Speech by Mr Mah Bow Tan, Minister for National Development, on Policy Changes Affecting the Property Market, at Parliamentary Sitting

Mr Speaker, Sir,

Introduction

1. Over the past few years, the Government has implemented several key policy changes related to the property market. These included adjustments to the CPF Ordinary Account contribution rates and cash downpayment requirements, and limiting the amount of bank financing for the purchase of private residential properties. We also capped the amount of CPF that could be withdrawn to purchase properties using bank loans.

2. Such re-tuning of policies from time to time is necessary to ensure their continued relevance to broader social and economic objectives. These objectives include enhancing Singapore's cost competitiveness, ensuring retirement adequacy for an ageing population, and maintaining a healthy financial sector.

3. These changes in CPF policies, mortgage financing rules, and policies relating to home ownership affect the property market, in one way or another. As such, we need to ensure that the rules set will foster the free and undistorted functioning of the property market. It is in our interest to ensure that the property market is stable and consistent with economic fundamentals, as it affects home ownership, asset values, retirement savings and the health of the banking sector.

4. So far, the various CPF, home ownership and mortgage rules have been introduced at different times to fulfil various objectives. Hitherto, we have not comprehensively reviewed all of them together.
We have thus decided to do a holistic review of various property-related policies, and implement them as a package. This way, we can provide stakeholders in the market with a complete picture, and ensure that the measures are consistent with one another.

5. The review has covered three major areas, namely (1) caps on bank financing for residential properties; (2) limits on the use of CPF for property purchases; and (3) restrictions on foreign ownership of lands and properties.

6. Let me stress that the purpose of the changes is neither to boost nor depress the property market. Rather, the review is to improve structural rules in the above areas to improve the functioning of the property market, and to better achieve broader economic and social objectives in todays context.
Some of the measures introduced will have a positive effect on the property market, while others may have a dampening effect. The net effect will depend on many factors, many of which are beyond these measures. We believe that with prudent and realistic decisions, the market will find a new equilibrium that will be based on economic fundamentals.

7. The Government Ministries/agencies involved in the review include the Ministries of Law, Manpower, Trade and Industry, and National Development, as well as the Central Provident Fund Board, Monetary Authority of Singapore, Economic Development Board, Singapore Land Authority, Housing and Development Board, and Urban Redevelopment Authority.

8. I will now proceed to elaborate on the measures that will be put in place in the next few months.
Details of these policy measures will be provided by the respective Government agencies separately.

Mortgage and Financing Policies
Raise LTV limit for housing loans from 80% to 90%

9. The first of these measures is the raising of the Loan-to-Value (LTV) limit for housing loans. MAS introduced the 80% LTV limit for bank-originated housing loans in 1996, together with the Government's package of measures to cool the private property market. The 80% LTV limit was intended not only to counter the market overheating at the time, but to ensure sound bank lending practices across property market cycles. The 20% payment by borrowers provided a buffer for banks in the event of a property downturn. This was particularly important as bank loans at the time ranked second behind borrowers' own CPF claims on mortgaged properties.

10. In 2002, the priority of claims over properties was changed so that banks now held the first charge for the property ahead of CPF. It has been three years since, and the market has had sufficient time to adjust to this change. Currently, over two-thirds of banks' outstanding housing loans are secured by first claims over properties. MAS is now ready to increase the housing financing limit to 90% of the property value. The remaining 10% which the purchaser has to pay will continue to deter over-borrowing by purchasers and minimize potential losses by banks arising from borrower default. However, to mitigate the increased risk that banks will take, MAS will require banks to hold more capital against housing loans which exceed 80% of the property value. MAS will also expect banks to apply rigorous internal credit evaluation criteria before extending high LTV loans.

11. In some countries, mortgage insurance is available to insure lenders against the risks of high LTV loans.
MAS is prepared in-principle to consider mortgage insurance as an alternative to the capital charge to mitigate the risks of high LTV loans. However, mortgage insurance is not yet available in Singapore. MAS will be studying its viability here and how best to regulate mortgage insurers.

12. HDB will similarly raise the loan limit for its flat buyers from 80% to 90%. The actual loans to be granted will be subject to the banks' and HDB's credit assessment and mortgage financing policies.

Limit minimum cash payment required for residential properties at 5%

13. Another revision to the housing loan rules in 2002 was the reduction of the cash payment for private residential properties to 10% of its value, down from 20% previously. The Government will now lower the cash payment for private residential properties from 10% to 5%. This means that a purchaser who is granted a 90% loan for his housing unit can pay his remaining 10% through a combination of at least 5% of the property value in cash, and the remaining with CPF.

14. For HDB flats financed with bank loans, the payment to be paid in cash is currently 4% and is slated to increase gradually to 10% in 2008.
In line with the reduction in the cash payment for private residential properties to 5%, the Government will adjust the cash requirement for HDB flats financed with bank loans to 5%, instead of to 10% as initially planned.

15. The raising of the LTV limit will take immediate effect and apply to all properties purchased from today. The 5% cash requirement for private properties will take immediate effect, while that for HDB flats will apply to flats purchased from 1 Jan 2006.

16. These changes will give consumers a wider choice of financing options when purchasing a property. However, I urge property buyers to continue to exercise prudence in their home purchase and financing decisions, and ensure that they can comfortably afford the expenses.

Central Provident Fund Policies
17. The CPF Board will streamline its policies to increase flexibility for the use of CPF savings to purchase property, while ensuring that adequate sums are put aside for retirement needs.

Reduce Minimum Lease Period (MLP) for use of CPF savings

18. The first policy change is to allow the use of CPF savings to purchase private residential properties with shorter leases. Currently, CPF members are allowed to use their CPF savings to purchase private residential properties only if these properties have remaining leases of at least 60 years. This is to ensure that the lease can last the average life expectancy of buyers.
This policy intent is still valid, but older members can also meet this objective when they choose to buy properties with shorter leases. The Government has therefore decided to allow CPF members to use their CPF savings to purchase private residential properties with remaining leases of 30 to 60 years. CPF withdrawal limits for the purchase of such properties will be pegged to the age of the purchaser and the remaining lease of the property. CPF will provide further details shortly. This policy change will take immediate effect.

Allow non-related members to jointly purchase private residential properties using CPF savings

19. The second change pertains to the purchase of private residential properties by non-related members. Currently, CPFB does not allow non-related CPF members to use their CPF savings to jointly purchase private residential properties.
However, non-related singles have been allowed to use their CPF savings to jointly purchase HDB flats. To align the treatment of private residential properties with HDB flats, the Government has decided to allow non-related singles to use their CPF savings to jointly purchase private residential properties.

20. This policy, which will take immediate effect, is expected to benefit singles who have been hitherto constrained by CPF regulations to share purchases of private residential properties.

Simplify the Available Housing Withdrawal Limit (AHWL)

21. The third change to CPF policies is to simplify the Available Housing Withdrawal Limit (AHWL). The AHWL limits the amount of CPF savings that CPF members can withdraw for housing purchases.
Currently, for CPF members below 55 years of age, the AHWL is set at either 80% of the gross CPF savings in the Ordinary Account and Special Account in excess of the prevailing Minimum Sum, or the available Ordinary Account balance after setting aside the Minimum Sum cash component, whichever is lower. However, the current AHWL is complex and difficult for members to understand. Therefore, CPF Board has simplified the requirement to set the AHWL only to the available OA balance after setting aside the Minimum Sum cash component. This will raise the AHWL for a small number of CPF members. This policy change will take immediate effect. Government's plans to reduce the CPF withdrawal limit for housing expenditure to 120% of the property's valuation limit by 2008 will remain unchanged.

Transfer Medisave Account (MA) overflows to Special Account (SA) or Retirement Account (RA) instead of to Ordinary Account (OA)

22. Currently, Medisave Account (MA) contributions in excess of the Medisave Contribution Ceiling, or "MA overflows", are automatically transferred to CPF members' Ordinary Accounts (OA), whose funds can be used for property purchases and other investments. To improve retirement adequacy for CPF members, the Government has decided to transfer MA overflows into the Special Account (SA) for members aged below 55 and into the Retirement Account (RA) for members aged 55 and above. The interest rate for the SA and RA is higher than that for the OA. This will benefit members and better ensure adequate retirement savings for members.
However, as savings in the SA and RA cannot be used for property purchases, the measure could affect a small number of members who currently rely on their MA overflows to finance their mortgages in properties. CPF Board will allow existing mortgagors who have difficulty servicing their loans arising from this measure to use their MA overflows to do so upon appeal, subject to conditions. This change will require the CPF Act to be amended and the effective date is set as 1 Jul 2006.

Impose restrictions on the use of CPF savings for multiple property purchases

23. The CPFB has also reviewed its policy on the use of CPF savings to purchase multiple properties. Currently, CPF members can use their CPF savings to purchase more than one property.
To ensure that retirement needs are not compromised, the Government has decided that only the CPF savings in the OA in excess of the Minimum Sum cash component can be used for the purchase of 2nd and subsequent properties. Members with inadequate Minimum Sum cash amounts will be allowed to use their CPF funds for the purchase of 2nd and subsequent properties if they undertake to sell their existing property within 6 months from the purchase of the second property. For the second and subsequent properties, the amount of CPF savings that can be used for their purchase is capped at 100% of the valuation limit of the property. This measure will take effect on 1 Jul 2006.

Phase out the Non-Residential Properties Scheme (NRPS)

24. The final change to CPF policies pertains to CPFBs Non-Residential Properties Scheme (NRPS). Currently, the NRPS allows CPF members to invest their CPF savings in non-residential properties such as office space, shops, factories and warehouses. Since members who wish to invest their CPF savings in properties can now do so by investing in property funds instead of physical properties, the Government has decided to phase out the NRPS by 1 Jul 2006. Existing NRPS users will be allowed to continue to use their CPF savings to pay their mortgage installments for non-residential properties.

25. CPF Board will release the details of the above six changes to CPF policies shortly.

Foreign Purchases and Ownership of Residential Properties
26. Let me now turn to changes affecting foreign purchase and ownership of private residential properties and lands in Singapore.

Allow investment in private residential properties to qualify for PR status under EDB's Global Investor Programme (GIP)

27. Currently, under the Global Investor Programme (GIP) administered by the Economic Development Board (EDB), foreigners can be considered for Permanent Resident (PR) status if they invest a certain minimum sum in business set-ups and/or other investment vehicles such as venture capital funds, foundations or trusts that focus on economic development.Private residential properties, which had been allowed under the GIP, were removed from the list of allowable investment instruments under the scheme in 1996. The Government has now decided to re-allow investment in private residential properties. Under a new option to the current GIP, a foreigner can now be considered for PR status if he invests at least $2 mil in business set-ups, other investment vehicles such as venture capital funds, foundations or trusts, and/or private residential properties. Up to 50% of the investment can be in private residential properties, subject to foreign ownership restrictions under the Residential Property Act (RPA). This additional option will complement our efforts to attract and anchor foreign talent in Singapore. This policy change will take immediate effect.

Foreign ownership of residential properties under the RPA

28. Under the Residential Property Act (RPA), foreigners can buy restricted properties only with approval. Restricted properties are landed properties as well as apartments in non-condominium developments of less than 6 levels.

29. The Government has reviewed the RPA rules and has decided to fine-tune the RPA rules in three aspects.

30. First, with immediate effect, foreigners can purchase apartments in non-condominium developments of less than 6 levels without the need to obtain prior approval. For landed properties, prior approval is still needed if foreigners wish to buy. Landed properties is a special class of residential property that Singaporeans aspire to own, and should remain restricted.

31. The second change concerns the exemption granted to some foreign companies from applying for a Qualifying Certificate (QC) when they purchase residential land for development. Under the RPA, foreign companies are required to apply for a QC. To obtain the QC, they must provide a Bankers' Guarantee for 50% of the purchase price of the land and commit to complete the development in 3 - 4 years. The purpose of these requirements is to ensure that foreign companies do not hoard land or purchase land for speculation.

32. Currently, a small group of foreign companies are exempted from these QC requirements. To level the playing field, the Government has decided to revoke the exemption status of currently-exempted foreign companies and subject all foreign companies to the QC requirements, with immediate effect. The existing land stock held by currently-exempted foreign companies will be given grandfather rights.

33. The third change concerns the requirements attached to the grant of a QC. We recognise that the QC requirements impose costs on businesses. To lower these costs, the Government has decided to reduce the required Banker's Guarantee from 50% to 10% of the land price. In addition, to allow foreign developers some flexibility to ride out unexpected changes in market conditions, the period allowed for completing developments is extended from the current 3-4 years to 6 years. The Ministry of Law will release further information on these changes and their implementation dates separately.

Conclusion
34. Mr Speaker Sir, to reiterate, the policy changes proposed above are not intended to steer the property market in any direction. Some of the policy changes will have a positive effect on the property market, while others may have a dampening effect. The overall impact of these measures on the market may be positive or negative, but that is not the purpose of our review.

35. Rather the changes must be seen in their totality, as a package that will enable the property market to work better, and to find its own equilibrium based on firm economic fundamentals. Some changes are refinements of rules put in place in earlier reviews. Others are to remove provisions or controls no longer relevant, or to introduce new opportunities. Where necessary, we have put in place adequate, but not excessive, safeguards.
We will continue to review our rules and policies from time to time, and to change them if conditions change or unexpected situations arise. But I believe that these new policies, which lay the foundation for us to achieve longer term objectives, will be relevant through the ups and downs of the property cycle.

36. I will be pleased to answer any questions from Members, together with my colleagues from MinLaw, MOM and MAS.