people.
They want:

Car
iPad
SmartPhones
Latest handbags
Homes to show off

Delaying gratification is a dirty word.

My son bought a 2nd car for $55,000. 3 years old.
He tells me its affordable
Loan spread over 7 years.

His salary is $2,500.

Do I help him? off course not.
He is responsible for his own life and financial health.

I did point out about marriage, wedding dinners, matrimonial home.
But it fell on deaf ears.
He even bought a Prudential policy that sees him paying $2,200 annualy.

Fool and idiot?

What to do?.. my genes are in there somewhere.

Then there are another million fools and idiot out there that provides a living for bankers, car dealers, insurance agents.

That said, the property market will not crash. More fools & idiots enter the workforce.. be it Citizens or not.

Anonymous said...

Sympathise with u. On a salary of $2,500 and he thinks he can afford a 2nd car?

Part of the problem is that we have become a consumption society and we have a never ending need to buy things we don't need.

The other part of the problem is a weak MAS which has allowed credit to grow in an uncontrolled manner by allowing car loans to stretch to 10 yrs, housing loans to stretch to 50 yrs and for credit card companies to grant u a credit line of $100,000 even when u don't ask for it.

Not too long ago, car loans do not exceed 5 yrs and banks cannot give out credit on cards so liberally. Lee Hsien Loong took over MAS and everything changed. We have become such an over banked country that everywhere u go, someone will be peddling credit to you either in form of credit cards or easy credit facility.

Funny how we never learn from other countries like US where financial institutions' profits are always the highest just before the downturn when debt limits are maxed out.

In US, they blamed Alan Greenspan for keeping interest rates too low for too long because it was the chief cause of the housing bubble that ended up with the great recession.

In Singapore, our PM has liberalized the financial mkts so much that banks are falling over each other to give u debt. What's strange is that he is allowing even more banks to set up shop here to make the situation worse. I used to be upset with the earlier leaders because I felt that they try and overprotect you. Looking back I think that it is much better than now where they leave you to die and all they want is higher COEs and higher property prices so that they can pay themselves better both in the govt and in Temasek & GIC.

Anonymous said...

Christians are smart because the law is blind

Anonymous said...

These laws are English laws. Christians influenced laws

Anonymous said...

The interest rate can't be kept continuously low for many years to come.

The world financial system has already reached a cross road where change must take place voluntarily or if not market force will force it to do so. To think that central banks have the power to manipulate is naive. Yes...they can keep interest low and print more money to kick the can further down the road but the final reckoning won't be too far off either.

So, folks that believe that inetrest rate can be kept perpetually low to support property market really don't understand history and the present dynamics that is related to it.

Anonymous said...

"...So, folks that believe that inetrest rate can be kept perpetually low to support property market really don't understand history and the present dynamics that is related to it"

Yes, it will not be perpetual, and it will go up.

The question is how much? Market forces is always present but this is a game for big boys who have access to endless amount of money.

USA will, in the many decades forward, will remain the king in setting rates, and the rest of the big boys will follow. Who else?

China? no way. Its too young in this game and they are not willing or able to be the interest rate setter.

From a low base rate of 0.2%, lets say the rate rises 1000%
How much will the rate be? 2%

Eventually trickles down to the home loan borrower it may be 4%
( yah, banks are real loan sharks)

If your home loan now is $4000 every month ( in cash & CPF )
this new rate of 4% will add:

$160 per month.

Do you see anyone jumping of the roofs with this increase? ( mind you.. increase of 1000% )

This doom & gloom picture is just jealousy, that people have missed the boat and the belief that being a contrarian is fashionable.

Japan is still "struggling" after their housing bubble burst. Its been more than 15 years.. do you see, hear people jumping off buildings? Their rates are zero.

This is a new world order and old thinking, referencing past events may be entertaining, but interest rate will remain below 5%.

( with 2000% increase from 0.2%, it will remain below 5%.)

Back in 1997, my housing loan rate was 6%.. You really think it will go back to that?. Gimme a break.. all the negative mindsets here... not thinking with empirical approach.. just emotional.. "If the rates go up.."

Anonymous said...

The law is not blind, just bias. They know what they are doing is partly evil and partly good.

They have to constantly trick their minds by worshipping the supposedly good in order to remain sane.

There is just too much blood in their hands. And the innocent blood on the ground is crying out for justice

The law ignores their cry. Hell has no mercy on those who are ungrateful with crumbs.

The rivers flowed from the blood of these men and women.

The haunting cry of liberty reverberated through chambers of justice but no one is there.

Anonymous said...

Don't know much about the economy and interest rates.

But the stock market charts tells me that we likely have hit at least a short term top on Thurs 19th July.

I'm short the market as of 23rd July.

Let's see if I can out do all the high priced talents at Tummysick Investments.

Anonymous said...

Some of the posts by the property bulls here reminds me of the arguments for internet stocks to continue going up during the dot com boom. World has changed and history wouldn't be good predictor of the future, etc. Warren Buffet was considered a dinosaur for missing the run and not knowing how to value internet stocks.

At the end of the day, the key question is what is the risk/reward of a property investment at current levels i.e. how much can it go up from here after running up more than 100% (bearing in mind govt will come up with more pty control measures if price goes up too much)and how much can it drop in case something goes wrong and all the supplies once built, cannot be withdrawn.

Anonymous said...

Good call on shorting the market on July 23! Heavy selling in most counters except of high quality yield stocks and F&N. 43 million shares were bot at 8.08. Looks like the takeover fight for APB happening at F&N level

Anonymous said...

Still don't understand yet!

After this crisis ended, there won't be BIG BOYS to set interest rate anymore.

The cause of the present global financial crisis is that there is a corrupted authority corroborating with politicians to control money-either through manipulating interest rate or printing money.

My point hasn't get across to some people who harp about a new world system. This system has been around for centruries since we are off the gold-standard and the present global crisis has proved that it is a failure and the present system will end soon.

So...no more low interest rate because no one will set interest rate in the new system that is going to replace this totally cracked corrupted system.

And, our stupid gahmen still want to loan 40 billions to IMF to perpetuate this system that soon to end?

Anonymous said...

Sorry..it should be

"My point hasn't get across to some people who harp about a new world system. This system has been around for decades..."

Anonymous said...

Agreed that the current system needs a revamp etc.

Think about interest rates set way back in 1990. US treasury bonds.
They mature in 2020 ( 30 year bills).
How about 30 year bills issued in 2009 during QE1? when will they mature?

Revamping this is not a walk in the park. Changing our Gahmen would be easier.

You cannot go around changing rates at whim & fancy.. it will take a bloody long time. How long?

How about another 10 years? the fastest that world leaders can agree on the changes?
For example, the price of gold was fixed by the US at US$35 an once during the Bretton Woods discussions. That was in 1947.
It was until Nixon's era sometime in the 1970s that US$ links with gold was dropped.

How many decades?

Not so easy to change these things.. a lot of self interests and preservation at stake here.
Keeping the interest rates low...ultra low is here to stay for a couple of decades.

If you think rates will go up, which country will be the hero to start?

China? Japan? USA? UK? EU? Canada?

Which is the likely candidate to start this rate hike rolling?

If and when they do raise rates, how much do you think their economy can bear?

I agree, EVENTUALLY rates will rise.. but 1000% rise from 0.2% is gonna be 2.2%.. what, where is the "danger?????"
Suddenly, you cant afford?

Then yes, you should be worried.. not the rate but your original financial position.

Anonymous said...

I understand what you are saying.

But the current monetary system may not last for more than another 2 more years.

None of the countries that you mentioned with take the lead to raise interest rate. But rather, the present monetary system will be forced to change in 2 years time and then there after, nobody has a say about interest rate.

It is only fair that savers, the remaining that survive the coming carnage, reap a better market force dictated interest rate since most of the wealth will be destroyed and what remains is precious and will be well sought after resource to rebuild.

Anonymous said...

The exchange rate mechanism to handle inflation instead of interest rate (which is tagged to the US rate) creates a lot of problem for our society. The low interest rate stimulate demand for cars and houses and this somehow increase price of cars and houses and what's not and thus increasing inflation. It is sad that our economists in the universities are not doing their job to understand all these and instead waste taxpayers' money chasing after stupid uiversity ranking.

Anonymous said...

Because US$ is the reserve currency, coupled with the fact that they have corrupted the system by setting up an authority (i.e Central bank) that has umlimited power to printing new money. That gives them the power to dictate interest rate.

Otherwise, interest rate can only be decided by lenders and borrowers. And if money cannot be created out of thin air, the scarcer money is, the higher will be the interest rate. No authority has the right to control this. It is immoral.is like stealing from the savers.

And we are already hitting a brick wall with the current system. One more last effort to kick the can down the road (i.e. QE3 which is QE Infinity) and the game will be over.

Anonymous said...

"...One more last effort to kick the can down the road (i.e. QE3 which is QE Infinity) and the game will be over."

This will continue.

Do not worry about the game being over. It wont happen within the next 20 years.

There is not one single world leader that has the courage to begin the series of change required.

The system has developed into one big interconnected ecology that only complete overhaul is the only solution. Surgical, precision strikes will not cure this.

Which country dares to be the first to back their own currencies with real worth and stick to it?

All reserves are held in US$. Going back to gold would create problems worse than what is happening now. Tell China that her 1 trillion US$ reserves ( held in US treasury bills ) is worthless and that she must now back the Yuan with solid gold bullion.

Short of world war 3, the can will be kicked as far as there are legs.World leaders have vested interests in doing so.

Dont hold your breath.. more money is comming, but you and I wont be getting one cent of it.

Anonymous said...

Of course money is coming. This is their only viable choice at the moment until they are forced to change system.

You think US$ will remain as reserve currency? Not so, countries have been establishing agreements among themselves to use their own currencies for trade instead of using US$. So, system is dynamics and is not what you think will always remain under a dictatorship control.

Change will come not voluntarily from the authority of any one country but it will be forced. It just requires the pain suffered to exceed a certain threshold. You think the present state can continue for 20 years? It is getting worse each. Each money infusion (QEs) are getting less and less effective. What do you think the last one, which is near, QE3, will last?

And we are just talking about interest rate affecting property price. what about other factors such as much higher employment rate or paycut?

Anonymous said...

It should read
====

And we are just talking about interest rate affecting property price. what about other factors such as much higher unemployment rate or paycut?

Anonymous said...

And yes...

China isn't stupid, they know that their 1 trillions US$ is at stake. Even if the system isn't going to change to one linked to resource, it is going to be inflated away. So they have been divesting their reserve "quietly", sneakingly trying to buy up resources all over the world. In contrast, only the Singapore SWF buy up sick banks and is prepared to infuse another $40 Billions to IMF.

A system that is gold linked isn't going to have more problem. It is a system that allows most average hardworking people to work and save and then manage to retire comfortably within their lifes.

Anonymous said...

All trade is quoted in US$

OIL
COTTON
WHEAT
METALS
GOLD

Even your credit card transactions done overseas is first converted to US$ then reconverted to your local currency.

USA has the largest arsenal of nuclear weapons. It has the largest aircraft carrier fleet. It is also the largest consumer of all things on this planet (still)

Europe is sinking.

China is still struggling to find its way to manage its population, infrastructure and politics. They have no clout in affecting monetary systems.

USA is the only dead horse to beat.

That said, interest rates WILL REMAIN ULTRA LOW.

Yes, until the threshold of pain is reached then something will happen.. but the leaders of today are young men and women bred on high octane lifetsyles.. that threshold will be decades away when they grow older.

Until then, its more printing and monetary easing. Watch when the German parliament and their courts approve the European mechanism.. another printing press will be created... this time its the EURO.

Lots of money coming man! tons and tons of it.. means more supply.. which any econs student will recognise... lower rates.

You dont need Jim Rodgers or CNBC to tell you this.

RATES WILL REMAIN ULTRA LOW.

Thanks Lucky, for this to continue.. its a bit off the original.. best

Singapore dividend stock said...

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Thanks

ex dividend calendar Singapore

Anonymous said...

When I say pain, I meant pain in the general people, not pain in the leaders.

We know they are going to print money and that is why interest rate can remain low. Greece and Spain can't print money and the interest rate for their bonds rised above 7%. So, we all agree that the power to print money allows them to keep interest rate artificially low.

However, you forgotten something. This time, printing of money is showing up as inflation. It is already more than 5% in many countries despite lethargic growth. And it is still not the end, it is set to rise even higher and highest since more QEs (coordinated worldwide) are coming.

How do you think when there is hyperinflation? Do you think people will still use US$? At that point, drastic rehaul of the system will occur and it won't be too long. Each QEs have been less effective and only add more inflation. 15 trillions of debts in 10 nations are maturing in 2 years times. What will be the effect of US$15 trillions QEs on inflation.

Anonymous said...

Countries are already preparing to move away from US$ because they all know that they will print and its value will be inflated away.

http://www.china.org.cn/opinion/2012-04/28/content_25262323.htm

Anonymous said...

China has been saying that they want to move away from US$ for a while but the euro crisis led them to switch their holdings from euro to US$. As long as china wants to continue with its export economic model and export to US (world's largest consumer), they will continue to receive more and more US$. Here's the dilemma for them - if they use the US$ they receive and buy say other currencies & gold without buying any US$, then the RMB will go up a lot against the US$. If that happens, then their export industries will become uncompetitive and hundreds of millions of Chinese workers will lose their jobs. The chinese have very little choice and they know it. That's the reason why they continue to hold a lot of US$ in their reserves. Once in a while, there may be a big headline that they pare down their US$ reserves. I suspect it is more to warn the US govt to get their govt deficit to more reasonable level & for placate domestic criticisms when the US$ drops when there is QE

Anonymous said...

Yes, debts are maturing soon, within the next couple of years.

That is why the Germans are in court debating if it was legal for Merkel to have agreed to create the Euro Funding mechanism. This Fund will operate exactly like the Fed having authority to issue more money. Prior to this, the Europeans did not have any such facility.

So, we have a new printing press waiting to go online within a year.More money.

The experience with Greece showed that debts can be cut. "hair cuts" as they are called. If it can be offered to one nation it can be done for Ireland, Portugual, Spain, Italy and anyone else. Another way of kicking the can down the road.

So with 15 Trillion in debt, regardless of it being in EURO or US$, discounts can be given and more money printed, and kick the can further.

When will it end? ha! ha!.. why should it? immoral? unethical? tell that to the Fed. Tell that to all the politicians that are in agreement with the bankers!
Who is gonna stop them?
Batman? Ravi?

As for inflation, look closely around the world. Which countries have inflation above 4%?

USA = 1.7%
UK = 2.4%
Germany =1.7%
China = 1.7%
Japan= 0%!!

Only India has 7% and that is because of their import duties. This is the same for Singapore, because of the silly inclusion of COE of vehicles and the property market.

So, what hyperinflation is there?

The situation in Singapore is very unique since our currency is managed by MAS using exchange rates.

WTO showers praise on Singapore's open economy and ability to ride out the financial crisis. That is just plain good advertisement.

But do you feel any wealthier?
No, neither do I.

Interest rates will remain low.

Property will continue to rise.

Anonymous said...

Not everybody agree with the official inflation data you state above.

1 US$ used to exchange 1.7-2 S$ not too long ago. It is 1 vs 1.25 now. Poeple must be kidding to think that inflation rate is 1-2%.

Some institutions keep another independent set of inflation data. If you take the avergae of the very optimistic and very pessimistic data, it is about 5-6%.

http://www.nypost.com/p/news/national/price_clubbed_in_jRGGyS9wKfAKjxAs0bkVnO


The present system can't persist longer when general poverty kept piling up. However, as I said, I don't know how changes will take place. It could be new political force. It could be revolution....it could be voluntarily evolution...

Anonymous said...

What I dun understand is why is the interest rate in singapore one of the lowest (fourth lowest) in the world?

http://www.deposits.org/world-deposit-rates.html

Is the interest rate kept artificially low? If so, is it too low for Singapore's own good?

Chongsian Lee said...

Hi Lucky Tan,
I was told that in year 1998, if someone took up a loan and later if the housing loan dropped. And if your outstanding loan is higher than 80% of the current housing price, you have to top up the amount in 1 lump sum to make the outstanding loan lower or equal to 80% of the valuation, even that you have a strong ability to continue paying the loan.
Is it true? this is the main reason for the housing price dropped in 1998.

Anonymous said...

@Anon 25/7/12 12:10,

>If your home loan now is $4000
>every month ( in cash & CPF )
>this new rate of 4% will add:
>$160 per month.

I know this blog is old but we should point out that the math logic is incorrect, in case someone read his comment on the above. If a person has $500k loan, simplistically, 4% extra interest will cost him extra $20k a year, or > $1600 a month. And NOT $160!

The Anon better rework his financial plan & numbers.

Anonymous said...

@ChongSian Lee 17/8/12 13:12

I used to work in a local bank. This is how it works - you took up a mortgage loan say 60% ( 2nd loan taken by Singapore citizen) or 80% (1st home loan) of the valuation price or selling price; whichever is lower. Bank naturally take the property as a collateral for the loan. At any time, ( good or bad economy) bank must have the ratio of collateral to outstanding loan amt be 60% or 80%. ie, the value of property acting as collateral must not be less than the outstanding loan amt - this happens during the last pty crash... People who bought in the peak n borrowed 80% found their pty halves the original amt they paid for it. Then, the bank will start asking these people to top up / lumpsum pay down their outstanding loans... Those who can't afford might have their property foreclosure...

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