Property is not a one-way bet to wealth

This story was first published in The Straits Times on July 6, 2013

IN ITS latest round of loan restrictions, the Monetary Authority of Singapore (MAS) closed a loophole that some home buyers were using to get favourable terms for their second or subsequent mortgages.

Parents who wanted to buy another property for themselves were putting down a child's name as the borrower, and then acting as a guarantor to enable the loan to be granted.

Such a move meant the parents could avoid less favourable mortgage terms, such as lower loan to value ratios, and extra stamp duty for those buying multiple properties. It also meant that they could get loans for a longer tenure.

Now, the guarantor of a mortgage must be treated as a co-borrower.

Institute of Policy Studies research associate Christopher Gee says this could also play an important role in stemming the generational transfer of mortgage debt, and cautions that Singaporeans' obsession with property will become destructive as the population ages.

  • Why was it important to close this loophole?

If you want to help your children set up their own home, you can give them cash to pay (the) down payment, but you should not be encouraging them to over-leverage based on your own asset base.

An added concern is how loan tenures have stretched. It used to be 15 or 20 years. Now, it's 35 years, which essentially means paying off your loan for your entire working life. Committing to this at a young age means ruling out expenditure on other important things throughout your life.

When property prices are going up, it may seem okay to do this. It's an investment that will yield big returns.

But then, one is not putting aside money for other things, like children's education, or health care or your own retirement. You're relying a lot on the sale of your property or rental income to provide for everything - which may not be sustainable if the market tanks.

  • Are local home buyers not properly aware of this danger?

Singaporeans' wealth is over-concentrated in real estate. The Department of Statistics has released a few papers which show that in Singapore, household balance sheets are 50 per cent residential property, which is higher than elsewhere, like Switzerland, Japan, the US or Britain.

By limiting people's loans in a sector to which households are already significantly over-exposed, the Government may be trying to reduce the concentration risk not just for financial institutions but also for households.

The fact is that we have an ageing population, which means that at some stage within the next 20 years, there will be a tipping point where there are more sellers than buyers in the market.

Retirees need to monetise their properties to have enough cash to live on. But at the same time, there are fewer young buyers.

This won't happen in a big bang, but it's an underlying dynamic that will accompany the ageing of the population.

  • Is it possible to change the "property is good debt" mindset? How can loan restrictions stop people from going after what is seen as a sure-win investment?

The policy message could change. It must be: Yes, home ownership is good, but it's for consumption, not for investment. The Government cannot keep pushing the "asset enhancement" story of properties rising in value and being one's nest egg and store of wealth, as property is not a "riskless" asset.

But in terms of what can be done, it is very difficult if political legitimacy is built on the premise of a robust housing market. Since most of the electorate are home owners, this skews policy towards aggressive action when prices fall, and incremental measures when they go up.

Incremental measures have unintended consequences in encouraging more people to jump in, because they think, 'There will be another round coming so I better lock my property in now'.

That accelerates demand, which is perhaps why the cooling measures have not entirely worked.

But then when the market goes down, the policymaker acts decisively and removes all the loan restrictions in one fell swoop to support the market. We saw this in previous down-cycles in Singapore, and in other markets. That sends a message too: that at the end of the day, the regulator will cautiously try to slow the market on the way up, but aggressively support it on the way down.

This may reinforce the perception that downside risks for property will be cushioned by government action, and hence encourage over-investment. To change this perception then, the Government may need to make it very clear that property is not a one-way bet, and that many of the prudential measures are here to stay.

  • Why is this bad?

The negative consequences of us pursuing the "home as investment" philosophy is that we end up as a nation of rentiers: People who live off the "fat off the land".

Over time, productivity suffers. More and more of human, financial and physical capital are tied up in real estate.

And if everyone is sitting around collecting rent, then who will pay it? We have to rely on an influx of people, which is also unsustainable. The land is finite.


This story was first published in The Straits Times on July 6, 2013

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