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!
