Sunday 30 June 2013

Fresh curbs on property loans: MAS introduces Total Debt Servicing Ratio (TDSR) framework - 28 Jun 2013

Factoring in all debt obligations among steps to encourage financial prudence
By Aaron Low, The Straits Times, 29 Jun 2013

TOUGHER rules have been imposed on mortgages to stop home buyers getting in too deep and to plug loopholes that let people dodge tougher loan limits on second and subsequent properties.

The new curbs are not seen by the Government as another step to cool soaring prices, but property experts say they will still have some effect by reining in borrowing.

The rules, which take effect today, demand that lenders consider a borrower's total debt obligations, including other mortgages and loans for cars, before granting a new home loan.

Banks will not be able to approve a loan if the monthly repayments of a buyer's total debt obligations exceed 60 per cent of his gross monthly income.

Take a property buyer who has a monthly income of $10,000 and debt obligations, including his car, credit card and other such loans, of $3,000.

If the new mortgage's monthly repayment exceeds $3,000, that would bring his total repayments to over $6,000 - and total debt obligations to over 60 per cent.

Banks would then have to relook how much they can lend to him under the new Total Debt Servicing Ratio framework - which applies to loans for all property types - announced by the Monetary Authority of Singapore (MAS) last night.

MAS said the rules also apply to borrowers looking to refinance, and said the 60 per cent limit will be reviewed over time.

Borrowers on a mortgage will also now have to be named as the owners of the property.

This and other changes to the loan-to-valuation rules are to prevent borrowers from getting round tougher limits for second and subsequent housing loans.

The changes will prevent parents from using their children's names to buy a second property, said Orange Tee's head of research and consultancy Christine Li.

"The old rules essentially encouraged two generations to service one housing loan," she said. "The move plugs the loophole and will encourage more prudent borrowing on home purchases."

MAS said last night that the new framework "will strengthen credit underwriting practices by financial institutions and encourage financial prudence among borrowers".

It added that its checks of the banks' residential loans last year showed that different lenders used different standards to approve property loans.

The new rules, which follow seven rounds of cooling measures, are aimed at giving financial institutions a "robust basis for assessing the debt ability of borrowers applying for property loans".

MAS said the measures are structural and meant for the long term. However, it said the current loan-to-valuation limits for housing loans are not permanent and will be reviewed depending on the state of the property market.

MAS noted that while the new rules "are not targeted to address the current property cycle, they are consistent with previous measures aimed at promoting sustainable conditions in the property market".

These moves to cool the red-hot market - the latest came in January - have only partially dampened demand as the J Gateway, a new 99-year leasehold development in Jurong East, showed yesterday when 99 per cent of the units were sold on the first day of its launch.

Barclays Capital economist Joey Chew noted that the central bank is keeping an eye on the prospect of higher interest rates following signals from the United States Federal Reserve.

"Investors who were intending to enter the property market now to lock in a low rate of interest may be thwarted, particularly if they are already highly leveraged."


Total Debt Servicing Ratio (TDSR) framework to be used
- Consider monthly repayments of new loan and all other debt.
- Calculate new loan repayments using medium-term interest rate (3.5per cent for home loans) or prevailing interest rate, whichever is higher.
- Discount variable income and bonuses by at least 30 per cent.
- Discount financial assets if used in calculating income.
Loan-to-valuation rule changes
- Borrower of loan must be mortgagor of the home.
- If borrower fails to meet TDSR threshold, his guarantor to be included as co-borrower.
- Use income-weighted average age of joint borrowers in deciding loan tenure.
For instance, if the father has a higher income than his son, it may mean an older average age and shorter loan tenure.

New loan rules may stay to stabilise property market
Measures aimed at investors, not potential home owners: Khaw
By Melissa Lin And Chia Yan Min, The Straits Times, 1 Jul 2013

TOUGHER new rules on property financing effective last Saturday are likely to be permanent and structural to stabilise the property market, Minister for National Development Khaw Boon Wan said yesterday.

"It's not really a cooling measure as such, but it's a measure which will be quite permanent. It's a structural measure which is good to ensure a more stable property market," he said, noting that the current low interest rates are not sustainable.

The Monetary Authority of Singapore (MAS) announced last Friday that banks have to use a standardised set of guidelines to assess property buyers' eligibility to borrow.

Banks will not be able to approve a loan if the monthly repayments of a buyer's total debt obligations exceed 60 per cent of his gross monthly income.

Mr Khaw noted that the new rules are targeted at investors, and are "not an issue" for potential home owners.

"We do have buyers stretching themselves, buying second or third properties," he said.

"And these are the people we worry about because when interest rates go up and they find that they cannot afford the increased mortgage, they may be forced to liquidate."

He was speaking on the sidelines of the launch of the Sembawang GRC Memory Project at Fuchun Community Club, aimed at collecting memories of Sembawang from long-time residents. These will be collated into a book.

Economists say the new rules are aimed at not just individual borrowers but also banks, so that they can better manage the impact when interest rates eventually start rising again.

Central banks in the United States and Japan, among others, have been rolling out huge monetary stimuli ranging from holding down interest rates to multibillion-dollar bond purchases in an attempt to kick- start lacklustre economies.

But the US Federal Reserve is expected to start curtailing its money- printing operations by the year end at the latest - a move that will put an end to the low interest rates driving stock market and real estate booms here and in the region.

The new property curbs are a "prudent reminder" from MAS that "both lenders and borrowers should not get carried away", said CIMB economist Song Seng Wun.

"There is a possibility that we are at the tail end of the prolonged low interest-rate environment and easy-credit situation.

"The measures will ensure the integrity of the banking system should interest rates start to climb, and also ensure that borrowers at the margin don't overstretch themselves," he said.

To prevent borrowers from overextending in their property purchases, MAS has also stipulated a floor in calculating interest payable on loans, even if prevailing rates are lower.

For residential property loans, the minimum rate is 3.5 per cent, while the rate for non-residential property is 4.5 per cent.

The new rules will prepare both banks and property buyers for the eventuality of higher interest rates, especially since the Fed's moves to "taper" its stimulus measures could come earlier than expected, said Bank of America Merrill Lynch economist Chua Hak Bin.

OCBC economist Selena Ling agreed, adding: "The measures will ensure that if interest rates spike faster or earlier than expected, banks do not end up with a lot of non-payments or foreclosures on mortgages."

As property loans have a long borrowing horizon, it "makes sense to use a more normalised interest rate", Ms Ling noted.

Dr Chua said that while household borrowing has not been increasing at an "overly drastic" rate, low interest rates and a strong job market have propped up credit growth in recent years.

Property is not a one-way bet to wealth

By Rachel Chang, The Straits Times, 6 Jul 2013

IN ITS latest round of loan restrictions, the Monetary Authority of Singapore (MAS) closed a loophole that some home buyers were using to get favourable terms for their second or subsequent mortgages.

Parents who wanted to buy another property for themselves were putting down a child's name as the borrower, and then acting as a guarantor to enable the loan to be granted.

Such a move meant the parents could avoid less favourable mortgage terms, such as lower loan to value ratios, and extra stamp duty for those buying multiple properties. It also meant that they could get loans for a longer tenure.

Now, the guarantor of a mortgage must be treated as a co-borrower.

Institute of Policy Studies research associate Christopher Gee says this could also play an important role in stemming the generational transfer of mortgage debt, and cautions that Singaporeans' obsession with property will become destructive as the population ages.

Why was it important to close this loophole?

If you want to help your children set up their own home, you can give them cash to pay (the) down payment, but you should not be encouraging them to over-leverage based on your own asset base.

An added concern is how loan tenures have stretched. It used to be 15 or 20 years. Now, it's 35 years, which essentially means paying off your loan for your entire working life. Committing to this at a young age means ruling out expenditure on other important things throughout your life.

When property prices are going up, it may seem okay to do this. It's an investment that will yield big returns.

But then, one is not putting aside money for other things, like children's education, or health care or your own retirement. You're relying a lot on the sale of your property or rental income to provide for everything - which may not be sustainable if the market tanks.

Are local home buyers not properly aware of this danger?

Singaporeans' wealth is over-concentrated in real estate. The Department of Statistics has released a few papers which show that in Singapore, household balance sheets are 50 per cent residential property, which is higher than elsewhere, like Switzerland, Japan, the US or Britain.

By limiting people's loans in a sector to which households are already significantly over-exposed, the Government may be trying to reduce the concentration risk not just for financial institutions but also for households.

The fact is that we have an ageing population, which means that at some stage within the next 20 years, there will be a tipping point where there are more sellers than buyers in the market.

Retirees need to monetise their properties to have enough cash to live on. But at the same time, there are fewer young buyers.

This won't happen in a big bang, but it's an underlying dynamic that will accompany the ageing of the population.

Is it possible to change the "property is good debt" mindset? How can loan restrictions stop people from going after what is seen as a sure-win investment?

The policy message could change. It must be: Yes, home ownership is good, but it's for consumption, not for investment. The Government cannot keep pushing the "asset enhancement" story of properties rising in value and being one's nest egg and store of wealth, as property is not a "riskless" asset.

But in terms of what can be done, it is very difficult if political legitimacy is built on the premise of a robust housing market. Since most of the electorate are home owners, this skews policy towards aggressive action when prices fall, and incremental measures when they go up.

Incremental measures have unintended consequences in encouraging more people to jump in, because they think, 'There will be another round coming so I better lock my property in now'.

That accelerates demand, which is perhaps why the cooling measures have not entirely worked.

But then when the market goes down, the policymaker acts decisively and removes all the loan restrictions in one fell swoop to support the market. We saw this in previous down-cycles in Singapore, and in other markets. That sends a message too: that at the end of the day, the regulator will cautiously try to slow the market on the way up, but aggressively support it on the way down.

This may reinforce the perception that downside risks for property will be cushioned by government action, and hence encourage over-investment. To change this perception then, the Government may need to make it very clear that property is not a one-way bet, and that many of the prudential measures are here to stay.

Why is this bad?

The negative consequences of us pursuing the "home as investment" philosophy is that we end up as a nation of rentiers: People who live off the "fat off the land".

Over time, productivity suffers. More and more of human, financial and physical capital are tied up in real estate.

And if everyone is sitting around collecting rent, then who will pay it? We have to rely on an influx of people, which is also unsustainable. The land is finite.

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