Game Over? New Property Cooling Measures Restrict Mortgages

You don’t need a PHD in economics to know property prices are in bubble state!

On 5th October, Friday, the Monetary Authority of Singapore (MAS) announced that it was capping the length of a home loan at 35 years.

MAS is taking this step now to require more prudent lending and to continue to watch the property market carefully.

And Singapore has signalled clearly that it will not lag behind the regulatory curve.



With effect from 6th October, 2012:

  1. All residential property loans will be subjected to a maximum of 35 years loan tenure, including HDB mortgage loan tenures.
  1. Tighter rules will apply to borrowers taking loans longer than 30 years, or have their loan periods extend beyond the retirement age of 65.
  1. If they already have an existing mortgage and want to take another one for another property, the cash down payment is 60 per cent, instead of the current 40 per cent.
  1. Same rules apply for refinancing loans.
  1. Non-individual borrowers now subject to 40% loan limit (down from 50%)

Reasons for Fresh Round of Property Cooling Measures:

  1. 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, who is also deputy prime minister.
  1. 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.
  1. 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.
  1. A “mockery” of 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 continue to watch the property market carefully. And Singapore has signalled clearly that it will not lag behind the regulatory curve. Hong Kong for example, moved to introduced 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 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 bite on for a while before continuing its upward climb. Official data showed that HDB resale prices rose 2% in Q3 form 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 unless demand drops to drastic levels over the next 6 months or so.  Therefore, it will still be pre-mature for knee-jerked 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 just 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. (Down from 60% loan to value, on top of an existing 3% 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 4 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 loan represent the majority of the market (which most likely never due to current affordability issues), we will be looking at the peak and saturation of the residential property market. Lesser buyers would mean lesser sellers, means either a price stabilisation or a fall in near future.

In any case, the steam from these latest mortgage restrictions will dissolve in no time like previous measures:

  1. 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.
  1. A low interest rate environment where there will always be ignorant investors who feel that putting their money in property is still a better bet than the bank.
  1. A euphoria atmosphere where buyers will always continue their dreams of making rich because they believe property prices will always continue to go up.
  1. 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 or sell after 4 years when T.O.P. There will also be those who cash out from their HDB, and use the profits to upgrade to private.

Unlike commercial property, the residential property market holds the key to wealth and credit of any society and country. When people feel rich through their home prices rising, everyone from consumer to business owners borrow. Credit is created and the ‘wealth effect’ leaks through the fabrics of any economy, generating economic growth and investment for all countries.

Governments do not want a bubble busting in their own back yards. They only want ignorant consumers to borrow and spend. That’s the reason why all property cooling measures are targeted at the residential sector, and not the commercial.

When will the bubble burst or prices fall? Only when that credit which fuel borrowing and spending comes to a complete halt because of fear and mass ‘exodus’, we will 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.

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To your investment success,

Gerald Tay


About the Author

Gerald Tay Author, entrepreneur, professional investor and loving father, runs with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'

Comments (3)
  • Cecelia from Dec 7 2012 - 5:11 pm Reply

    Although you’ll have a higher monthly payment, it is always better to take the shortest term possible when it comes to home loans. I’m all for this capping restriction. It will certainly save you thousands of dollars in interest.

    • Gerald Tay Dec 10 2012 - 11:57 am Reply

      Hi Cecelia,

      I’m all for shortest term possible when coming to personal home loans.

      The problem lies where ignorant buyers and amatuer investors try to take the longest possible loan tenures to either speculate the already booming property market or try to own a private property which they cannot really afford in the first place base on current low interest rates which will spike eventually.

      gerald tay

  • property agency May 7 2013 - 10:19 am Reply

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