- Wealth PMS (50L+)
Singapore has figured out the best way to burst a bubble is to reduce the leverage taken to make that bubble go higher. They’ve upped the taxes on properties, and reduced the total debt service ratio that borrowers can have.
In Singapore, the government raised the minimum down-payment on second-home purchases, brought in new taxes for foreign and corporate buyers, and added a stamp duty for all residential properties. The Monetary Authority of Singapore said June 28 that home loans should not exceed a total debt-servicing ratio of 60 percent. In August, the central bank then cut the maximum period for new loans to buy public housing, where about 80 percent of Singaporeans live, by five years to 25 years. Mortgage payments were capped at 30 percent of gross monthly incomes, down from 35 percent, according to the Housing & Development Board.
So buyers will pay more (through taxes) for properties. And then, if they take a loan, their total loan payments (including cars and other debt) cannot exceed 60% of their income. The housing loan mortgage itself (interest plus principal) can’t go beyond 30% of pre-tax income. The term of such loans are limited to 25 years.
In India, I’ve argued that we have signs of a housing bubble. I’ve also stated that we have unnecessary housing “subsidies” – tax saving on interest AND principal, capital gains offset if you have capital gains of ANY sort (not just housing), lower interest rates, offsetting losses on rents against salaries. None of these are available for loans taken by individuals for other purchases (cars, scooters or TVs). I argue that we should remove these subsidies to make housing affordable and curb bubbles.
States have already upped taxes. Housing loans have been deprioritized when they go beyond Rs. 75 lakh. India’s loan to value (for banks) is capped at 75% for larger loans and then, there are no prepayment penalties.
However, India has two kinds of housing lenders – banks (well regulated by the RBI) and housing NBFCs (not that well regulated). Regulations must apply to all lenders, otherwise there’s just player arbitrage.
We don’t seem to have the inclination to curb this bubble. And as I speak, it is imploding. Housing is not so leveraged in India that it will hurt banks – there is a cash “black” component to housing buys that is effectively the buyer’s equity. (A bank loses only after the buyer’s equity has been wiped out) But the burst of the bubble *will* hurt everyone – from individuals to real estate companies to cement manufacturers.