The Monetary Authority of Singapore (MAS) announced on Thursday (May 26, 2016) that it will be relaxing the curbs on car loans put into place since 2013.
Those rules limited car loans to 50 to 60 percent of the purchase price, with a repayment period of five years.
For cars with an OMV below $20,000, buyers will be able to borrow up to 70 percent (previously 60 percent) of the car’s purchase price and pay it back over seven years.
For cars with an OMV above $20,000, buyers will be able borrow up to 60 percent (previous 50 percent) for seven years.
Industry watchers say this might spur greater demand for cars, and drive up COE prices.
In a press statement, the MAS said the adjustments follow the sustained moderation in certificate of entitlement (COE) premiums and in the resulting inflationary pressures over the last three years.
MAS’s deputy managing director Ong Chong Tee said: “In 2013, when we introduced the measures, our immediate aim was to help restrain escalating COE premiums and consequent inflationary pressures.
“Since then, demand conditions have moderated and it is timely to ease the measures.”
The Most Likely Reason Behind the Policy Easing
Given that the government is going all out to push for a “car-lite Singapore“, it may seem contradicting to ease the car loan policies at this time.
However, it should be noted that MAS’ mandate is to “promote sustained, non-inflationary economic growth through appropriate monetary policy formulation”, rather than being concerned with transport or environmental issues.
The most likely reason why MAS is easing the car loan measures at this time is most likely due to concerns regarding deflationary pressures.
On May 24, 2016, MAS reported that Singapore’s Consumer Price Index (CPI) dropped by 0.5 per cent in April from the same period one year ago – the 18th straight month of decline and the longest streak of negative inflation since 1977.
The biggest culprit for this drop was private road transport costs, which fell 7.1 per cent in April, from the same month a year ago. This was mainly due to a larger decline in car prices amid weaker Certificate of Entitlement (COE) premiums, as well as a drop in petrol pump prices from last year.
What Does it Mean for Property Loan Policies
Does this mean that MAS is going to tweak loan rules for property as well?
As part of measures to cool the red-hot property market in 2013, MAS reduced the loan-to-value limit for buying properties. Buyers taking a second home loan may only borrow up to 30 to 50 per cent of the property purchase price, and those taking a third home loan may only borrow up to 20 to 40 per cent.
MAS also introduced the Total Debt Servicing Ratio (TDSR) framework which effectively limits the loan a home buyer could take on, relatively to his/her income.
However, when we examine the CPI report for April, accommodation costs decreased by a mere 0.9 per cent over the same period one year ago, compared to the 3.2 per cent drop in March. Actual and imputed rentals fell at a faster pace, but the cost of housing maintenance and repairs rose.
Moreover, core inflation rose 0.8 per cent in April.
Hence, it does not look likely that MAS will ease housing loan policies in the near future, as the price drop for housing is insignificant and in fact, seems to be tapering off.
But what the car loan policy easing has shown is that MAS is keeping a very close watch on inflation numbers, and is concerned that Singapore might enter into a “deflationary spiral”.
If inflation numbers and property prices continue to head southwards in the next year or so, MAS might just start to ease some of the housing loan restrictions it put into place in 2013, with the loan-to-valuation (LTV) limit the most likely measure to be eased first.