Friday, October 5, 2012

New Singapore property cooling measures by MAS Restricts Loan Tenure for Residential Properties to 35 years

Singapore is experiencing a typical low interest rate and cheap credit fueled property bubble and with QE3 rolled out there seems to be no end in sight for the price inflation in Singapore property. In Q3 2012 alone private residential property rose 0.5% while public resale flat prices jumped 2% compared to the previous quarter of the year (See Singapore private property and HDB's resale prices up in Q3 2012).

Some experts were expecting a new property cooling measure after new money printing operation of FED (QE 3). And the new Singapore property cooling measure announcement came from Singapore Central Bank, Monetary Authority of Singapore (MAS) on October 5th 2012:
The Monetary Authority of Singapore (MAS) will restrict the tenure of loans granted by financial institutions for the purchase of residential properties. MAS’ move is part of the Government’s broader aim of avoiding a price bubble and fostering long term stability in the property market.  
The maximum tenure of all new residential property loans will be capped at 35 years.  In addition, loans exceeding 30 years tenure will face significantly tighter loan-to-value (LTV) limits. This will apply to both private properties and HDB flats. The new rules will take effect from 6 October 2012[1]
According to MAS press release [1], the latest property cooling measure put an absolute limit of 35 years on the tenure of all loans for residential property. 35 years restriction will apply to loans to both individual and non-individual borrowers, as well as refinancing loans.

And for individuals if the tenure exceeds 30 years or the loan period extends beyond the retirement age of 65 years, Loan-To-Value ratio (LTV ratio) will be 40% for a borrower with one or more outstanding residential property loans and 60% for a borrower with no outstanding residential property loan.

Singapore overall residential private property prices rose 0.5% quarter-on-quarter in Q3 2012
Photo - URA
The new measures seems to target property investors who are inflating the prices and can inflate them more on the back of QE3. Although this move took the market by surprise, after recent news about the ABSD, they seems to be targeting the right audience  Recent news show that more than one third of the buyers in Singapore are either foreigner (19%) or Singapore residents (citizens or PRs) (%18) with more than one or two properties:
According to the media, Singapore Government has collected half a billion dollars from Aditional Buyers Stamp Duties (ABSD) in the first 9 months of 2012. But the most interesting and overlooked numbers were the number of people paying the money:
About $261 million of the ABSD take came from foreigners who are not permanent residents (PRs). They bought 1,400 homes in the nine months leading up to the end of August. They make up a quarter of the buyers who have paid the additional tax.[1]
Before these news, we did not have the number of property investors with more than one property. Now we know that 5,600 units are bought by foreigners and Singapore Resident investors (with more than one property). Since around 15,000 units are sold in the first 9 months of 2012, we can calculate that 37% of private residential property in Singapore were sold to foreign and local investors. And 28% or almost one third of private residential property in the first 9 months of 2012 were sold to Singaporeans and Singapore PRs who has more than one and 2 properties in Singapore. While many cannot afford a property because of the high prices, it also seems like Singapore's rich are forced to invest in property because of low interest rate - high inflation situation. Since 30+ years loans are mostly taken by these investors, the new LVT rules will probably effect them most.

Singapore property buyers
Photo - The Straits Times
As usual, experts(!) media talked to does not expect any significant impact on the market since they say the 30+ year tenure loans are an insignificant portion of the total loans (In Singapore media always talks to people whose income is depending on sales of property directly or indirectly and not surprisingly these so-called experts are always upbeat about property). But according to MAS, more than 45% of new residential property loans granted by financial institutions have tenures exceeding 30 years and over the last three years, the average tenure for new residential property loans has increased from 25 to 29 years.[1]

The longest loan term is 40 years for many banks in Singapore with the exception of UOB which has recently launched a 50 years loan scheme (and now they can say bye bye to this product).

According to The Straits Times, latest property cooling measures to mortgage rules may deter older investors:
"The latest changes to mortgage rules could deter many house-hunters from buying a new property - or at least give them serious pause, analysts and property market watchers said on Friday. 
Chief among this group will be older investors looking to buy a second or third investment property, they noted. And HDB upgraders who want to get on the private property ladder will also not be spared."[3]
For some buyers, the new rules mean game over:

"But for a buyer like investor Jack Liang, 49, who is on the hunt for his third property, the new rules mean "game over" he said. If he finds a $1 million property that he wants, he can take only a 16 year loan, up to the retirement age of 65 years old. His monthly repayment will be $4,546, likely more than its rental yield. He can take a longer loan, but for only 40 per cent of the property's value, as it is not his only housing loan. He must then have $600,000 cash in hand to purchase the property."[4]

[1] - MAS Restricts Loan Tenure for Residential Properties
[2] - Singapore property update September 2012
[3] - Latest changes to mortgage rules may deter older investors
[4] - 35 year limit set on home loans

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