Say goodbye to the goblin … Sub-prime spook was exaggerated, could vanish by Halloween: Analyst

IT was the “goblin” that wreaked havoc on markets the world over but come Oct 31, investors may be celebrating Halloween for more reasons than one.

The goblin that is the impact of the United States sub-prime mortgage problems could go away as early as then, and growth would return by year-end in time for Christmas, said Mr Ken Fisher, CEO of Fisher Investment.

Saying the sub-prime spook had been exaggerated, Mr Fisher likened it to the scare caused by the Y2K millennium bug and the avian flu warnings, where the perceived risks were greater than the actual threat to the global economy.

“The fact is, if every sub-prime mortgage that could possibly default defaulted, the most it could do is slow down US gross domestic product some,” he told the media on the sidelines of the Forbes Global CEO Conference here yesterday.

“The US economy may slow down, but so what? Because the US is the biggest economy, they tend to think that when the US gets a cold, the world is going to get pneumonia. This, today, is wrong,” said Mr Fisher, a long-running Forbes Magazine columnist with a reputation for accurately forecasting market trends such as the bursting of the dotcom bubble in March 2000.

He could well be proven right again. The International Monetary Fund (IMF) is reportedly raising its world economic growth forecast upwards to 5.3 per cent from the 5.2 per cent it indicated in July.

This is even as it expects the US economy to grow at a slower 1.9 per cent, versus July’s forecast of 2 per cent, according to Financial Times Deutschland, citing unnamed sources.

The IMF expects global growth next year to be 5.2 per cent, and US growth to pick up speed to 2.8 per cent. As for China, the forecast this year has been raised from 11.2 per cent to 11.5 per cent.

With the US’ GDP of US$13 trillion ($19.8 trillion) contributing to only about a third of the US$42 trillion global GDP, the shrinking US economy should actually be led by the performance of the larger non-US economies combined, Mr Fisher said.

Even so, the two economic powerhouses — China and India — would still be affected by a big slowdown in the US economy, said Nobel Laureate Michael Spence, speaking separately on the sidelines of the conference.

But things could be different in 10 years, he added.

“In 1981, when China grew at 9 to 10 per cent, it didn’t make a bit of a difference to the global economy — it was a tiny little economy. Now it is rather large,” said Prof Spence, who won the Nobel Prize in 2001 for economics and is Professor Emeritus of management with the Stanford Graduate School of Business.

The 10 per cent growth enjoyed by China last year is equal to about 2 per cent of the US GDP, and the professor believes that at current exchange rates, the Chinese economy could be worth up to US$4 trillion in the next three to four years.

While the longer term outlook may still be healthy, Mr Tharman Shanmugaratnam, Minister for Education and Second Minister for Finance, warned at a separate event yesterday: “The re-pricing of risk in financial markets is probably not over. There is also increased uncertainty in the near term for the US economy, which could impact the outlook in Asia.”

Speaking at the opening ceremony of a new office for SG Private Banking, he added: “It is too early to say what the economic impact in Asia will be. Should the US economy slow down sharply, Asia will certainly feel the drag.” 
 
Source : Today – 11 Sept 2007

More market panic ahead as banks ‘fess up’ on sub-prime – Confidence in banks exceptionally low, says JP Morgan Asia

Be prepared for more market panic as major banks continue to ‘fess up’ to their holdings of US sub-prime mortgage securities over the next several months, said Ivan Leung, JP Morgan Asia chief investment strategist.

The world’s financial markets are in turmoil as worries over exposure to the US sub-prime mortgage debt has led to a freeze in the credit market with global central banks having to step in to provide liquidity.

Around the world, banks are under intense pressure as investors and analysts cast a spotlight on their exposure to sub-prime, or high-risk, property loans in the US through their investments in collateralised debt obligations, known as CDOs.

There is little information on the amount of CDOs held by banks, which has led to ‘exceptional low’ confidence in the banks, said Mr Leung in an interview last week. In the past month, European and Asian banks including DBS Group Holdings and United Overseas Bank have revealed their CDO holdings.

‘(US banks) originate it, they package it, they sell it – but it doesn’t necessarily mean they hold on to it,’ Mr Leung said.

He said that, often, US banks do hold on to some of these CDOs in structured investment vehicles – off their balance sheets – so there is no transparency on their holdings. He described this as scary.

‘European banks, and to a lesser extent – so far as we have seen – Asian banks, were purchasers of these products,’ Mr Leung said.

‘So the crisis in confidence is not so much that there could be a 80 billion or even a 200 billion dollar loss of sub-prime; the confidence issue is that we don’t know exactly who is holding all this debt,’ he said.

And we don’t really know the prices of all this debt, and how much of it will be subject to default, he said.

‘The confessions, you see them once in a while; that’s why we think this is an issue, because over the next three to six months, some banks will begin to confess that they have some on their balance sheet, and some off-balance sheet, but clearly right now, nobody really has a true picture of what’s going on. ‘It’s the worst of all situations – nobody knows.’

Mr Leung expects the markets to veer between confidence and ‘blind panic’ each time there is another disclosure.

Bank shares skidded on Aug 24 after DBS and three of Asia’s biggest banks revealed bigger-than-expected exposure to the US sub-prime mortgage crisis.

DBS said that it had US$1.6 billion (S$2.43 billion) in holdings of CDOs – more than the S$1.3 billion disclosed on Aug 7.

An additional 1.5 million sub-prime borrowers may fall behind on their mortgage payments as introductory interest rates on those loans rise this year and next, US Federal Deposit Insurance Corp chairman Sheila Bair said last week.

Among the 2.5 million sub-prime mortgages with interest rates that are expected to be reset this year and next, ‘1.5 million will be in financial distress’, Ms Bair said.

Getting any kind of centralised data collection will be very challenging, she said.

JP Morgan estimates that US$600 billion worth of adjustable rate mortgages will be reset over the next 12 months.

But, following the adage that there are always opportunities when risks are high, Mr Leung said that one way for investors to take advantage of the current extreme volatility in the markets is to buy ‘plain vanilla’ short-term structured notes with capital protection.

The notes are designed to give a high payout even if the stock markets move only slightly higher, he said. ‘When volatility is as high as it is right now, we can go for simple structures,’ Mr Leung said.

The notes that JP Morgan is offering are meant for investors who share the view that the US mortgage crisis will not lead to a recession. Lower growth, yes, and therefore moderately bullish stock markets still.

Mr Leung said that JP Morgan was positive on undervalued markets such as Thailand and South Korea and favours Singapore and China companies which have superior corporate and economic fundamentals.

Source : Business Times – 10 Sept 2007

Property loans: local banks turn cautious

Banks are tightening up on the way they lend money for buying homes while the property market is coming off the boil, housing agents report.

With the world’s financial markets in turmoil, following a crisis in US mortgage lending to people with bad credit records, bankers in Singapore say that when it comes to assessing home loan applications, the ability of borrowers to pay is paramount.

The trouble in the financial markets, coupled with the ‘ghost month’ here which makes the third quarter traditionally a slower period for home sales, has led to asking prices easing, especially in the secondary market, agents say.

Citigroup economist Chua Hak Bin says: ‘Banks have definitely become more cautious.

‘Just look at The Straits Times classifieds – they’re flooded with speculators trying to offload.’

Dr Chua reckons that property prices have cooled about 5-10 per cent.

Knight Frank managing director Tan Tiong Cheng has a different take on the situation; he says prices from actual deals that he has seen have not slipped. ‘That impression may have come from those ridiculous (asking) prices,’ he said.

He said the apparent increased wariness of bankers was a reaction to the volatility in the stock market which was affected by the US sub-prime mortgage crisis. And bankers’ ‘natural instinct’ is also to be more prudent, said Mr Tan.

Generally, banks continue to finance a maximum of around 80 per cent of the value of a property, despite rules allowing up to 90 per cent funding. And some housing agents say banks have become stricter in valuations and are lending less than 80 per cent of the value of the property.

‘Banks control the valuations,’ said one agent.

The agent said feedback from buyers is that banks can’t match the valuations and they have to cough up more cash for the purchase.

Especially at times of rapidly changing prices, the notional value of a property as set by expert valuers can be adrift from what buyers are actually called on to pay.

Banks say they rely on their panel of experts appointed from property consultant firms for valuations.

Some also have in-house valuers to provide a view of the overall market.

‘In general, we will take the valuations by the appointed valuer as fair value,’ said Gregory Chan, OCBC Bank head of consumer secured lending.

‘However, where new benchmark pricing is concerned, we will take the average. Although valuation is a key component, a borrower’s creditworthiness remains the primary consideration in determining loan eligibility and some factors taken into account include income level, credit history and repayment ability.’

Helen Neo, Maybank Singapore head of consumer banking, said the bank does not discriminate against high-end properties, especially where purchase price is supported by valuation.

‘However, we would take a more conservative stance in terms of loan quantum should the purchase price exceed valuation significantly,’ she said. ‘However, for loans amount of $2 million and below, we require the borrower to use our in-house valuer.’

A DBS spokeswoman said: ‘In assessing loan applications, we accept valuations professionally done by reputable certified valuers who are on the DBS panel. In addition, we consider the buyer’s ability to repay and the purpose of the purchase.’

At DBS’s second-quarter results briefing in July, chief executive Jackson Tai said the bank had been taking a ’stringent view’ on credit quality and had ‘avoided any concentration’ in a single development or district.

At the very high end, foreigners make up a significant portion of buyers – and banks have been seeing more of such borrowers.

Edmund Koh, DBS’s head of regional consumer banking, said there had been an increase in foreigners taking up loans, from 5.6 per cent of the total new loans book last year to 7.8 per cent for the year to date. United Overseas Bank executive vice-president Eddie Khoo disclosed last month at the bank’s secondquarter results that foreigners account for about 10 per cent of home loans. Overall, too, the bank was being cautious, given the market conditions.

‘As you know, property prices are moving up quite rapidly,’ said Mr Khoo. ‘But what’s good is that we are seeing less than 10 per cent of loans being booked (with) more than 80 per cent financing. We have a good portion of customers putting in more cash and equity in the purchase of property.’

Dr Chua said that banks were becoming more cautious in extending property loans to foreigners, especially in cases where prices were sizzling and people were buying for investment.

Anecdotally, he was aware of several cases where people could not get valuations to match their purchase prices.

For the mid-tier segment and if it is for owner occupation, banks are still more relaxed in their loan criteria, Dr Chua said.

Latest official data show that borrowing by homebuyers was up 8.1 per cent in July, accelerating from 6.9 per cent in June.

Mortgage growth had been sluggish for several months despite the Singapore property boom.

In the 11 months to March, mortgage growth in Singapore remained under 3 per cent even though home sales surged.

A key factor for this is the popularity of deferred payment schemes offered by developers, and many of these projects are approaching completion.

Dr Chua expects mortgage growth to reach double digits by the end of the year.

UOB and DBS said their Singapore mortgage book grew at 15 and 14 per cent respectively in the first half of this year.

There is little similarity between US lending practices and those in Singapore, where the banks have a good buffer in their exposure to mortgages. Although the Monetary Authority of Singapore eased financing limits from 80 per cent to 90 per cent two years ago, most banks said the bulk of their loans are booked at not more than 80 per cent financing.

They also said that investment properties do not account for more than 20 per cent of total loans.

Source : Business Times – 05 Sep 2007

Banks get flexible with property needs

The short supply of available office space in the central business district is driving financial institutions to be more flexible when planning their real estate needs.

“Currently, banking and finance tenants occupy 36 per cent of all Grade A stock in Singapore, or close to 500,000 sq m,” said Justin Kean, associate director of Asia Pacific occupier research at consultancy Jones Lang LaSalle (JLL).

“This figure has increased by approximately half since the beginning of 2006.”

Added Mr Kean: “This implies that much of the recent rental movements in this market can be attributed to the banking and finance sector.”

A JLL white paper on real estate trends in the banking and finance sector showed financial institutions are exploring ways to create a better work environment, besides just looking at physical locations for expansion.

Advancements in data storage and communication technology have enabled the separation of front and back-end operations. The latter are then moved to cheaper locations.

To optimise office space, some banks here are considering the possibility of hot-desking, or allowing staff to work off-site or from home.

Such arrangements, together with the adoption of flexible work hours, would give the banks the flexibility to absorb minor shocks in the market, which might result in the reduction of staff numbers, without downsizing their real-estate portfolio.

JLL said, in line with the rise in corporate social responsibility within the sector, more real estate managers are making it an important part of their portfolio management strategy, including selecting eco-friendly buildings.

Source : Weekend Today – 25 Aug 2007

HSBC offers home loans with payment holiday

New borrowers with HSBC’s variable rate home loans are to be allowed to defer their repayments for a month each year, six months after taking out a loan.

The bank, which announced the new ‘payment holiday’ feature this week, said each deferred monthly instalment will be added to the outstanding balance on the loan, which means customers who choose to defer a payment will need to pay higher subsequent monthly instalments.

Wendy Lim, the bank’s head of consumer banking in Singapore, said the option of a payment holiday would give customers greater flexibility in managing their finances.

A customer can take a one-month payment holiday for each anniversary year of the loan, but the first deferment can be made only after six months. The monthly instalments will be revised after each payment holiday.

The bank has also launched new home loan packages directly linked to the three-month Singapore interbank offered rate or Sibor, a common benchmark for banks’ loans to businesses here.

Interest rates charged on these home loan packages will be the published three-month Sibor on the first business day of each month, plus 0.7 of a percentage point, a bank spokesman said. In recent months, other banks here have also introduced mortgages based on publicly available benchmark rates.

Source : Business Times – 23 Aug 2007

MAS paving way for banks to buy mortgage insurance

The Government is drafting new rules to pave the way for banks in Singapore to take up mortgage insurance for the first time.

Such insurance protects banks from the risk of borrowers defaulting on their mortgages, which make up a major chunk of banks’ loans portfolio.

Some banks may implement mortgage insurance later next year, say industry players. This may be in anticipation of a surge in new mortgages when more properties are completed and home owners on deferred payment schemes take up loans.

Deferred payment schemes, which allow homebuyers to delay paying the bulk of a new home’s price for up to a few years, have been popular here.

In response to The Straits Times’ queries, the Monetary Authority of Singapore (MAS) said it is ‘drafting the required legislation’ for mortgage insurance. This follows the consultation paper it issued last October that set out the proposed regulatory framework for the business.

Almost every bank in Singapore has been in talks with mortgage insurers to cover borrowers with higher loan-to-value (LTV) mortgage, typically above 80 per cent. LTV refers to the loan amount as a percentage of the property’s value.

Mortgage insurance, which is available widely in other markets such as the United States, Australia and Hong Kong, protects residential mortgage lenders against losses if borrowers default.

There are no mortgage insurers operating in Singapore but the MAS said it has ‘received indications of interest from several internationally renowned’ providers to open outlets here. Two firms thought to be eyeing the Singapore market are Hong Kong Mortgage Corp and one of the US’ largest mortgage insurers, Genworth Financial.

The MAS declined to say when the legislation will be put in place but some bankers expect it to be ‘quite soon’, especially with concerns about defaults on higher-risk home loans.

‘Against the backdrop of the subprime home loan crisis in the US, there is inadvertently more pressure on banks to take precautions with their mortgages,’ said a banker.

While the risk of defaults is generally low here, there is still a danger that an economic downturn may affect the ability of borrowers, especially those on deferred payment schemes, to service their loans, he added.

Citibank Singapore business director Tan Chia Seng also noted that ‘if property prices keep rising faster than increases in income, it may make sense for banks to consider additional tools for managing default risk, such as mortgage insurance’.

Banks now must set aside higher amounts of capital for mortgages with an LTV of more than 80 per cent.

But the banks will be able to reduce the amount of capital they set aside by buying mortgage insurance.

The MAS said it is ‘prepared to apply a lower capital risk charge for high LTV loans with mortgage insurance as a risk mitigant’.

Banks may also decide to pass on some of the mortgage insurance costs to borrowers in the form of higher interest rates. In Hong Kong, all banks, including DBS, must take out mortgage insurance for loans with an LTV above 70 per cent.

But the MAS said it ‘does not interfere with banks’ decisions about whether or not to use mortgage insurance to mitigate mortgage risks’.

Even with the upcoming regulations, it is unclear whether mortgage insurers will pile into the Singapore market.

One Hong Kong player, PMI Group, noted that selling mortgage insurance in Singapore could be ‘quite difficult’.

This is because ‘mortgage pricing is quite low in Singapore and banks are very comfortable with the lending at the 80 per cent LTV,’ said Mr Albert Ting, PMI Hong Kong’s country manager. PMI is a reinsurer to Hong Kong Mortgage.

Another mortgage insurer, Radian Group, is understood to be in talks with several banks in Singapore. But its plans may be put on hold as it is currently facing massive losses of well over US$460 million (S$701 million) in sub-prime loan investments, said one source.

Source : Straits Times – 22 Aug 2007

CPF stretched to provide cover for ageing population

The guaranteed interest rate under the CPF scheme will rise by one percentage point for amounts up to $60,000, in an effort by the government to make retirement savings last longer.

In addition, the age at which drawdowns on the Minimum Sum can begin will be raised progressively so that the savings can stretch further.

The government will also legislate the re-employment of workers, to take effect from 2012. Initially companies will be required to re-employ workers up to age 65, and later up to 67.

For the CPF scheme, some form of annuity will be made compulsory for those below 50, said Prime Minister Lee Hsien Loong yesterday at his National Day rally speech.

Mr Lee said the CPF Board will pay one percentage point more on the first $20,000 of Ordinary Account balances, and on up to $60,000 on a member’s combined accounts comprising the OA, Special, Medical and Retirement Accounts.

Mr Lee said: ‘I think we must improve the returns on the CPF. And I think our main focus is to help the lower and middle income groups.’ Half of active CPF accounts have less than $45,000. These are members who are working and contributing to their accounts.

With $45,000, Mr Lee said: ‘… you are not poor but I would not think it is wise to strongly encourage you to go and play the stock market. Why? First, you don’t have enough savings. Secondly, you may not have the expertise. Thirdly, you should not expose yourself to excessive risks…’

The CPF Board will be taking the route of enhancing the existing risk-free framework. More than half of the active members will get one per cent more on all their balances.

The $60,000 of funds can still be used for housing and medical expenses. But it cannot be invested through the CPF Investment Scheme.

This is expected to cheer the majority of members, who appear to prefer the safety of the guarantee. Private sector investment fund managers and insurers, however, may be disappointed as a higher guaranteed rate raises the risk-free bar which their funds have to beat, even if it applies only to up to $60,000 of funds.

Investor education efforts to date have set out to encourage individuals to step out of the comfort zone of a guaranteed rate.

The concern has been that a relatively low guaranteed rate of 2.5 per cent may not keep pace with inflation or cover the risk of a shortfall in funds.

As at March 31 this year, a total of $25.9 billion OA funds, and $5.7 billion of SA funds were invested in a mixture of stocks, funds and insurance policies. There is still another $57 billion of OA funds and $23.8 billion of SA funds that are uninvested.

For amounts in excess of $60,000, members are still free to invest through CPFIS.

Mr Lee said a percentage point more in the annual interest rate will make a big difference. A young man who starts work at 21 earning $1,700 a month, and buys a four-room HDB flat, will earn about $20,000 more in interest by the age of 55.

The hike will cost the government $700 million initially. The cost will rise as members save more in the CPF. The cost, said Mr Lee, is equal to the entire government grant to the HDB every year of $750 million.

There will be no change to the concessionary HDB loan rate formula.

On drawdowns, members are currently required to set aside the Minimum Sum at the age of 55. This is drawn upon from the age of 62 in monthly payments. But if the account is drawn upon too early, a retiree may outlive his savings. Based on the current scheme earning 4 per cent in interest, the annual income from the Minimum Sum lasts 20 years, after which the account is depleted.

Deferring the drawdown by a year will earn the account more interest, and make it last two more years till 82. But more people will live past 82, in particular women, said Mr Lee.

As the government legislates re-employment until 65, the drawdown age must be raised progressively as well.

In 2012, the year when re-employment of workers will be required, the drawdown will begin to rise, and will reach 65 by 2018. Members who are currently 58 or older will not be affected. For those 53 and younger, the drawdown age will go up to 65.

Mr Lee said the move may not be popular. ‘But we have no choice. People are living longer, we have to work longer, and we’ve got to start drawing on the reserves later. Therefore we have to start moving now.’

For older workers in their 50s who are affected by a later drawdown age, a one-off bonus interest will be paid to their Retirement Accounts. A bonus will also be paid to those who voluntarily defer their drawdowns, even if they are currently 58 and older.

Annuities are a solution to the need for an income in retirement, said Mr Lee. But few people opt to convert the Minimum Sum into an annuity as Singaporeans do not understand annuities.

Source : Business Times – 20 Aug 2007

UOB clarifies its home loans stand

We would like to clarify your report, ‘UOB tightens up on home loans in face of dizzy market’ (BT, Aug 9).

Firstly, the article mentioned that ‘UOB has been lending only 80 per cent of a home’s valuation, even though most banks are willing to stump up 90 per cent of the selling price’. This is inaccurate. The bank is a market leader and aligns itself with market practice.

Thus, if any customer submits a loan application for up to 90 per cent of the property’s valuation, whether the bank grants the loan will depend on factors including the creditworthiness of the borrower as well as the merits of the property. The bank would consider the loan application favourably if the borrower meets the bank’s criteria.

Secondly, the article also highlighted that ‘UOB has also decided to put its own cap on valuations, which appear more conservative than the current market prices’. The bank does not have a policy on valuation caps.

Market conditions change very quickly and if there is a valuation cap, adjustments in valuations will have to be made as well. Thus, any cap in valuations will only complicate the loan and approval process.

The article also incorrectly quoted Eddie Khoo, UOB’s executive vice-president, personal financial services, as having said ‘we require a higher cash portion’. He did not make such a comment.

He was also quoted as having said that ‘more than 80 per cent of UOB’s home loans were for owner occupation and that foreigners accounted for 20 per cent of home loan customers’. This is inaccurate. He said foreigners account for 10 per cent of home loans.

For the record, UOB grew its Singapore home loans book by 15 per cent for the 12 months ending June 30 2007, outpacing the industry average.

Source : Business Times – 13 Aug 2007

UOB tightens up on home loans in face of dizzy market

Wee Cho Yaw has done it again, though only time will tell if he was ahead of the curve.

At a time when property prices have started to touch giddy heights, the chairman of United Overseas Bank (UOB) has reportedly asked his institution to tighten lending criteria.

Since late last month, UOB has been lending only 80 per cent of a home’s valuation, even though most banks are willing to stump up 90 per cent of the selling price.

UOB has also decided to put its own cap on valuations, which appear more conservative than the current market prices.

Mr Wee, arguably Singapore’s sharpest banker, stepped down as chief executive of UOB in April this year and was succeeded by his oldest son, Ee Cheong.

UOB’s stricter lending criteria mean that some potential borrowers have been turned away. A UOB mobile sales banker complained that she has been losing sales but has told prospective customers that she can try to appeal on their behalf. UOB is believed to be the first bank to make its lending norms more stringent.

At UOB’s second-quarter results on Tuesday, Eddie Khoo, executive vice-president, personal financial services, said that less than 10 per cent of the bank’s new home loans this year provided more than 80 per cent financing.

‘We require a higher cash portion,’ said Mr Khoo.

He said that more than 80 per cent of UOB’s home loans were for owner occupation and that foreigners accounted for 20 per cent of home loan customers.

For certain hot projects in the prime districts such as Orchard Residences, Scotts Square or St Regis Residences, UOB has put a valuation cap of $3,600 per square foot (psf), even though sales and sub-sales have been reported at much higher prices.

Scotts Square, launched last week, saw 169 units sold at an average price of $3,983 psf. The highest price paid was $4,430 psf for a one-bedroom apartment on the 41st floor, of the 338-unit project, said Wheelock Properties, the developer.

The median price for St Regis Residences on Cuscaden Road, developed by City Developments, is $3,713 psf, according to Urban Redevelopment Authority data. In June, it was reported that a unit went for $4,635 psf at the 173-unit St Regis Residences which has only 15 units unsold.

At selected projects in the upmarket districts 9, 10, 11 and in Marina Bay, UOB is said to have set the valuation cap at not more than $2,600 psf.

Sub-sales of The Sail @ Marina Bay are being advertised at prices ranging from $1,900 psf to over $3,500 psf. Caveats lodged show that units were sold from prices as low as $1,249 psf for The Sail which was first launched in 2004.

Even for the recently launched Fontaine Parry near Serangoon, UOB is said to have a valuation cap of $834 psf. According to sole agent Knight Frank, the first phase of Fontaine Parry, which was sold out, saw prices starting at $850 psf and some sub-sales are now going for $900 psf.

For the first half of 2007, UOB grew its total home loans book 18 per cent, outpacing the industry average, to $20.7 billion. DBS’s group home loans rose 8.75 per cent to $26.1 billion. UOB said Singapore mortgages were up 15 per cent while DBS reported an almost similar growth of 14 per cent.

In August 1995, Mr Wee said famously: ‘I don’t think the property market will collapse but prices have reached a high and the upside is limited.’

Although still sympathetic to first-time property buyers or HDB upgraders, he said the bank had more stringent criteria for speculative buyers and those investing in second properties.

The strategy meant that UOB lost some market share in property loans.

UOB that year reduced financing to only 65-70 per cent of the purchase price of a property, compared to about 90 per cent in 1992, just before the height of the property frenzy which peaked in 1996 before crashing.

Singapore’s property market subsequently went into a long depression, which lasted for the most part of the decade until 2003 and sent many borrowers into negative equity – where the size of their loan was larger than the value of their property.

The bank is opting for caution again.

Said a spokesman: ‘UOB has always taken a prudent approach in its credit assessment process. A loan application is assessed on the creditworthiness of the borrower as well as the merits of the property. We would consider the loan application favourably if the borrower meets our criteria. From time to time, the bank reviews its home mortgage policies, and if necessary, adjustments may be made to align with market conditions.’

Source : Business Times – 9 Aug 2007

Property loans rising in boom market

As the property boom chugs full steam ahead, banks’ exposure to the sector has been steadily widening and their risks may be deepening, especially as a result of the prevalence of deferred payment schemes.

As at end-June, housing and bridging loans as well as loans to the building and construction sector made up nearly half – a high of 47 per cent – of the more than $200 billion loan portfolio of commercial banks here, according to preliminary figures obtained from the Monetary Authority of Singapore (MAS).

This has been a steady increase from the 33 per cent from about a decade ago (end-1996) around the height of the last property boom, and the 42.5 per cent at the start of the current property boom at the end of 2002.

In absolute terms, the housing and bridging loans were worth some $64 billion as at end-June, compared to about $63 billion six months ago.

Loans to the building and construction sector stood at about $30 billion as at end-June, an increase of 21 per cent from a year ago, said MAS.

Not surprisingly, the run-up in property prices has led to an increase in housing and bridging loans (the consumer loans), but this rise has slowed dramatically from the early years of the current boom.

Right after the current property boom started, housing and bridging loans surged 17 per cent between end-2002 and end-2003 to reach $52.2 billion. Since then, the increase has slowed to about 2 per cent for the first six months of the year and from end-2005 to the end of last year, the value of housing and bridging loans increased by only 2.2 per cent.

Housing and bridging loans’ share of the total loans of commercial banks – while still the biggest – has also declined over the last couple of years. Their share of total loans, after building up over the years to a peak of 33.8 per cent at end-2005 has dipped over the last one-and-a-half years to about 32 per cent as at end-June this year.

What is perhaps more significant for the financial sector is that the loans to the building and construction sectors including loans made to developers have been expanding much faster over the past few years and have been taking up a bigger share of total loans extended by banks.

Loans to developers have an added element of risk because of the deferred payment scheme which allows home buyers to pay only a fraction of the property’s price upfront.

Loans to the building and construction industry, after contracting between 2004 to end-2005 as the construction industry went through the doldrums, surged 14.4 per cent to $26.3 billion as at end-2006. The further growth to $30 billion as at end-June this year represents a growth of 21 per cent from end-June 2006.

‘As MAS has previously said, the use of the deferred payment scheme by property developers introduces additional risks to the developers, and to the banks which finance these developers, because property purchasers under this scheme are not subject to credit checks by developers.

‘This is unlike property purchasers who apply for housing loans and are subject to credit assessment by banks. MAS expects banks to exercise prudence in their financing to the property developers and be fully cognizant of the additional risks from the use of deferred payment schemes,’ a spokesperson from MAS told BT.

Last week, during the release of MAS’ annual report, Heng Swee Keat, the authority’s managing director had said that MAS is keeping a close eye on developments in the property boom. As Singapore’s central bank and the regulator of the financial industry, MAS’s concerns with regard to the property boom are how rising prices impact inflation and the risks posed to the stability of the financial system.

Mr Heng had noted that the banking sector’s exposure to the property and construction sectors is ’significant’ and that housing and related loans have grown over the last few quarters. ‘So for both of these reasons, we will be watching developments in the market very carefully.’

The Urban Redevelopment Authority (URA) price index for private homes, released on Friday, has risen 13.5 per cent for the first half of this year.

URA figures also revealed that developers sold 9,385 uncompleted private home in the first six months of this year, less than a thousand units shy of the record 10,363 units sold through all of last year.

Source : Business Times – 30 Jul 2007