Melissa Lin & Chia Yan Min | The Straits Times | Tuesday, Jul 02, 2013

TOUGHER new rules on property financing effective last Saturday are likely to be permanent and structural to stabilise the property market, Minister for National Development Khaw Boon Wan said yesterday.

“It’s not really a cooling measure as such, but it’s a measure which will be quite permanent. It’s a structural measure which is good to ensure a more stable property market,” he said, noting that the current low interest rates are not sustainable.

The Monetary Authority of Singapore (MAS) announced last Friday that banks have to use a standardised set of guidelines to assess property buyers’ eligibility to borrow.

Banks will not be able to approve a loan if the monthly repayments of a buyer’s total debt obligations exceed 60 per cent of his gross monthly income.

Mr Khaw noted that the new rules are targeted at investors, and are “not an issue” for potential home owners.

“We do have buyers stretching themselves, buying second or third properties,” he said.

“And these are the people we worry about because when interest rates go up and they find that they cannot afford the increased mortgage, they may be forced to liquidate.”

He was speaking on the sidelines of the launch of the Sembawang GRC Memory Project at Fuchun Community Club, aimed at collecting memories of Sembawang from long-time residents. These will be collated into a book.

Economists say the new rules are aimed at not just individual borrowers but also banks, so that they can better manage the impact when interest rates eventually start rising again.

Central banks in the United States and Japan, among others, have been rolling out huge monetary stimuli ranging from holding down interest rates to multibillion-dollar bond purchases in an attempt to kick- start lacklustre economies.

But the US Federal Reserve is expected to start curtailing its money- printing operations by the year end at the latest – a move that will put an end to the low interest rates driving stock market and real estate booms here and in the region.

The new property curbs are a “prudent reminder” from MAS that “both lenders and borrowers should not get carried away”, said CIMB economist Song Seng Wun.

“There is a possibility that we are at the tail end of the prolonged low interest-rate environment and easy-credit situation.

“The measures will ensure the integrity of the banking system should interest rates start to climb, and also ensure that borrowers at the margin don’t overstretch themselves,” he said.

To prevent borrowers from overextending in their property purchases, MAS has also stipulated a floor in calculating interest payable on loans, even if prevailing rates are lower.

For residential property loans, the minimum rate is 3.5 per cent, while the rate for non-residential property is 4.5 per cent.

The new rules will prepare both banks and property buyers for the eventuality of higher interest rates, especially since the Fed’s moves to “taper” its stimulus measures could come earlier than expected, said Bank of America Merrill Lynch economist Chua Hak Bin.

OCBC economist Selena Ling agreed, adding: “The measures will ensure that if interest rates spike faster or earlier than expected, banks do not end up with a lot of non-payments or foreclosures on mortgages.”

As property loans have a long borrowing horizon, it “makes sense to use a more normalised interest rate”, Ms Ling noted.

Dr Chua said that while household borrowing has not been increasing at an “overly drastic” rate, low interest rates and a strong job market have propped up credit growth in recent years.