A policy resolve to rein in asset prices

When the Monetary Authority of Singapore (MAS) last Friday announced fresh mortgage curbs to prevent new bubbles from forming in the property market, much of the attention focused on the measures and their impact.

But arguably, what is even more significant is the signal Singapore policy makers are sending to the market.

After the US unveiled a third round of quantitative easing (QE3) last month, a BT article raised the threat of fresh liquidity flows and the likelihood of more cooling measures to keep asset bubbles away. It was, at the time, not the consensus view, with many arguing, as they still do now, that existing policies are sufficient to keep prices in check. This was especially (and not surprisingly) the view of the real estate sector, and as recently as the end of September, the Real Estate Developers' Association of Singapore (Redas) said the property sector did not need another round of cooling measures, and that a thorough review of earlier measures put in place should be done first.

Such views, while reasonable enough in themselves, miss the bigger point. And that is that in any robust policy making framework, the imperative is to stay ahead of the curve. Existing cooling measures may or may not have already reined in property prices, but that does not define current scenarios.

A new situation has arrived with QE3. The Federal Reserve's decision to pump US$40 billion into the US economy each month until sustained jobs growth kicks in, while welcome news for the struggling global economy, also created the risk that loose monetary conditions in the US may push funds into the region in search of yields and fan asset price inflation, with Singapore a likely prime target for such flows. Indeed, QE3 also marks the start of what many see as an extended round of global easing, with all the associated liquidity risks.

It is in this context that the MAS is acting. "Monetary conditions worldwide are far from normal," said Deputy Prime Minister Tharman Shanmugaratnam, noting that the latest round of QE3 in the US and low interest rates have made credit easy, though this will eventually change.

"We are taking this step now to require more prudent lending, and will continue to watch the property market carefully," said Mr Tharman, who is also Finance Minister and MAS chairman.

And Singapore has signalled clearly it will not lag behind the regulatory curve. Hong Kong, notably, moved to introduce mortgage curbs immediately after QE3 was announced. In its fifth round of mortgage-tightening measures, the Hong Kong Monetary Authority announced that it would limit the maximum term of all new mortgages to 30 years. Additionally, mortgage payments for investment properties cannot be more than 40 per cent of buyer's monthly incomes, compared with 50 per cent previously.

There is some debate over whether the MAS could be acting prematurely in the domestic context because property price increases recently have not been so marked. Official data showed that HDB resale prices rose 2 per cent in Q3 from Q2, while private home prices gained 0.5 per cent over the same period. Separately, the SRX Residential Property Flash Report showed resale prices of non-landed private homes rising 3.2 per cent in Q3.

However, it's worth pointing out that the stated policy objective has always been that property values should move in tandem with economic fundamentals. Economists now expect advance estimates for Q3 to show that the economy shrank 1.8 per cent over the July to September period. Add to Q2's seasonally adjusted 0.7 per cent quarter-on-quarter annualised drop in GDP, and Singapore would have suffered a technical recession, or two consecutive quarters of quarter-on-quarter contraction. Viewed in this context, even a modest rise in property prices could be fundamentally out of line.

So far, the property sector's reaction to the new measures has been mixed. The changes include setting an absolute limit of 35 years on the tenure of all residential property loans and tightening loan-to-value (LTV) ratios for certain new loans. Redas said the measures will not have a major impact, and the initial assessments suggest that the new rules will affect mostly older buyers, and those looking to own more than one property. But again, this may not be the most crucial point.

The most important point that the market should take away from the latest MAS measures is the underlying policy resolve to keep asset prices here in check. Singapore regulators have signalled their intention to act, again and again if necessary, to ensure that the runaway prices of the last cycle will not be repeated.

Last Friday's measures may be confined to the residential market and a specific group of buyers, but the evidence is clear enough that policy makers are prepared to introduce more measures to cool prices in non-residential sectors for instance - where there have been some signs of overheating - or to further curb foreign buying interest, if needed. "We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system," Mr Tharman said. That is as explicit as it can get.

Source: Business Times – 8 October 2012