Stiff home loan curbs a long-term measure

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.

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