It is official: Singapore property bubble has burst.
According to the Singapore Real Estate Exchange, 3 out of 10 HDB flats are sold below valuation price. 8 areas particularly affected are Bishan, Geylang, Jurong West, Punggol, Sengkang, Sembawang, Woodlands and Yishun. This news signal the beginning of the property bubble burst which have seen the resale price index hitting 200 in 4Q 2012 [Source]. The current resale price index registered 2 consecutive quarters of falling, with the third fall expected in 1Q 2014.
This fall is in sync with Forbes financial columnist Jesse Colombo who recently published a technical analysis predicting that Singapore is heading for a financial crisis like Iceland [Source]. The PAP, through the Monetary Authority of Singapore, however refuted the renowned financial analyst who rose to fame for correctly predicting the 2008 global financial meltdown, to which Jesse published a follow-up article accusing the PAP government of being in denial mode [Source].
Given that more than 25% of the mortgage loan in Singapore is based on floating interest rate [Source] – a loan scheme which guarantees interests as low as 1.8% or way below HDB concessionary loaning rate for 2 or 3 years, after which the homeowner will need to get a new loan package called “refinancing”. The question lies with what happens when these private banks started raising loan interest rates.
When mortgage interest rate is going to increase, we will start to see more people starting to sell off their house in a bid to downgrade. Housing prices will plunge further to the point where we see some homeowners servicing a mortgage loan that is below valuation price i.e. a $300K mortgage loan on a house worth only $250K. When that disparity happens, we will start to see more people defaulting on their home loans. In 2008, the HDB announced there were 33,000 homeowners or 8% defaulting on HDB loans when the resale price index was only around 139, way much more affordable than today’s resale price index of 201. As the PAP do not want to declare the number of HDB loans on default today, the default rate is definitely much higher given that prices are more expensive today. With an increasing default rate, there will be more foreclosures and direct sales made by banks.
However, owning a number of properties recovered from foreclosures is useless to banks. These are mere paper value, albeit a depreciating one, and they will be short on cash. Singapore local banks will start to see diminishing profits as the paper value of these properties see lower valuation. It will only a matter of time these diminishing profits turn into losses. And there we go: a full blown financial crisis.
Gone are the days of cheap credit. Brace yourself, the shit has only started to hit the fan.