By guest contributor Gerald Tay
On 5th October, Friday, the Monetary Authority of Singapore (MAS) announced that it was capping the length of a home loan at 35 years. With effect from 6th October, 2012:
- All residential property loans will be subjected to a maximum of 35 years loan tenure, including HDB mortgage loan tenures.
- Tighter rules will apply to borrowers taking loans longer than 30 years, or who want to have their loan periods extend beyond the retirement age of 65.
- If they already have an existing mortgage and want to take another one that require these tighter rules for another property, the cash down payment is 60 per cent, instead of the current 40 per cent.
- Same rules apply for refinancing loans.
- Non-individual borrowers now subject to 40% loan limit (down from 50%)
Reasons for Fresh Round of Property Cooling Measures
- To curb upward pressure on property prices from the current low interest rate worldwide, and the rapid credit growth driven by the US’ latest round of quantitative easing (QE3). “Monetary conditions world-wide are far from normal,” said MAS chairman Tharman Shanmugaratnam.
- To prevent prices from spiking beyond sustainable levels, so that the eventual correction “which will hurt borrowers and destabilise our financial system” can be softened, if not avoided.
- To prevent “false confidence” from buyers and lenders that the property can always be sold off for a profit if the loan becomes difficult to service.
- A response to the 50-year home loan offered by United Overseas Bank (UOB), which drew the ire of National Development Minister Khaw Boon Wan, who described it as a “gimmick”.
Impact on Property Market
MAS is taking this step now to require more prudent lending and to curb over-bullishness in the property market. Singapore has signalled clearly that it will not lag behind the regulatory curve. Hong Kong for example, moved to introduce mortgage curbs immediately after QE3 was announced. In its 5th round of property cooling measures, the Hong Kong Monetary Authority announced it would limit the maximum term of all new mortgages to 30 years. In addition, mortgage payments for investment properties cannot be more than 40% of the buyer’s monthly incomes, compared with 50% previously.
There is a debate if this new round of cooling measures will be effective in bringing property prices down to a more sustainable level. As in all previous cooling measures, the market seems to only cool for a while before continuing its upward climb. Official data showed that HDB resale prices rose 2% in Q3 from Q2, while private home prices gained 0.5% over the same period. Resale home prices of non-landed homes have risen 3.2% in Q3.
The Straits Times reported showflats continue to see good traffic on Saturday, the day the mortgage-tightening measures were implemented. Potential buyers were also sniffing out if developers will offer special perks or discounts to buyers to take the sting out of the new restrictions. None did so far, and probably won’t do so unless demand drops to drastic levels over the next six months or so. Therefore, it is still premature for a knee-jerk reaction in the property market.
Impact on Home-Buyers
Except for much younger buyers who are able to take the full 35 year loan tenure, the older ones especially those in their forties and have been waiting for prices to fall to buy, will be disappointed. A 40-year old will now be only able to take up to 25-year loan tenure to enjoy the usual 20% down payment.
But if he were to take out the shorter 25-year loan of $800,000 for a $1 million property, this would now mean monthly payments of $3,051, at current interest rates of 1.1%. This is $400 more than if he were to take a 30-year loan. Older home buyers will take the hardest blow while the younger buyers should get away with just paying a shade more every month.
Impact on Investors
For Investors like me, the new rules would mean “Total Game Over” for the residential property market.
For an investor who already have an existing mortgage on hand, finds a $1 million property that he wants, he would have to fork out a $600,000 as down payment in cash if he needed to take a loan exceeding 30 years or if the loan period extended beyond 65 years of age. This is down from 60% loan to value, on top of a potential existing 3% Additional Buyer’s Stamp Duty, plus a 4-year Seller Stamp Duty. Putting such a hefty sum locked in an illiquid asset with a minimum holding period of more than four years (to avoid seller’s stamp duty) plus having to pay taxes just to own one, it sure does not justify any savvy investor’s potential “Cost of Opportunity” in other more sensible assets to grow his net-worth by another zero.
For an investor who is already 50 years or older, even if he does not have any existing loan on hand, his monthly mortgage payments with only a 15 –year loan will be $4,823, likely more than his monthly rental yield.
Overall Assessment of the Residential Property Market
Unless much younger home buyers (30 years or younger) with no existing home loans represent the majority of the market (which is not likely due to current affordability issues), we will be looking at the peak and saturation of the residential property market. Fewer buyers would mean either a price stabilisation or a fall in near future.
However, the steam from these latest mortgage restrictions may dissolve in no time like previous measures because:
- According to the ‘Property Investor Profile Survey’ conducted by Ascendant Assets, the average age of a typical Singapore property investor is 46. Even before the new measures kick in, the buyer already knows that most banks will offer him maximum loan tenure of around 19 years based on his retirement age.
- A low interest rate environment where ignorant investors still feel that putting their money in property is still a better bet than in the bank.
- A euphoric atmosphere where buyers continue their dreams of becoming rich because they believe property prices will always continue to go up.
- The “Wealth illusion Effect” purported by the governments through rising property prices has already created a ‘Gangnam Style’ society in Singapore. Younger home buyers, who hope of living that ‘dream lifestyle’ will borrow to their max at low interest rates to buy new launches, hoping to stay in it or sell after 4 years when it T.O.Ps. There will also be those who cash out from their HDB, and use the profits to upgrade to private housing.
The residential property market holds the keys to wealth and credit in any country. When people feel rich through their home prices rising, everyone from consumers to business owners borrow. Credit is created and the ‘wealth effect’ leaks through the fabric of the economy, generating economic growth and investment for all countries.
Governments do not want a bubble bursting in their own backyards. They only want consumers to borrow and spend. When will the bubble burst or prices fall? Only when the credit which fuels borrowing and spending comes to a complete halt because of fear and a mass ‘exodus’ from the market, will we then see “blood” on the streets.
Let the herd of “sheep” enjoy their grazing for now, while the hungry wolves are already waiting behind the bushes.
By guest contributor Gerald Tay, CEO and Chief Trainer at CREi Academy Group.