On Margin Call for Property
 

Under what circumstances would banks issue margin calls?

Example
X buys a Singapore property valued at 1M. He has a good credit rating and takes a loan to valuation of 80% (X pays 0.2M and borrows 0.8M). He never misses a payment and so far has paid back 0.05M, now owing the bank 0.75M. Unfortunately, property prices drop , such that his property is now worth 0.7M.

Question 1: Would X get a margin call from the bank? Note that he is still able to keep up with the monthly payments.

Question 2: Are all banks equally ruthless in issuing margin calls.

Question 3: If X had taken a loan to valuation of 60% on the 1M property, and paid back 0.05M so far, he now owes the bank 0.55M. The value of the property dropped from 1M to 0.7M (i.e. the LTV is now 0.55M/0.7M=78%, greater than the original 60%). Will X get a margin call?

First, will property prices drop by so much?

If my understanding of the standard mortgage contract is correct, the bank reserves the right to recall the loan or ask you to top up the difference at its discretion.

The answer to your first question: You are dead wrong. Singaporeans have grown complacent and overly optimistic on the property market due to the relentless increase in prices over the past couple of years. What goes up must come down and prices had declined by as much as 50% in the late 90s property crash. It would definitely happen again, not if but when, and my gut feeling is it is coming within the next few months.

You can see it happening already

aiyo, don't be sour grapes. singapore today is different from the 90s, so many highly paid bankers, lawyers and civil servants nowadays. if you need a home, just buy within your budget no point cursing the market. even if financial crisis returns, the most we will see is 20% correction from current prices, but with low interest rates most people can afford to hold.

Writiali Poy
 

q1: technically yes
q2: Not sure
q3: No, since current market value of property > outstanding loan, hence still positive equity.

Are you waiting for market downturn when over-leveraged owners start off-loading their properties? Start conserve capital now, there will be a lot of bargains in next 3 year

Is Singapore really different from the 90s. From dotcom companies, shares, commodities to properties, this is one phrase that is always quoted. Look through the history of all bubbles, that is one phrase that is always cited. However the end result is always the same. All assets go through cycles. They go up and will also always come down.

Paraphrasing a wise economist: The market can remain irrational longer than you can resist the lure of investment and insist on holding cash.

Thanks for the answers. This tells me that many people will be in trouble when property values drop <20%, that will be the start of the steep fall.

Yes, I am waiting for the crash, and trying to save as much as I can. Had been asking my friends and family on the 'criteria for margin call' for property, but most don't even know what is a margin call! This also tells me that most people do not know the risks of buying property.

I'm not formally trained in finance or economics. When I first bought my home (i.e. my very first property), I was surprised about this thing called leverage, where with merely 20% downpayment I could own a property. So good ah, what is the catch? Now I know that leverage cuts both ways.

If you look at historical housing bubbles internationally, when they burst they might even go slightly below the start at the bubble. US is experiencing a large deflation in properties ever since 2008. When I was in UK recently, every street in my neighbourhood had a 'for sale' sign.

Some may argue that our long term fundamentals are so strong (i.e. we are so small in size and surrounded by water) that prices cannot go below 20%. But I prefer to see the numbers.

I don't know what are the statistics for housing bubbles in Singapore. Wasn't born yet! Anyone care to share the statistics?

e.g. 1997 bubble, prices dropped to 50% from peak to trough.
2008 bubble, prices dropped to ?? %.

It's hard to compare with 1997. In 1997-8, we had the Asian Financial Crisis, China wasn't strong yet, and US and Europe were still booming. Now, it's the reverse - that's why some are arguing that Asia will boom while the west crashes.

Whatever you do, just be careful with what you do - prepare for the worst and hope for the best.