Wednesday, June 13, 2012

Bursting of the property bubble

Many people think that the Government will be able to control the property market to keep it from a collapse. I have seen the property market burst a few times - so I shall share with you what is a possible scenario, and why the Government will not be able to stop a collapse.

Suppose there is panic with the Euro or the US dollar, due to the economic crisis in Europe or America. We have read about the big and unsustainable deficits and the printing of money to support the economy. Many analysts are predicting various types of possible dire consequences.

You may say - well, that is Europe and America. It should not affect the Singapore property market. In 1998, during the Asian Financial crisis, interest rate shot up to 20 percent in Singapore. People, who borrowed money from the banks were suddenly asked to pay back the loans. They have to sell their properties at distressed prices.

If there is a financial crisis in 2012, which is possible, the people who have to dump their properties at distressed prices could be the foreigners and local speculators who were over-stretched and had bought expensive properties at astronomical prices. When they dump their properties at distressed prices, can the rest of the property market hold up?

During the 2004 crisis, the Singapore property market was saved by a smart move by the Government to allow borrowers to re-pledged their properties to the banks at higher priority over the CPF savings. This allows the bank to report the mortgages as safe, so there was no need for the properties to be foreclosed.

The next crisis could be different, as the properties prices are much higher now, and many borrowers could be foreigners or local speculators who do not have this CPF cushion. This is just a random thought - and I might be wrong!


8 comments:

Tan Kin Lian said...

Read this article about central banks printing money. http://www.cnbc.com//id/47792734. It must lead to high inflation and high interest rate. Prepare for the bursting of the bubble.

Tan Kin Lian said...

Here is another worrisome news
http://www.cnbc.com//id/47790499

Anonymous said...

Remember the recent report by the Boston Consulting Group?

There are lots of millionaires per household here.. 1 in every 6 homes.

Although a collapse will wipe all this out, I am certain the Gov will have very creative ideas to reflate assets.

They cannot allow values to drop. they will lose the mandate super fast.

They will surprise you & me.. again.

Only in Singapore. Watch this space.

Anonymous said...

Hi Mr Tan, can you state your source for 20% rates? My memory during 1997-1998 is that the highest rate is only 10%. Thanks.

Tan Kin Lian said...

@11.23 pm
If you wish to ask me a question, you should at least state your name. I do not reply to Anonymous people.

Xianlong said...

We now already have 7 billion people on this planet.

UN Environment Summit warned that global food demand gonna double by 2030. 30% of sinkies are elderly by 2030.

High food prices will force many to sell flats to feed themselves. A collapse is imminent.

Anonymous said...

It will take a global economic crisis that trigger economic weakness for more than 1 year to see any chance of the property turning sustainably down. Job losses, rising interest rates, rental rate declines, vacancies and retreating specuvestors and foreigners will see to that. And if a downtrend goes on for a few years, you will see the "property always go up" mentality change. It will be a vicious cycle. When it finally rain, it will pour.

Leslie Chua said...

There was a crashed of 30% for private properties back in early 2009 6 months after lehman incident. It quickly rebounded after a short while due to QE 1/2 from fed reserve where they started printing trillions of dollars from thin air and adjusted the interest rates to zero %. Alot of not so financial savvy Singaporeans thought that properties here are resilient against any external storm. But they did not know that central banks in US are actually preventing our properties from crashing. When the coming crisis hits, we can be sure of the full potential because these central banks already used up all their bullets to prevent any further downturn. Printed trillions and also zero % interest. There is nothing much they can do to contain the crisis.

Beware of the coming credit crunch while will make 2008 look like a dwaft. Interest rates will hike due to the large amount of liquidity printed since the last financial crisis.

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