http://www.businesstimes.com.sg/arch...eason-20130803
Published August 03, 2013
Home prices, housing affordability within reason
Singapore Real Estate Exchange Property Index data refutes Moody's downgrade
By Mindy Tan
[email protected]
NOT only are home prices within reason, housing affordability - measured by the mortgage debt servicing ratio (MDSR) - is well within its historical norm.
This would mean that Moody's assertion that rapid loan growth and rising real estate prices have endangered the health and stability of the resident property market is questionable, according to the Singapore Real Estate Exchange (SRX).
Looking at data from the Singapore Real Estate Exchange Property Index (SPI), prices of Singapore's non-landed residential homes rose 104 per cent between January 2000 and June 2013.
This translates into an average annualised capital gain of 5.4 per cent.
"For an asset commonly used to hedge against inflation, an annual price appreciation of 5.4 per cent looks reasonable for a country that has, since 2000, experienced average annual inflation of 2.2 per cent, gross domestic product (GDP) growth of 6.5 per cent per year, average unemployment of 3.7 per cent, and transformed itself into a regional powerhouse in finance, health care, logistics, biotech and entertainment, to name a few," said SRX in its report.
Turning its attention to housing affordability, SRX found that its "most conservative MDSR" across all income segments - so termed because it assumes a loan tenure of 30 years, 100 per cent loan-to-value (LTV), and a 15-year fixed mortgage rate (2.95 per cent) which is considerably higher than that of the variable rate - is still reasonable on a historical basis.
Adjusting the LTV to reflect the market's average LTV of 40-53 per cent on the other hand saw MDSR improve accordingly.
At 80 per cent LTV, all four income segments see the MDSR fall below 21 per cent. At 50 per cent LTV, the income segments are below 14 per cent MDSR.
The study looked specifically at four market segments - people who fall into the 40th to 50th income percentile (classified as mid-tier HDB); 70th to 80th income percentile (upper-tier HDB); 80th to 90th income percentile (mid-tier private); and 90th to 100th income percentile (upper-tier private).
Further sensitivity analysis on the impact of 30 per cent, 50 per cent and 100 per cent increase in fixed mortgage rate was also conducted.
Assuming that interest rates go up by 100 per cent, the mid-tier HDB segment would see MDSR spike to 36 per cent from 25 per cent; upper-tier HDB would see their MDSR go up to 29 per cent from 21 per cent; mid-tier and upper-tier private would see MDSR increase to 32 per cent from 23 per cent, respectively.
This shows that income appreciation has sufficiently kept pace with property price appreciation, said SRX, noting that it would take a significant increase (in the range of 50 per cent to 100 per cent) in interest rates before the current MDSR approaches historical heights.
In addition, given that bank underwriting and government regulation have kept LTV well below 100 per cent, it goes that while there may be individual cases of households overextending themselves, households in general are in better condition than they have been historically to service their debt.
It is for these reasons that Moody's rationale for the downgrade is questionable, and its analysis in reaching its conclusions deserving of more scrutiny, said SRX.
Moody's lowered its outlook for Singapore's banking system to "negative" from the previous "stable" outlook in July, citing a rapid rise in loans and soaring property prices in Singapore.
Given an impending rise in interest rates, these trends could spell trouble for the country's banks, said the ratings agency.
The Monetary Authority of Singapore quickly refuted this, saying that local banks are not at risk, and that regular stress tests have shown that adequate buffers are in place to cope with the inevitable upturn in the interest rate cycle.
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