New measures on property loan

Over the weekend, the government rolled out new measures on property loan to curb excessive borrowings by property investors. The new ruling requires lenders to take into consideration of the debtor’s other existing loans when granting property loans.

The aim is to strengthen credit practices by financial institutions and encourage financial prudence among borrowers. The central bank will also refine rules related to the application of the existing Loan-to-Value (LTV) limits on housing loans. These refinements seek to ensure the effectiveness of the LTV limits that were put in place to cool investment demand in the housing market. In particular, they aim to prevent circumvention of the tighter LTV limits on second and subsequent housing loans.

The question at the back of investors’ mind will be whether the new measure will be the ultimate needle to burst the housing bubble. My take is that this new measure will not have any significant effect on the housing market.

To put things into perspective, the current housing situation is not truly due to demand and supply dynamics. The private home market has witnessed huge gains in prices in recent years because of the hot money flowing from foreign countries such as United States and China as a result of loose monetary expansion. Cash rich investors poured in funds to pump up prices of local private homes. Therefore no matter what policies that are going to be or have been implemented by government, they will have limited effectiveness to cool the market because the rich will not be hurt. Only the middle-income buyers will be curbed by the slew of measures.

The meltdown in our housing bubble will only occur when there is an increase in mortgage interest rate, and I see it looming soon. Very often, our local banks take the cue from United States banks. If United States’ Federal Reserve stopped the bond-buying programme and increased interest rates, this could signal local banks to follow too.

In local context, an increase of 1 to 2 percentage in interest rate will mean a substantial monthly instalment amount to pay if property investors took out million dollar housing loans. Not many people can manage this huge jump in the monthly instalment. When this happened, many people are going to be caught off-guarded in their finances and this could be the start of another new crisis. To mitigate this, homeowners should opt for mortgage packages that allow them to take advantage of the low-interest rate environment and choose a lock-in period which is comfortable. Also, wealth builders should borrow what they can afford to and not over-stretch finances.