Why property cooling measures were needed

As an essential complement to monetary policy, they contained market bubble: MAS
By Vikram Khanna, The Business Times, 26 May 2014

The property cooling measures adopted by Singapore from 2009-13 - 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 (MAS) managing director Ravi Menon.

However, they were introduced during a "highly unusual situation". As such, they will not be a permanent feature of policy and will only be used from time to time.

Mr Menon was speaking last Saturday at the inaugural Asian Monetary Policy Forum, which brought together academics, former central bank governors and economists from several countries to discuss monetary policy issues in the Asian context.

He pointed out that the global financial crisis of 2008-09 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.

However, the crisis led to a situation that required innovative responses from central bankers.

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.

Private and public house prices in Singapore rose more than 50 per cent from mid-2009 to mid-2013, 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 account of 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, Korea and Malaysia.

Mr Menon explained that attempts to deal with property price run-ups by 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.

Nor are financial vulnerabilities evenly spread across the economy; they tend to be concentrated in certain areas such as property. Traditional monetary policy "is too blunt an instrument for addressing such specific risks . . . and it can cause significant collateral damage to the rest of the economy," he said.

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 therefore 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. Buyer stamp duties range from 3-18 per cent, while seller stamp duties range from 4-16 per cent.

"These are essentially transaction taxes that aim to curb the speculative flipping of properties," he explained.

But while macroprudential measures should be an essential part of a central bank's toolkit, Mr Menon stressed that the focus on financial stability - which became more important after the global financial crisis - should not be overdone to the extent that monetary policy becomes detrimental to price and output stability, which are the traditional goals of central banks.

"The current situation is highly unusual. We must not fall into the trap of believing that the innovative policy measures taken now . . . represent the basis for a new paradigm in the future.

"I suspect when the dust has settled, and more normal conditions return, monetary policy regimes will not look drastically different from pre-crisis days," he said.

The Asian Monetary Policy Forum was organised and funded by the University of Chicago Booth School of Business, the National University of Singapore (NUS) Business School and the Monetary Authority of Singapore.