Goh Eng Yeow asks if banks should tighten lending guidelines now.
IT MAKES sense to ask ourselves if the current terms extended by our banks for home loans are too generous.
If I recall correctly, these guidelines were relaxed, along with the scrapping of other anti-speculation measures like the capital gains tax on property sales profits, to fight the then scary free-fall in home prices after the bursting of the dotcom bubble bust in 2000.
But the loose monetary policy now practised by the US Federal Reserve to fight falling prices in the United States has the effect of depressing interest rates elsewhere in the world, where economic conditions are not similar to the US.
Given the risk of bursting a rather big bubble in our housing market, one has to ask if it is still sensible to stick to the same guidelines which were used to combat our own deflationary downward spiral in home prices. Will we be sowing our own seeds of destruction by doing so?
Banks will, of course, say that they have a sophisticated risk management system to screen borrowers to ensure that such a similar disaster like the US sub-prime crisis does not take place here.
Examples extended by bigger and more well-established global lenders offer no consolation.
In Britain, HBOS had recklessly lent on the UK mortgage market and this forced it into a shot-gun marriage with Lloyds Bank late last year, as the global credit crunch took a turn for the worst. The merger succeeded in dragging Lloyds into the morass as well, and it had to be rescued by the UK government.
It is also interesting to delve into some of the strings attached by the banks here to ensure they get their money back.
Last week, I had a good laugh as my lawyer friend regaled me with the tales of the measures taken by the banks to lend themselves comfort on the creditworthiness of their borrowers.
She had a couple of cases where the bank had insisted on a third person giving an “open guarantee” to the home loan offered to the young couple buying the flat. This string was attached because the bank was fearful that, given the size of the loan, the monthly mortgage payment might stall if either or both of the couple should lose his/her job.
“In the past, it was usually the father, the mother or the in-law. But now, I see an unmarried sister or brother standing in as guarantor for the loan as well,” she said.
I wonder if the guarantor knows what he is getting into. He probably signs on the bottomline, as a gesture of goodwill towards his sibling who is getting married – and he is not anticipating that he will make any payment at all.
But he has made an open guarantee and he is liable for any further future borrowings if his married sibling takes up a further loan on the flat. It certainly sets the stage for future family discord.
On a more serious note, there was this observation made by a friend who used to work in Dubai whose building boom has come to a screeching halt because of the global credit crunch.
Each day, he said that there were 4000 to 5000 people leaving Dubai as the jobs market dried up. What some foreigners did was simply throw their car/house keys at the airport, as they caught the next plane out of the city.
With his observation comes this question: Are foreigners getting the same generous access to home loans as Singaporeans? There is hardly any hold over them if Singapore hits an economic bump and they simply flee back to their home country. Will the banks then end up becoming unwilling owners of their condos and HDB flats?
This morning, I had a Cai Jin column published on the same subject asking if we will end up suffering a subprime style crisis because of the way that the cheap credit is fuelling our housing boom.
One reader took issue with me for saying that in some countries such as China, home-owners have to make full cash-payment of their houses, claiming that many first time buyers there could get loans from the Chinese banks.
China is a huge country, and his observation may only hold true for a few big Chinese cities, and a very small segment of the population. Suppose that just 1 per cent of the Chinese population successfully get a housing loan, this will work out to 12 million people.
But this detracts from my argument that banks in Singapore are about the most generous in the world in requiring borrowers to fork out only 10 per cent down payment in order to qualify for a home loan.
I have another example to offer: Last year, a friend of mine went across the crossway to Johor Bahru to open a current account at the branch where he already maintained a savings account for many years. To his surprise, he was asked to get a guarantor – and that was just for opening a checking account. He was not even applying for a loan.
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