Moulmein, Kallang, GRC, dusk, night skylineIn our earlier commentary on the 6.9 million Population White Paper, we mentioned that a “projection” of 45% foreigner mix could be a disaster waiting to happen. In fact, we are actually more worried about that “45% will be foreigners” statement than the 6.9 million population. Even with the 55% Singaporeans in 2030, there’s also the doubt that all of them will be ”core” Singaporeans that have strong, cultivated ties to Singapore.

As many people have pointed out, they are concerned with the dilution of “true-blue Singaporeans” and from a Singapore property perspective, we have good reasons to be concerned. As many have cautioned, foreigners (and even newly minted citizens) do not have strong ties to Singapore and our community; As foreigners, Singapore is not their home. Naturally, their presence will be more transient; they may leave as they please.

So, let’s start off with the assumptions we’re making. We’re postulating that the foreigner mix will be similar to the present, with proportionate numbers of Permanent Residents (PRs), work permit and employment pass holders, domestic helpers and other smaller groups, such as students. Even if the mix were slightly different, we’re assuming that it would become more heavily skewed to PRs and employment pass holders. This is precisely the group that would have the financial resources to participate in the Singapore property market.

With a greater overall percentage of foreigners compared to the present, it can be deduced that the proportion of Singapore property in foreign hands (including perhaps, public housing owned by PRs, not that we agree) will be higher too. That means, inevitably, a higher percentage of foreigners will be loaning from our banks. Just as it is now, most property owners – both foreign and local – will be leveraged when it comes to their property purchase. What that means is they will be owing Singaporean banks up to 80% of their property price, in addition to interest.

One wonders how leveraged our local banks are as well; what is their reserve compared to the amount they have given out in housing loans? Let’s take a look at it in our scenario below.

So, that’s how our scenario starts off. We have the 45% foreigner mix, in a total population of 6.9 million, as “projected” by the White Paper. Let’s assume 700,000 housing units are sufficient for this population, and everyone has found something they like, be it private or public property. We go about our lives, working to grow our GDP and pay off our 30-year housing loans.

But we aren’t doing so in a vacuum, are we? The thing about global crises is that they’re kind of like a storm wave crashing over a boat. If the boat is stable enough, and isn’t over-leveraged by a heavy cargo on the top deck, it can probably withstand smaller waves indefinitely. But financial systems these days are trickier than boats. All it takes is that one big wave, hitting at just the right moment; perhaps just when the cargo was skewed 45% off to one side by a previous wave…

A global crisis severe enough to affect multinational companies and their foreign employees could see those foreigners leaving our shores in droves. It will be akin to a sudden vacuum, which is always followed by an implosion, whether literally or figuratively. Such a crisis will be bad enough that some maximally leveraged foreigners will just leave, debt be damned. Now, we are not suggesting that foreigners in Singapore will fail to honour their loans, we simply wish to point out the reality that such an option is clearly available to them with little impact once they have left Singapore for good. This isn’t without precedent; in Dhubai, suddenly bankrupt expatriates abandoned exotic supercars by the roadside in their panicked exodus, to evade a mountain of lavish credit.

While it is doubtful that Singapore will throw them in jail for going into negative equity, there will be a few that will just throw in the towel and run back home. It is doubtful that our banks will be able to pursue the debt to foreign shores.

In any economic crisis when property owners fail to service their mortgages, banks would, based on the terms and conditions of the applicable mortgages, pursue against these property owners. At times, these property owners could be made to pay up or made bankrupt. What happens if the property owner is a foreigner? Will the bank be able to go after that individual if he or she has fled the country? How much longer will it take for the bank to process a mortgagee sale, for example, if the person is no longer in the country? We would imagine the process to be difficult and long drawn simply because the bank needs to prove that it has tried its best in locating the owner.

Of course, with more properties being occupied by foreigners going forward, the risks are also not coming solely from the foreign home owners, but also the tenants. In a bad economy when foreigners inevitably leave, a higher percentage of foreigners will directly translate to a larger property glut with more unoccupied units, bringing unprecedented pressure on local property prices.

As with the worst of storms, this will feed back into a new cycle of defaulters and bankrupts, and even more foreigners leaving. The higher percentage of foreigners projected in 2030 amplifies this effect. Currently, two-thirds or more of the population is made of Singaporeans, so the risk of such a scenario is tempered by the majority of property owners and occupiers being Singaporeans. If there is indeed a near-future economic crisis, our banks are probably quite prepared and none of our local banks are likely to be too adversely affected.

But with a 45% foreigner mix, our banks take on higher risks due to the change in population composition. During the last two economic crises in 1980s and 1990s, property prices dropped by more than 40%; at that time, the foreigners only made up 14% and 25% of the total population, respectively. Is our system prepared for such a shock?

That brings us back to our question: what kind of reserve do our banks have? Well, every bank maintains a capital adequacy ratio* (CAR), which is set by the Monetary Authority of Singapore (MAS) to ensure that banks have enough capital to deal with major economic crises.

The banks need to ensure that its capital adequacy ratio sufficient. If MAS’ current CAR was derived with data from the crisis of the 80s or 90s, when the ratio of foreigners to Singaporeans was much lower, it may no longer be relevant. A higher percentage of foreigners in 2030 (from 14% to 25% to 45%), implies more foreigners owning properties; this will likely render the CAR requirement outdated. Thus the projected 6.9 million people, of which 45% are foreigners, will adversely affect property risk in Singapore. If not sufficiently stringent with the CAR, our banks may well be under a lot more risk than previously experienced. At that point Singapore herself will be at risk, as we ponder bailouts of our local banks.

Is that 1% to 2% growth worth the risking the nation in a perfect storm?

To us, the risk implied by this White Paper is quite unsettling. What do you think? Are we just trying to rock the boat? Drop us a comment below or on our Facebook, Twitter, and Google+ pages. Keep track of our latest articles by liking or following us!

* Definition of CAR – http://www.mas.gov.sg/en/News-and-Publications/Press-Releases/2011/MAS-Strengthens-Capital-Requirements-for-Singapore-incorporated-Banks.aspx

 

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  5 Responses to “45% Foreigners – The Perfect Property Storm For Our Banks and Nation”

  1.  

    Only way is to vote out the PAP because they never listen to true blue Singaporeans. For those in power, we are just unknown and faceless beings, just like tools and machines to propel the economy and create wealth for them and let them stay in power. When these tools and machines gets old, they need not be maintained, just discard them, let them die a natural death and replace with new ones(import them) and it don’t cause them a thing.

    •  

      What’s a “true blue Singaporean”? Singapore is a nation of immigrants who comes here for whatever reasons but at the same time contribute to the society. For example, Amy Khor, Khaw Boon Wan, etc, are not born in Singapore, but no one will deny their contributions. So are they “true blue”?

  2.  

    this is not exactly what im looking for -_-. i need help. i have to do a 800-1000 word report on something like the ‘use’ of foreigners to increase singapore’s population. i will have to do both sides(disadvantages and advantages). can u guys help me by looking for useful links?
    thnx.

  3.  

    If the risk is high then the banks should do their own diligence and set the rate for the loan accordingly. If they know these are risky people to loan to and still loan to them, the BANKS are letting greed cloud their judgement and they deserve to bite the bullet if things go south.

  4.  

    You are right on this. I know of people who can even forged a death certificate from a third world country to get insurance to pay up his debt in some parts of this world.

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