Property mix served up Singapore sling with extra bubbles
Four months ago, when UK chancellor George Osborne made a trip to Singapore, the pretext was to promote a collaborative development of Singapore and London as offshore renminbi trading hubs.
But Mr Osborne could have picked up some other useful intelligence en route. If there is one country that has seen a UK-style bubble develop in its property market, it is Singapore.
Over the past four years, the Asian city state has implemented more than a dozen measures to cool its housing market and stem a growing tide of protest from locals that rich foreigners are making home ownership unaffordable.
If this sounds like an echo of popular sentiment in London, that is because these are very similar economies. A big financial services industry, paying generous wages, sustains demand for high-end housing. That, in turn, pulls up prices further down the price scale, a dynamic accentuated by the availability of mortgage finance at record low rates. Both cities are also regional hubs for wealthy foreigners, with solid legal systems and relatively open borders attracting property investment from Chinese, Russian and Middle Eastern millionaires.
Last week, the Bank of England’s Financial Policy Committee finally produced a couple of needles to prick the property bubble. One limits the mortgage finance an individual can borrow to a maximum income multiple of 4.5 times, though each bank will be able to ignore the cap for up to 15 per cent of its mortgage lending.
The other obliges mortgage lenders to check their customers could still afford to make repayments if rates rose 3 percentage points over the next five years.
But the needles were blunt. Barely 10 per cent of mortgage lending currently exceeds the 4.5 times loan-to-income multiple, giving banks scope for more aggressive lending. And most banks already model for interest rates rising 3 or 4 percentage points.
Back in 2010, when Singapore began to tighten mortgage conditions, the initial moves were similarly token. Stamp duty was imposed on property sellers, and the cap on the size of a buyer’s loan relative to the value of the property being bought was trimmed from 90 per cent to 80 per cent. Every few months since then, there have been further, ever more desperate measures. Stamp duty was raised, to punish quick purchases and resales; the LTV cap was cut to 50 per cent; higher taxes were imposed on foreign buyers; and a tradition of 50-year loans was cut to 30 years. None had much of an effect.
So much so that this normally politically conservative island nation has been rebelling. The popularity of the ruling PAP party – in power since the formation of Singapore as an independent state 49 years ago – has plummeted. Disaffection with rising property prices is widely cited.
As Mr Osborne plans the Conservative party’s strategy for the 2015 UK general election, he will want to avoid a similar fate. After introducing policies, such as the subsidised Help to Buy scheme that accelerated growth in the UK housing market, the chancellor is in a tricky spot. The feel-good impact on homeowners who have seen the value of their property rise dramatically risks being overwhelmed by a generation of prospective housebuyers who feel priced out of the market.
That is quite apart from broader risk to individual borrowers, and the economy as a whole. Amid growing talk that interest rates will normalise in five to 10 years at about 5 per cent, 10 times their current level, those who are borrowing now to buy property at elevated prices may find themselves unable to service their debts.
It was only recently that Singapore’s cooling measures finally had a clear impact on runaway house prices, following introduction of a new “total debt servicing ratio” – a metric that limits a borrower’s aggregate debt repayment commitments to 60 per cent of income. Property purchase volumes have duly fallen by 50 per cent. Prices are down by 6 per cent and are forecast to fall by as much as 20 per cent.
The Bank of England’s softly-softly start to cooling the UK market recalls the timid Singaporean measures of 2010 – but the UK could not handle four more years of bubbly growth, particularly in London.
The Bank for International Settlements, the global body that represents the world’s central banks, is certainly unimpressed. At the weekend, it warned that “euphoric” markets need to be urgently cooled to prevent debt burdens getting out of control. London property is a case in point. Incremental macroprudential tinkering is all very well, but if they lull policy makers into raising interest rates “too slowly and too late”, bubbles will get out of control.
Four months ago, when UK chancellor George Osborne made a trip to Singapore, the pretext was to promote a collaborative development of Singapore and London as offshore renminbi trading hubs.
But Mr Osborne could have picked up some other useful intelligence en route. If there is one country that has seen a UK-style bubble develop in its property market, it is Singapore.
Over the past four years, the Asian city state has implemented more than a dozen measures to cool its housing market and stem a growing tide of protest from locals that rich foreigners are making home ownership unaffordable.
If this sounds like an echo of popular sentiment in London, that is because these are very similar economies. A big financial services industry, paying generous wages, sustains demand for high-end housing. That, in turn, pulls up prices further down the price scale, a dynamic accentuated by the availability of mortgage finance at record low rates. Both cities are also regional hubs for wealthy foreigners, with solid legal systems and relatively open borders attracting property investment from Chinese, Russian and Middle Eastern millionaires.
Last week, the Bank of England’s Financial Policy Committee finally produced a couple of needles to prick the property bubble. One limits the mortgage finance an individual can borrow to a maximum income multiple of 4.5 times, though each bank will be able to ignore the cap for up to 15 per cent of its mortgage lending.
The other obliges mortgage lenders to check their customers could still afford to make repayments if rates rose 3 percentage points over the next five years.
But the needles were blunt. Barely 10 per cent of mortgage lending currently exceeds the 4.5 times loan-to-income multiple, giving banks scope for more aggressive lending. And most banks already model for interest rates rising 3 or 4 percentage points.
Back in 2010, when Singapore began to tighten mortgage conditions, the initial moves were similarly token. Stamp duty was imposed on property sellers, and the cap on the size of a buyer’s loan relative to the value of the property being bought was trimmed from 90 per cent to 80 per cent. Every few months since then, there have been further, ever more desperate measures. Stamp duty was raised, to punish quick purchases and resales; the LTV cap was cut to 50 per cent; higher taxes were imposed on foreign buyers; and a tradition of 50-year loans was cut to 30 years. None had much of an effect.
So much so that this normally politically conservative island nation has been rebelling. The popularity of the ruling PAP party – in power since the formation of Singapore as an independent state 49 years ago – has plummeted. Disaffection with rising property prices is widely cited.
As Mr Osborne plans the Conservative party’s strategy for the 2015 UK general election, he will want to avoid a similar fate. After introducing policies, such as the subsidised Help to Buy scheme that accelerated growth in the UK housing market, the chancellor is in a tricky spot. The feel-good impact on homeowners who have seen the value of their property rise dramatically risks being overwhelmed by a generation of prospective housebuyers who feel priced out of the market.
That is quite apart from broader risk to individual borrowers, and the economy as a whole. Amid growing talk that interest rates will normalise in five to 10 years at about 5 per cent, 10 times their current level, those who are borrowing now to buy property at elevated prices may find themselves unable to service their debts.
It was only recently that Singapore’s cooling measures finally had a clear impact on runaway house prices, following introduction of a new “total debt servicing ratio” – a metric that limits a borrower’s aggregate debt repayment commitments to 60 per cent of income. Property purchase volumes have duly fallen by 50 per cent. Prices are down by 6 per cent and are forecast to fall by as much as 20 per cent.
The Bank of England’s softly-softly start to cooling the UK market recalls the timid Singaporean measures of 2010 – but the UK could not handle four more years of bubbly growth, particularly in London.
The Bank for International Settlements, the global body that represents the world’s central banks, is certainly unimpressed. At the weekend, it warned that “euphoric” markets need to be urgently cooled to prevent debt burdens getting out of control. London property is a case in point. Incremental macroprudential tinkering is all very well, but if they lull policy makers into raising interest rates “too slowly and too late”, bubbles will get out of control.
