ST : Tighter financing regulations will have bite, say experts

Aug 31, 2010

new property rules

Tighter financing regulations will have bite, say experts

By Esther Teo

IF YOU already have a mortgage on a home, you will need more cash on hand to buy a second property - under new rules announced yesterday.

Buyers with one or more outstanding housing loans will now have to stump up a downpayment of 30 per cent of the property's price, up from 20 per cent previously. At least 10 per cent must be in cash - up from 5 per cent before - but the remainder can come from their Central Provident Fund (CPF) accounts.

This means that buyers will now be able to borrow up to only 70 per cent of the property's purchase price, instead of 80 per cent previously.

These new financing rules are more significant measures to cool the housing market, experts said. They added that these moves would weed out speculative activity from the market and prevent buyers from overextending themselves - while leaving first-time buyers unaffected.

The Ministry of National Development said in a statement yesterday that while non-performing loans made up less than 1 per cent of all loans as at the second quarter, there are signs that more borrowers are taking loans of more than 70 per cent of a property's price.

Local banks yesterday told The Straits Times that they have seen an increasing number of home owners investing in multiple properties in recent years.

United Overseas Bank said most of these home buyers took up financing of up to 80 per cent of the purchase price.

OCBC Bank said that while the majority of its loan applications are for home-owner occupation, it has seen an increase in the number of applications for investment purposes - compared with a year ago. An increasing number of home-loan applicants have applied for loans of more than 70 per cent of the property price, it added.

Kim Eng analyst Wilson Liew said the new measures would ensure that banks remain prudent in their lending practices.

DMG & Partners property analyst Brandon Lee said the rules would also effectively force out speculators.

'They would have to think twice before buying as the cash outlay now is reasonably higher... Sales volume will probably be hurt across all segments,' he said.

ERA Asia-Pacific associate director Eugene Lim said the measures would affect demand in the mass-market private property segment.

HSR chief executive Patrick Liew said speculators made up about 20 per cent of the mass-market segment, and that the new measures might flatten the sector for the next two quarters.

Demand could drop by up to 20 per cent in the next few months, as buyers react in a knee-jerk fashion and speculators stay on the sidelines, he said.

However, since economic fundamentals are strong and the market had already been slowing, he does not expect prices to head south.

Instead, Mr Liew thinks prices will hold at current levels before gradually increasing again from the second quarter of next year, because there is still genuine demand in the housing market.

ERA's Mr Lim said that a significant number of mass-market condo buyers live in HDB flats with outstanding mortgages, so demand for such private homes might take a beating now that the required downpayment has been increased.

Mr Colin Tan, research and consultancy director of Chesterton Suntec International, said the steps 'had more bite' than previous ones. It would most affect demand from high-risk buyers who are highly leveraged, he said.

'These measures will help to soak up the liquidity in the market as those who could previously afford three similarly priced homes, fully leveraged... would now be able to afford only two, lessening demand by a third,' he added.

However, owners who are just selling their home to buy another need to get their timing right and ensure the first mortgage is fully paid before taking out a new loan.

If not, they will be allowed to take out only a 70 per cent loan for the new home and would have to pay the remaining 30 per cent upfront.