Stiff home loan curbs a long-term measure

Stiff home loan curbs a long-term measure
PHOTO: Stiff home loan curbs a long-term measure

If you have been considering taking up a home loan, the new lending limits that local banks must apply will probably have you wincing. And no wonder - they are one of the toughest sets of loan rules worldwide.

The limits were introduced last week by the Monetary Authority of Singapore (MAS) as a new total debt servicing ratio framework. Banks now have to take into account all of a borrower's outstanding debts, including for cars and credit cards, when assessing a mortgage application. Total monthly repayments cannot be higher than 60 per cent of gross monthly income.

But the new limits may all be for the good of sustaining the property market, say two financial experts and an academic, as higher interest rates in the near term and an ageing demographic in the long term put pressure on the "Singapore Dream" of property-led riches.

Barclays analysts Joey Chew (JC) and Tricia Song (TS) demystify MAS' moves and warn of a supply glut in 2015.

Is the new framework too conservative? Seven rounds of cooling measures have already reduced property speculation and prevented buyers from taking on too much debt.

JC: Globally, it is unique for the MAS to set an industry-wide specific threshold on total debt - that is, beyond mortgage loans. Jurisdictions like South Korea or Hong Kong have thresholds only for mortgage debt. It definitely puts more cost on the banks to collect and verify the data.

TS: Singapore and Hong Kong are two places where there is also the property bubble issue. After several rounds of cooling measures, the authorities want to close loopholes that have caused previous measures to not work as well as they should.

But they have worked in moderating price growth in the property market. So is this necessary?

JC: This measure is not a Band-Aid on a bleeding wound. It's not about urgently fixing something that is wrong. It's something to raise the overall bar for the lending industry, to safeguard the financial system.

The timing indicates that the Government is worried about the impending global transition to a more normalised interest-rate environment, after years of very low rates. Globally, investors expect quantitative easing (QE) in the United States to end, and rates to start rising earlier than expected.

The MAS says banks must use a medium-term 3.5 per cent interest rate to assess borrowers, substantially higher than the current 1-plus per cent. Why 3.5 per cent?

TS: This rate is based on historical trends from 1999 to 2008. While it may seem high now, it was not that long ago that rates were at this level. In 2007, they were at this level. I would think 3.5 per cent is a bear case now but is not impossible.

JC: People tend to see things in the short term and extrapolate too much from recent history. We've had really low interest rates from 2009 until now, but with the US Federal Reserve tapering off on QE, we have to start preparing for a normalisation. Rates won't reach 3.5 per cent straightaway, as the global economy is not in a position to take that yet, but it's a precaution leading up to that.

Price growth in the property market has moderated, and flipping or speculation has gone down substantially. What challenges lie ahead?

TS: The worst-case scenario for the property market is that interest rates start rising very fast and the huge supply of completed units starts coming through.

Currently, we still have tenants queueing up to take flats and apartments, but what happens when there are a lot of empty units and interest rates start rising? For investors who have bought property for renting out, they may not be able to make enough rental to cover their mortgages. What happens will then depend on whether people think this is just a temporary situation or if they panic and start cutting rents and asking prices.

However, we believe that, generally, investors are conditioned after four years of measures to take a longer-term perspective and have holding power.

JC: It's all pretty much going to happen at the same time - 2015 is when the supply boom is coming in, and that's when we predict the Fed will start hiking rates. The Government will then need to manage its communications very carefully.

Now, the situation is one of pent-up demand and a lack of supply, so the message is that supply will come. But if and when a supply glut happens, they will need to reassure everyone to hang on.

One option they have is to relieve some of the cooling measures of the last few years. They can make it easier for investors again to create demand.

Joey Chew is an economist and Tricia Song a property analyst at Barclays Singapore.


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