The Monetary Authority of Singapore (MAS) announced on 28 June the introduction of a Total Debt Servicing Ratio (TDSR) for all property loans granted by financial institutions (FIs) to individuals with effect from 29 June 2013. MAS expects any property loan extended by the FI to not exceed a TDSR threshold of 60% and will regard any property loan in excess of 60% to be imprudent. In addition, MAS refined the rules related to the application of the existing loan-to-value (LTV) limits on housing loans.
We expect these measures to have limited impact on purchase demand for the first and second private residential property for most households. Although the purchasing ability of the second property is affected to some extent, the absolute quantum remains reasonable, all things being equal. Notwithstanding, investment demand, especially for the third property onwards, will be affected by a larger extent due to the stricter financing rules.
However, if the household intends to refinance its first property and be subject to the higher 3.5% medium-term interest rate used under the TDSR framework, its purchasing ability for the second property will be reduced by a greater extent. Purchasing ability will also be lowered if the household’s income consists of a higher variable component which is now subject to a 30% haircut.
The MAS also mentioned that it will monitor and review the 60% threshold over time, with a view to further encourage financial prudence. If the TDSR threshold is lowered to 50%, purchase demand within the HDB upgrader segment will be weakened significantly.
The dampening effect on investment demand will be greater when the cumulative effects of the earlier rounds of cooling measures, such as the higher Additional Buyer’s Stamp Duty (ABSD) and stricter LTV rules are also take into account. Assuming that the TDSR limit is maxed out, the initial cash outlay which includes cash downpayment, stamp duties and transaction costs will amount to around three to four years of the gross monthly income of most households. We expect this cash outlay to be a greater hurdle in purchasing decisions compared with the stricter financing restrictions.
Source : DTZ (Groupe UGL)