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Fret not about house price increases and debts


By Alan Cheong / Savills, The Edge Property | February 6, 2016 9:00 AM MYT
Tags: home priceloandebtmortgagealan cheong
One of the concerns about the private residential property market is that rapid price increases are inducing households to chase after the market and, in doing so, take on further debt. The procurement of more debt is part of the reason for the rapid growth in housing loans in Singapore, bringing with it a fear that a fallout in the residential market would affect the quality of financial institutions’ loan books. Also, the rapid growth in housing loans is deemed a misallocation of debt from more productive activities. This article looks at several issues related to housing loans. One is whether the focus on house prices as a primary source of that increase is justified. Second, can we have house price increases and still stay on course with a measured increase of housing loans over time? Finally, we look at what measures are the least risky to reconfigure. By risk, we mean a higher chance of a resurgence of asset price inflation and rapid housing (or mortgage) loan growth.

Indeed, the year-on-year increase of housing loans has been astronomical, averaging 11.8% since the late 2002. Volatility has been tremendous, too. Looking at this, many will jump to the conclusion that much of this increase is due to asset price inflation (see Chart 1). Is that really the case? The chart shows that while housing loans have increased dramatically, the average price rise per annum, as captured by the Urban Redevelopment Authority’s (URA) All Private Residential Property Price (including EC) Index, has been growing at a much lower 5% a year. So, where did that excess growth of 6.8% a year come from? Volume increases is one — this has averaged 3.4% since 2002 as statistics are available only from then. Another is the likelihood that there has been a long-term rise in loan-to-value (LTV) ratios and other factors (see Chart 2).



housing and bridging loans rate

average annual house loan growth



Unfortunately, if we consider the dynamics of housing loans — such as how loans for projects under development are progressively disbursed, or loans that get repaid when the life of the mortgage expires, or when one sells a property or takes on a fresh property loan in the resale market — parsing the price increase to various attributing factors gets complicated. This means we cannot just use these statistics without subjecting them to modifications. As the housing and bridging loan numbers that are published by the Monetary Authority of Singapore are net cumulative loans (they include loans that have been retired or reduced), we will somehow have to arrive at the gross new loans drawn down each year. Using URA’s Realis database on the total value of transactions in the market each year, the change in the value of transactions can be used as a proxy for other the gross level of loans taken up. However, it is still not that untangled after accounting for that because the total value of transactions includes primary sale units — although these have been concluded, their loans have yet to be fully drawn down, and we have to account for this. Our growth attribution numbers are just an estimate, but this should not detract us from the general picture that emerges.

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