Tuesday, October 9, 2012

MAS sounds alarm bells for Singapore property bubble

"The current climate of low interest rates, globally and in Singapore, is likely to persist for some time. It will continue to spur demand in the residential property market, pushing up prices beyond sustainable levels. The eventual correction could be painful to borrowers and destabilize the economy". These are words The Monetary Authority of Singapore (MAS) used in their press release to announce the new Singapore property cooling measures targeting home loan tenures.

As you can see in the figure below, the property prices went up to the roof and new records. Although this picture clearly shows how the sharp increase can be reversed by sharp declines (happened several times in the near past i.e. in 1997 and 2009) as it is typical to asset bubbles, many in Singapore think this time is different.

Tharman Shanmugaratnam, Chairman of MAS, said:
“Monetary conditions worldwide are far from normal. QE3 and low interest rates have made credit easy, but this will eventually change. We are taking this step now to require more prudent lending, and will continue to watch the property market carefully. We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system.”[1]
Singapore Property Index
The photo of Singapore property bubble
According to the MAS, more than 45% of new residential property loans have tenures exceeding 30 years. Since these long tenures are typical to property investments where long tenure and low interest rates creates a positive cash flow of monthly rent - monthly mortgage payments, this show people are increasingly parking their money to property with not so many alternatives available in low interest rate + high inflation environment. This can also be seen in ABSD numbers: Although they need to pay 10%+ stamp duty upfront,more than one property). Since around 15,000 units are sold in the first 9 months of 2012, around 37% of private residential property in Singapore were sold to foreign and local investors (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).

Song Seng Wun from CIMB Research, told AFP that MAS's move was likely prompted by "fears of a property bubble":

He said the market has been red-hot due to low interest rates and easy access to credit. 
Last month, media reports said one government-built high-rise apartment was sold at a new record price of more than $S1 million ($A797,700). Finance Minister and MAS chairman Tharman Shanmugaratnam warned the low interest rate and easy credit regime could change. 
A rise in interest rates could leave borrowers hard up in repaying their loans and when property prices fall banks are left holding the bad loans - a situation that could shake the financial system.[2]

[1] - MAS Restricts Loan Tenure for Residential Properties
[2] - Singapore tightens home loan rules

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