Further Tightening of the HDB Market - MSR and Loan Tenure

Apparently someone up there thinks that the screws are not tight enough and they have to tighten it more to screw HDB owners up.

After achieving some initial success with the Mortgage Service Ratio (MSR) and shorter loan tenure which resulted in HDB resale transactions and cash-over-valuation (COV) falling, the Ministry for National Development (MND) decided to cut the MSR (35% to 30%) and loan tenure (30 years to 25 years).

What will happen next? Your guess is as good as mine.

Resale transactions and COV will continue to ease thereby making it more affordable for first time home buyers. The latest median transacted COV is $20,000.

With a shorter loan tenure and MSR, buyers have to fork out more cash if they buy a more expensive or big HDB flat. There will be lower demand for 5-room and bigger flats.

Sellers will curse their luck. As it is, I have seen advertisements for the same HDB flats for more than a month without success. The seller was only asking $20,000 COV. Two weeks ago, the advertisement changed to View To Offer (VTO) with no mention of COV. It is going to get more chilly for HDB resale flat sellers. There are going to be more transactions where COV is zero or even negative depending on how desperate the seller is.

Those borderline HDB upgraders who committed to a private condominium or executive condominium in 2010 will be the first to get hit HARD, real hard! When I say borderline, I mean those who need to sell off the HDB flat as they do not want to rent out their HDB flat and have no ability to service two loans. Their condominium or EC is going to obtain its TOP in 2014.

But as it is, our Government always try to balance out the market. To maintain a steady rental market for those wanting to hold on to their HDB flats, the Government has directed that the new Permanent Residents (PR) ie. those who get PR status for less than three years rent them. If I am a PR, I will be mad.

Already with the Additional Buyer's Stamp Duty (ABSD), a PR have to pay additional 5% for their first property purchase. Many are putting off the purchase of a property. Now they have to wait even longer. Who knows if the ABSD rate might go up?

Despite the Government trying to keep the HDB rental market steady, we doubt it will help much. First, approvals for PR status have been falling year after year since the Government tightened the criteria. We don't see it easing soon. Second the number of HDB upgraders who are holding on to their flats and renting them out is increasing. The 2Q 2013 subletting cases rose 6% from 1Q 2013. While HDB flat rentals have been holding steady, it is near the tipping point.

The mass market condominium will experience a knee jerk reaction but the fall in transactions will not be glaring. MND chose a nice month to announce new measures. It is the Lunar Seventh Month afterall and transaction volumes are expected to be low anyway.

Hopefully investors will be more sane after absorbing the new cooling measures and not pay ridiculous prices for a mass market condominium unit.

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!