THE latest clampdown on mortgages is pretty severe, prompting one observer to say that there is '100 per cent certainty' that the measures will cool the market.
The Monetary Authority of Singapore (MAS) has followed up to close a potential loophole, by proposing to impose the same lower loan limits on mortgage equity financing.
To recap, last Thursday, the government said that the loan-to-value (LTV) limit for more than one home loan is now 60 per cent, down from 70 per cent, and for non-individuals, it's 50 per cent. This is in addition to slapping a sellers' stamp duty of as high as 16 per cent, up from 3 per cent previously.
If the measures are going to work 100 per cent as the property market observer says, it follows that the banks will be 100 per cent affected, with the most immediate impact being lower loans growth.
Home loans which grew over 22 per cent in November, based on the latest data available, was the driving force of bank lending last year.
The new measures could signal an almost immediate contraction in home loans growth. But the ripples will spread as loans to contractors and developers could also shrink, along with lower demand for related support services, such as those provided by lawyers, agents, and retailers of furnishing and fittings.
Consumer spending could be pinched too because people spend more when they feel wealthy. If home prices slide, they will feel less rich.
With the additional clamp on mortgage equity financing, other sectors of the economy may also feel the impact of the new measures. Potential borrowers could have intended to use the funds for share financing, a holiday or for their children's education.
Bankers have so far put on a brave front. All agree that the latest measures will weed out speculators and make for a more sustainable property market in the longer term.
If banks had only been more prudent by lending only 50 or 60 per cent of the value of the property, the government might not have needed to act.
The latest measures are very drastic, certainly more harsh than those Hong Kong imposed last November to cool its property market.
Perhaps the Singapore government is trying to pre-empt the flow of hot money from China that could be diverted to Singapore after Hong Kong imposed restrictions on its property market.
'The unprecedented measures were due to uncertainties that emerge from the large amount of liquidity from quantitative easing in the developed countries,' said a United Overseas Bank research note. 'The new measures might turn away overseas speculators and hence could curtail the additional inflows that resulted as China and Hong Kong further clamp down on their real estate markets. In turn, this could reduce the pace of Singapore dollar appreciation ahead of the monetary policy meeting in April.'
So the multiplier effect could also reach the Singapore dollar which, up to last week, was expected to continue to appreciate.
The list of imponderables is going to be a headache for banks which have been struggling with low interest margins.
Will this lead to a new round of interest rate wars as banks fight hard to hang on to their customers? It's going to be an interesting 2011!