New Cooling Measure on the Property Market

Although that the new Total Debt Servicing Ratio (TDSR) have been done and dusted and even well covered by the media, we feel that the analysis in the media have missed out certain pertinent points even to the extent of dismissing the new measure as mild. Some analysts even say it is not a cooling measure. How can we say it is not a cooling measure when it will affect demand?

• As an analyst, I have brought up the issue of financial institutions granting loans where the debt servicing ratio (DSR) was as high as 60% and different financial institutions have different ways of assessing the ability of borrowers to repay the loan to the media.

• The Monetary Authority of Singapore imposed a mortgage servicing ratio (similar to DSR) of 30%/35% on the HDB market on 12 January 2013. It is a matter of time this is extended to the private residential market. 

• This measure has bite in our opinion. The TDSR takes into account all the outstanding debts a borrower has. These debts can include car loans, credit card installments, study loans and all kinds of debts the borrower is repaying at the moment.

• Unlike previous cooling measures where the Government has hinted that it will be temporary, Minister Khaw has said that this measure will be permanent because the financial institutions did not have a structured way of assessing the ability of borrowers to repay loans. And the ratio can be lowered too!

• The interest rate used to compute TDSR is not the current low rate of 1% but the medium term rate of 3.5% for housing loans. This means to comply with the TDSR of 60%, the borrower has to cough up more cash, borrowing less from the financial institutions.

• Guarantors have to be the co-owner of the property. This effectively closes the loophole where cash rich parents used their child’s name to buy a property to qualify for a 80% loan and avoid paying the Additional Buyer’s Stamp Duty.

• Demand will come down for sure be it near term or long term.

• Interest rate will go up. Why? Imagine a financial institution has $1 million to lend. When the borrower can borrow up to 80%, the bank need only to find one or two borrowers to take up the $1 million. The tighter loan to value ratio implemented previously means the financial institution means the financial institution has to source for two to three borrowers to take up the $1 million. Now with the TDSR, the financial institution needs more than three borrowers to take up the $1 million. But the number of borrowers will decline with the new TDSR as well. This means to maintain the profit margin (which is already razor thin now), interest rates have to go up.

• Developers will build smaller units to keep them affordable to buyers. Currently the average unit size in new launches is around 81 sq m in the first six months of 2013. This is expected to go down to 70 sq m which is the minimum set by the Urban Redevelopment Authority.

• Resale market will see dip in demand as their unit sizes are bigger than the new launches.

What will be the impact on the property market?

The Government still has a few more tricks up their sleeves. If I may guess, they might require buyers to have the full cash in their bank account before they can buy from new launches. Some buyers do not have 50% cash in their banks when they take a second property loan. They may have 40% cash and because payment to the developer is on a progressive mode, the remaining 10% will be saved up over a period of one to two years.

The thing to note is this measure is not the last and it will stay even if the market corrects!

Buying Iskandar Properties - The Risks

With all the news on numerous Singaporeans buying homes in Iskandar, one would have thought that the past reputation of uncompleted homes, abandoned projects or delays in completion haunting Malaysia is gone.

But it appears not to be.

Just recently, a mixed development project consisting of hotel, shopping mall and residential units, minutes away from the Causeway found itself in the limelight after irate buyers complained of delays to the press.

Buyers say that they were given conflicting information on the completion dates of the project.

Here's what the developer said – the 80 per cent completion rate cited in 2011 referred to the lower floors and that "every floor has a different completion date". Just like in Singapore, projects are given a five-year grace period for completion.

"But projects first get three years unless you apply for an extension, which we did not plan for. If we had applied for the extension to five years, this year would have been the fifth year, and we'd be in time to complete the project."

The firm said the sales and purchase agreement begins only on the date of purchase, not the day which construction started. That means every buyer's three-year duration started at a different date. It also means if the project is completed within three years of the sales and purchase agreement, there is little disgruntled buyers can do.

Ouch! So the completion date of the project is a moving target. Hope the buyers get their keys soon. And one thing to note – this developer is listed on the Malaysia stock exchange.

We hope that buyers of projects in Iskandar check the fine print before signing.

Eco Housing from Brazil

In March, The Straits Times reported that Brazilian developer EcoHouse Group had netted $70 million from Singapore investors for three of its housing projects in Brazil, the latest one being the 2,176-unit Bosque Residencial project in Natal, in the north-east of the country.

The promised return is 20 per cent within a year, when the units are resold to Brazilian buyers later at a higher price.

One forumer noted: "How come these people can afford to spend so much money in super expensive marketing, hire the priciest office in Singapore and Dubai, buy football clubs in Brazil and Italy, pay 20 per cent returns in just one year and still make a profit?

"I would believe it if they were developing luxury properties for the highest segment . . . but for goodness sake, it is social housing in an emerging economy!"

A forumer at Valuebuddies.com highlighted that EcoHouse on its website said: "Across its global companies, EcoHouse employs more than 1,000 people in eight countries and 2013 revenues are expected to top £250 million ($400 million)."

He asked: "If revenue is 250 million pounds, and at 23,000 pounds per house, they would have to sell and complete 10,869 houses."

Think of it this way - why is the Government allowing foreigners to profit from social housing? And why would they fly half the world to sell you the project? Why aren't they selling it straight to the poor?