Loan curbs target rising rates, but other dangers lurk

PHOTO: Loan curbs target rising rates, but other dangers lurk

SINGAPORE - Another carefully targeted missile to expunge certain buyers from the property market was launched last Friday.

The Monetary Authority of Singapore (MAS) trained its latest measure on one specific class of real estate investors: those spending too much of their monthly pay packet paying off their debts.

The weapon was a new lending framework that capped how much property buyers can borrow to finance their purchases if they are already significantly in debt. They will be restricted to loans where monthly repayments, combined with all their other debt obligations, do not exceed 60 per cent of their gross monthly income.

But the MAS was quick to stress that this move was not yet another cooling measure - there have been seven rounds since 2009 - to deflate housing prices.

The strategy this time is a bit different from the previous curbs.

For one thing, it is meant as a permanent framework to standardise lending practices, in contrast to recent steps that were highlighted as temporary actions to tame runaway prices.

Unlike earlier measures, Friday's manoeuvre also included no tactics to directly check demand such as raising or extending additional taxes on home buyers and sellers.

What this shows is that the MAS is becoming more concerned about affordability - not so much for first-time buyers deterred by soaring prices as for investors piling on debt to buy rental property.

Indeed, in contrast to the doleful reactions of market watchers to previous curbs, analysts say the new rules will have a limited impact on home sales and prices.

Instead, the MAS appears to be simply preparing the ground for more realistic interest rates, which are expected to rise from their ultra-low levels as soon as next year.

As a start, the MAS says monthly instalments for any new mortgage must be calculated based on minimum "medium-term" interest rates: 3.5 per cent for housing loans and 4.5 per cent for loans for other properties.

For now, analysts estimate that most mortgage applicants are not in danger of busting the debt limit and will not be deterred by it. Maybank analysts say the total debt servicing ratio of borrowers from domestic banks is a "comfortable" 40 to 50 per cent, assuming an interest rate of just above 3 per cent.

"While some cooling off of property loan approvals cannot be ruled out, we expect the impact to be limited," they add.

But it is worth noting that the MAS has left the door open to reducing the 60 per cent ratio over time, "with a view to further encouraging financial prudence".

To drive the point home, the central bank could also raise the minimum interest rate to be used in computing monthly repayments for new loans. The current 3.5 per cent floor is conservative: Mortgage rates are about 1.5 per cent now, but were above 5 per cent in 2006.

In its latest financial stability report, the MAS noted that a 4 percentage point rise in mortgage rates would lift the mortgage-servicing ratio of the average household by 13 percentage points.

This means that if home loan rates rise from 1.5 per cent to 5.5 per cent, a household now paying $6,000 of its monthly $10,000 income in repayments will have to fork out $7,300.

There were hints by United States Federal Reserve chairman Ben Bernanke last month that the bond-buying programme that has kept interest rates in the basement will be wound down.

This sparked fears that higher interest rates would not be far behind and, in turn, sent US home loan rates spiking to 4.56 per cent last week, from 3.74 per cent a month ago, the Wall Street Journal reported.

There is every indication that rising rates could be painful for Singapore, where households have been on a borrowing spree in recent years, fuelled by record prices for homes and cars.

Economists have long flagged worries over debt levels here, noting that compared with other countries in Asia, they are higher as a share of the overall economy and rising more quickly.

Mortgages, in particular, have hit record levels as a proportion of both the economy and of total deposits. But rising interest rates are not the only worry for Singapore property investors. The more fundamental concern is a potential mismatch between demand for property by investors and demand for homes by tenants.

Even if investors are forced to do their sums more conservatively, they are still likely to be keen on buying property, given a lack of suitable alternatives that can be heavily leveraged, provide monthly income and still offer the opportunity for sizeable capital gains.

So the tighter loan rules, while taking out some would-be investors, might push the rest to cheaper homes further from the city or more cramped, which are less attractive to tenants.

These cheaper units are being furiously built now to meet demand from investors but they will compete for tenants with the HDB flats, which are also being ramped up in supply. That means this housing segment faces the biggest risk of vacancy in any oversupply situation, leaving investors short of rental income to repay their loans.

Hence, even as the MAS zeroes in on interest rates, it should be aware of the other threats to property market stability - especially in the suburban battlegrounds.

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