Singapore residential property – new loan framework to counter over-leveraging

July 9, 2013 / By  

On 28 June 2013, the Monetary Authority of Singapore (MAS) introduced a Total Debt Servicing Ratio (TDSR) framework for all property loans granted by financial institutions to individuals. The TDSR takes into account borrowers’ other outstanding debt obligations when granting property loans and this total debt limit is set at 60% of gross monthly income. In addition, the housing loan rules were also tightened to ensure that borrowers do not circumvent the loan limits with proxy or guarantor arrangements. The MAS explained that the TDSR would streamline uneven lending practices by different banks and also improve the credit underwriting practices. Implementation of the TDSR was said to be consistent with previous measures to promote sustainable conditions in the property market and was not meant to target the current property cycle. These latest measures are structural in nature and intended to remain for the long-term.

However the announcement of the TDSR just days before the Urban Redevelopment Authority (URA) released its second quarter estimates on residential property price indices, suggests that the new loan framework arose out of concerns over sustained property market buoyancy. In particular, the index for Outside Central Region (OCR) rose 3% in the second quarter, up from 1.4% in the preceding quarter. OCR which is equivalent to the suburban mass market has been the best performing segment since the recovery from the financial crisis in mid-2009. OCR prices have risen nearly 70% since then and in spite of an array of cooling measures in place, it still managed to rise by 9.4% over the last four quarters. This is in contrast to the prime market where demand remains sluggish and prices are softening.

The buoyant OCR segment has contributed to the resilience in primary market sales by developers, where it dominates with a 60% market share. Notwithstanding a tough set of cooling measures imposed in January, developer sales have rebounded with the first five months of 2013 averaging nearly 1,700 units per month, a still healthy level compared to the monthly average of 1,850 units in 2012. Sustained sales and price buoyancy are two key factors that cause unease amongst policy makers so we can infer from these recent trends that policy makers intend to maintain a tight grip on the market.

The introduction of the TDSR and tightening of housing loan rules amidst continued market optimism dispels the notion that the authorities are less likely to intervene in the market since demand and prices would ease by themselves, with an eventual reduction in liquidity and an increase in interest rates. There is concern that rising interest rates would increase the risks of over-leveraging by buyers, exacerbated by possible purchasing at the peak of the market. The TDSR, together with the tightening of housing loan rules and other measures already in place, appears to better mitigate such risks for both the borrower and the lender. As with past measures imposed, the impact on the market will be closely monitored and further measures cannot be ruled out given a potentially more risky market ahead.

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