We had a dry ten months with no policy intervention until the Monetary Authority of Singapore introduced a new set of financial rules capping the maximum term for any residential home loan to 35 years on Oct 6. Additionally, if you are older and taking a housing loan term that stretches beyond your retirement age of 65; or if you are young but the loan tenure exceeds 30 years, you will be subject to a lower loan-to-value ratio of 1) 60% if this is your first housing loan and 2) 40% if you have an existing housing loan.

While researching for this blog, I discovered that volume, in terms of dollar value, of new housing loans granted has picked up and is largely being driven by those with the goal of making an investment. These investors have increased by over 20%, while those buying properties to own and occupy also expanded, but at a slower pace of 17%. Given the weakness in the global and domestic economy, this activity is alarming and especially poignant, because the pace of growth of housing loans granted has been on a continual decline since 2011 (when the series started).

Source: Monetary Authority of Singapore, Jones Lang LaSalle Research, Oct 2012

In my opinion, this recent change will most likely impact the older group of investors. To keep their monthly payments low, generally most investors will opt for a longer housing loan term.

In the latest Household Expenditure Survey (2007), the Department of Statistics reported that 50% of the households with a monthly income exceeding S$7,000 are between 30 and 44 years old. This cohort is more likely to take longer loans than investors below 30 (less affected by the policy) or those over 45 years old (they are likely to have built up sufficient equity to take lower quantum loans anyway).

Of all the new housing loans granted in 2Q12, 28% were for investment purposes. Assuming that the profiles of the borrowers of these loans followed the national pattern of income distribution, 50% of them will be significantly affected by this policy. Over the coming quarters, I believe the resale property market could see a decline in activity of up to 14%. However, as the average loan-to-value ratio reported in the Monthly Statistical Bulletin by the Monetary Authority of Singapore is about 44%, which is close to the latest policy cap of 40% on those with an existing housing loan or a loan term that exceeds the legal retirement age, the impact of the new measures could be weaker than expected. At the end of the day, we have to keep watching the market to know what is really going to happen.

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