The logic behind property cooling
THE property cooling measures adopted by Singapore from 2009 to last year - known to economists as "macroprudential measures" - were an essential complement to monetary policy and have succeeded in containing the property market bubble, according to Monetary Authority of Singapore managing director Ravi Menon.
However, they were introduced during a "highly unusual situation". Therefore, they will not be a permanent feature of policy and will be used only from time to time.
Mr Menon was speaking on Saturday at the inaugural Asian Monetary Policy Forum.
He pointed out that the global financial crisis of 2008 to 2009 forced central bankers to pay more attention to issues of financial stability. Before the crisis, their main focus was on macroeconomic stability - mainly inflation and output.
Mr Menon noted that traditional monetary policy measures, such as interest-rate increases, would not have been able to deal with the financial vulnerabilities that resulted from the massive expansion of global liquidity since 2008, which led to large capital inflows and rising asset prices in economies like Singapore.
Prices of private and public housing in Singapore rose more than 50 per cent from mid-2009 to the middle of last year, after which they stabilised. This followed eight rounds of property cooling measures which included:
Loan tenure caps of 35 years
Loan-to-value ratios of 80 per cent for the first property loan, 50 per cent for the second and 40 per cent for the third, for loan tenures of less than 30 years; and ratios of 60 per cent, 30 per cent and 20 per cent for first, second and third property loans respectively for loan tenures of more than 30 years.
A total debt-service ratio of 60 per cent on borrowers, taking into account all their debt obligations; and
Caps on banks' property-related exposure at 35 per cent of their total exposure.
Singapore was one of the pioneers in the use of such macroprudential measures, which were in fact first deployed here in 1996. Some of them have also been used by China, Hong Kong, South Korea and Malaysia.
Mr Menon explained that attempts to deal with property price run-ups using conventional monetary policy could have backfired.
"In fact, paradoxically, a central bank that tightens monetary policy to stem financial vulnerabilities could perversely attract more capital flows into the economy, resulting in stronger credit growth and rising asset prices," he pointed out.
Moreover, during a property boom, expectations of price appreciation may have a greater effect on property prices than interest rates. "Using monetary policy to prick a property bubble may require very sharp increases in interest rates to be effective. But this may have unintended spillovers on other parts of the economy."
He added that raising banks' capital requirements for property loans may also not be effective. In a booming market where banks compete, higher capital charges "do not translate into sufficiently higher lending rates that can restrain demand", he said.
Mr Menon pointed out that even macroprudential measures may not be enough to sufficiently contain loan growth or asset-price increases. That is why Singapore also adopted fiscal measures, such as stamp duties on property buyers and sellers.
"These are essentially transaction taxes that aim to curb the speculative flipping of properties," he explained.
While macroprudential measures should be an essential part of a central bank's toolkit, Mr Menon stressed that the focus on financial stability should not be overdone.
"I suspect that, when the dust has settled and more normal conditions return, monetary-policy regimes will not look drastically different from pre-crisis days," he said.