http://www.todayonline.com/business/...-affordability

Property

TDSR rule will hit affordability

05 July



Singaporeans were totally caught off guard when the haze struck on June 17, with the Pollutant Standards Index (PSI) rising to 155, the worst reading in 16 years. Four days later, the PSI soared to a record 401. There was a mad scramble for masks here. I read on Facebook that even the popular MBK Mall in Bangkok ran out of N95 masks because Singaporean tourists apparently snapped them all up. Though the latest haze incident was short-lived, it taught us a good lesson on being prepared for unforeseen circumstances.

Last Friday, the Monetary Authority of Singapore (MAS) announced the new total debt servicing ratio (TDSR) framework in what I saw as a parallel with the PSI saga, with the central bank preparing Singaporeans for a “haze scenario” when interest rates start to rise. The MAS could have seen signs of debt levels rising relative to the ability to service them when it rolled out the loan curbs on cars in February, and now on mortgages.

The move surprised some market observers because, only recently, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam gave the assurance that the Government did not intend to introduce another round of property cooling measures. In its statement last Friday, the MAS said: “While the rules are not targeted to address the current property cycle, they are consistent with previous measures aimed at promoting sustainable conditions in the property market.”

Yet, the announcement was also not totally unexpected, especially with the rising number of cases of Singaporeans using proxies — either children or close relatives — to buy properties on their behalf in order to circumvent the January cooling measures. It is estimated that these buyers form 20 to 30 per cent of the demand for new launches today.

The concept of TDSR is not new in the market, at least not in Singapore. When you purchase a property in Malaysia, you have to submit all your relevant documents for the bank to assess your TDSR, which is calculated as the percentage of total debt payments over income. Acceptable TDSRs vary from lender to lender and can range from 30 to 60 per cent, with a majority of financial institutions maintaining a 40 per cent TDSR. Hence, our 60 per cent cap is quite generous.

Some might not count the latest move as the eighth set of cooling measures, but its impact, when coupled with the January curbs, can be significant, especially on housing affordability. Let us take a closer look at the numbers.

Data from the Department of Statistics shows that monthly household income in the 71st to 80th decile is S$11,973. Given that around 20 per cent of Singaporeans live in private residential properties, this is probably an appropriate entry income level to be assessed. Let us round it up to S$12,000 for easy calculation.

Under the new TDSR, families with this income can use up to S$7,200 a month to service all debts, including existing mortgages, personal loans and car loans. If the borrower has no other debt obligation, he or she will be allowed to use all the money to fund the property purchase. But there is one catch: The interest rate the bank uses is no longer the prevailing record-low interest rate. It will start from 3.5 per cent and will be the prevailing interest rate if it exceeds 3.5 per cent.

Let us assume that the borrowers of this typical household are both 40 years of age and they can take a loan of up to 80 per cent of the property value. The home they can afford will be S$1.79 million, possibly a four-bedder at mass market new launches today.

But what if the family also has a car and some outstanding consumer loans totalling S$2,000 a month? This will reduce the affordability by 30 per cent. Now the family only has S$5,200 to service the housing loan. As such, the home within their reach is now reduced to S$1.28 million. (see Table).

However, if there is still an outstanding mortgage loan, things can take a turn for the worse. Using the same example as above, if the family is already paying S$3,500 for monthly instalments, the investment home that they want to purchase can only be S$680,000 or less based on a 50 per cent loan-to-value (LTV) on the second loan. This would push investors to smaller units in more out-of-the-way locations, given that many new mass market homes easily cost more than S$1,000 psf.

For joint borrowers, an income-weighted average age approach is also adopted to compute the loan tenure. This is commendable because it is no longer feasible for young borrowers to rely on their parents’ income to service the loans. Often, these parents also rely on rental incomes that may not be sustained over a long period of time as the property market faces a potential supply overhang in the next few years.

And as the loan tenure shortens, the debt rises quickly and eats into the numerator of the affordability equation. This will price some older investors out of the market.

However, one possible downside is that the new rule also indirectly encourages home buyers to go for as long a loan repayment period as possible, in order not to exceed 60 per cent of the gross monthly income. Instead of paying off all the loans in 15 years like what many of our parents did, many will not hesitate to go for the maximum tenure as long as it does not affect the LTV. This means more interest will be paid in the long run and savings can be depleted. Should one lose his or her job or income when the economy goes into a recession, the debt problem could snowball.

The good news is that data from the Credit Bureau Singapore shows that as of the first quarter of this year, the proportion of people having multiple home loans is merely 12 per cent, and it has been coming down steadily since 2010. Among the multiple loan holders, 61 per cent do not have other debts such as personal loans and car loans, higher than the 58 per cent in 2009. That leaves only about 22,121 mortgage loan holders, or 4.7 per cent, who are probably overstretching themselves if they are not high-income earners.

In short, the new TDSR framework came just in time for us to get ready for what lies ahead — an impending interest rate hike, which can be as early as next year. It also weeds out over-leveraged investors and speculators. But the challenge remains as Singaporean households are more in debt than a decade ago, mainly due to property purchases. Our household debt has risen to 75 per cent of gross domestic product, doubling from 38 per cent in 2000.

One of the most basic rules of financial planning is to set aside six to nine months of salary as an emergency fund, but I am not sure how many Singaporeans stick to the conventional wisdom when they invest in properties. Full employment is not possible all the time, too, as the economic cycle fluctuates. It is wise not to get too caught up in the hype, especially when one has not planned anything for rainy days.

ABOUT THE AUTHOR:

Christine Li is head of research and consultancy at property firm OrangeTee.