Housing Mortgage Crisis – No Nation Spared

The Straits Times Index fell 20.52 points Monday to close at 2,776.98, volume was a trickle at 948 million, while gainers/losers stand at 157/371.

As second-quarter earnings filtered in, we saw that most companies fail to impress with slowing sales and profit margin as compared to last year, and expectations for financial year 2008 had been adjusted downwards.

More importantly, Investors are wary of entering the volatile stock market. To be sure, volatility currently holds sway over all forms of investment, be it stocks, commodities, bonds, properties, etc. Taking up positions for too long could be detrimental to profits as they tend to evaporate rapidly once bad news emerge.

In fact, some analysts lament that the situation is so fluid that their views on the market are rendered irrelevant as soon as their reports are published. Short of a better suggestion, I believe sitting on cash is the safest option now even if high inflation eats away at our wealth.

While I still have substantial investments in blue-chips, I am less concerned about their performance than the poor outlook for Singapore private properties.

Such a trend does not bode well for the economy. Currently, the service and construction sector are the key boosters for our “healthy” economic indicators but the champagne may stop flowing in another year or so. Massive layoffs in the construction sector due to lesser and barely profitable projects are expected.

The sentiment has deteriorated so much that a plethora of properties offering superior location, iconic design and fantastic amenities are left on the racks because no takers are interested or the price offered is too low. In prime locations, prices have dropped so drastically that developers are happy to achieve breakeven or even taking losses to clear inventories.

It is easy to do the math. A developer’s major expenses consist of the land price, construction cost and development charges. None of the three elements have fallen in tandem with the sales prices. In fact, construction fees are continually bursting budgets because of high material cost.

Add to the fact that new building regulations stipulating that bay windows and planters be considered as part of Gross Floor Area, developers are hard pressed to survive, not to mention, making profits. I will discuss more on the implications in future posts.

Meanwhile, let’s look at the upheavals in the global housing market ignited by the US subprime mortgage crisis. I can safely say that, in its aftermath, no nation will be spared. Japan which has barely recovered from the property bubble of the ’90s are once again flirting with a major recession.

Japanese property sector is not in the pink of health and that is an understatement. Property developer Suruga Corp sounded the death knell when it filed for bankruptcy in June after failures in securing new financing from banks. On top of the credit squeeze, it has also been caught by soaring energy and raw material costs.

Last month, rival developer Zephyr Co followed suit by seeking court protection with $893 million in debts. Just this week, Urban collapsed from US$2.4 billion of debts, which marks Japan’s biggest bankruptcy in six years, prompting fears that the property sector is on the brink of a disaster.

Over in Europe, the United Kingdom takes the cake with some analysts billing their housing market as “beyond tipping point.Austrialia and New Zealand are not having it easy either.

In light of such sobering facts around the world, I think it is timely to remind ourselves to set aside some contingency funds to tie over the financial storm and economic slowdown. Over-extending our resources is the worst thing to do in a bear market. Things will get worse before they get better, so taking any huge positions now is foolhardy.

However, it is not wise to take your eyes entirely off the screen. When the opportunity is right, you should take measured risks. There are several oversold stocks on SGX which are approaching March lows, I see strong support for the Straits Times Index at 2740, so there could be a rally of sorts soon. Try to accumulate undervalued blue-chips gradually if you have surplus cash.

Till tomorrow.

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