A horror called "Credit"

Without going into a litany of the sub-prime saga, it is easy to see that we in Singapore are enjoying a decent economy (albeit a quickly receding one now) that is pretty dependent upon our collective abilities to owe. We buy furniture we can't afford, cars we can't afford, houses we can't afford and sometimes, even appliances we can't afford. Perhaps "can't" isn't the right word.

The seduction of "extended repayment", "interest-free instalment", "your future today" and other creative tempts has so shapened our financial crutch that maybe "don't want to" is a better phrase for "can't". Furniture houses can lend up to 10 times your monthly salary while your credit card limit is only 2 times. Money makes the world go round.

Borrowed money makes the world go round quicker and somewhat more thrillingly.

Too thrillng that the Government decided to stop deferred payment schemes for property purchases exactly a year ago. It served us well in propping up the property market by distorting it for 10 years. It was hoped that the distortion will dissipate over time but it didn't, and in the softening market today, it has returned to haunt.

[DPS is when you put in a small amount of cash payment and borrow the rest with the condition that regular repayment begins only when the building is completed, which is usually 3 years later. 3 years is plenty of time to flip properties, so that you "run away" before repayment starts.]

If you plonked in 10% on a piece of property 2 years ago, a 30% drop 3 years later will more than negate your equity in the property and in times like this, banks will avoid you like a plague when the DPS is up. Anticipating this, you sell at a discount and you immediately create a vicious downward spiral for others like you, who are just a step slower.

While this is not the same as the sub-prime problem, it produces the same effect: banks or individuals holding onto properties worth far less than what they paid for or will be paying for. Those who are not flipping are innocent by-standers trapped in the same quagmire and I have friends like that. Suddenly the world ain't so thrilling.

If I learnt anything at all from my MBA finance modules, it is in just 3 little words, "cash is fact".