Total debt service ratio on the Singapore residential market

September 10, 2013 / By

The Singapore residential market saw another round of policies – not a cooling measure as the Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam specifically mentioned during his announcement of the policy, which has been in effect since 29 June 2013. Yet the effect of this latest financial framework has led to a dramatic 73.3% m-o-m contraction in new home sales during the month of July – the first monthly sales record available after the policy intervention. The volume of new home sales declined to only 481 units (excluding executive condominiums) – the lowest on record since December 2009.

This latest policy aligns the financial institutions’ underwriting procedures and encourages greater prudence among borrowers. Financial institutions assessing a borrower’s ability to service the debt will now have to take into account the latter’s other outstanding debt obligations. This total debt obligation should not exceed 60% of the borrower’s income. Besides taking a medium term or prevailing market interest rate, whichever is higher, haircuts of 30% must be applied to all variable income, including rents.

Just last week, preliminary data released by the Monetary Authority of Singapore showed that the loans to deposit ratio breached the 100% threshold – the first time since September 1995. This adds further evidence supporting the policy intervention, as most economists reportedly agreed.

While the policy is new to Singapore, it’s not that uncommon elsewhere. The ratio of 60% appears rather generous compared to those in other markets.

Is this latest Total Debt Servicing Ratio Framework (TDSR) the proverbial straw that broke the camel’s back? As this policy is new to the Singapore market, its effect is not easily identified. Mr Tharman stated that while hard data is not available, the ministry’s assessment is that 5-10% of borrowers could be at risk of over leveraging under this guideline.

The effect of this policy is likely to be most felt in the high-end segment, given the already weak activity there. A softening of some 3-5% in prices can be expected in this segment over the next three to six months. The mass market could see more resilience in the short term while in the longer term this financial framework will have the effect of reducing volatility and normalising demand. Together with other demand and supply side measures, the government may be better able to achieve its objective of keeping price growth in line with economic growth, at 2-4% per year.

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