Targeted cooling measures would be more effective

Curbs such as ABSD and TDSR do not seem to have produced the desired results

THE first part of this article last week concluded that the Singapore household balance sheet is rock solid: household net worth is increasing because household assets such as shares, CPF, currencies and savings are increasing more than household debt.

Targeted cooling measures would be more effective

However, the pace of increase in mortgages remains a concern for the authorities. There is fear that the extended period of low interest rates may be over soon and over-stretched borrowers may find it tough to service their monthly repayments. Subsequently, they might sell their properties at a significant discount to current market values. Market valuations will then drop.

Are we over-borrowing against our homes?

According to the MAS, the average loan-to-value ratio (LTV) for housing loans was 47.5 per cent in Q2-2013. (Table 1) This is based on a quarterly survey of financial institutions which accounts for more than 90 per cent of the housing loans in Singapore. As at Q2-2013, the total home loans granted was $193.7 billion, out of which $162.8 billion has been utilised (including partial drawdowns for properties under construction).

The 47.5 per cent LTV refers to the homes which have mortgages and included those which are under construction. Homes which are unencumbered, i.e. no loans attached, are not included in the LTV ratio.

The 47.5 per cent LTV is by itself not worrisome. As a benchmark, the authorities allow Real Estate Investment Trusts (Reits) gear up to 60 per cent LTV if their debt were independently rated. MAS also allows a maximum 80 per cent LTV for an individual's first home loan.

The $162.8 billion of utilised home loans at an average LTV of 47.5 per cent implies that the value of homes backing these loans stood at about $342.7 billion. Of the $162.8 billion utilised loans, about 10 per cent are backed by HDB flats and another 10 per cent are backed by properties that are in various stages of construction.

That is, only 80 per cent or $130.2 billion of mortgages are backed by private residential properties that are completed.

Century 21 Singapore estimated that the total value of private residences which are completed to be about $485.8 billion (see Table 2)

Private and public housing

In addition, there are 10,430 units of Executive Condominiums (ECs) which are completed and whose loans are with the financial institutions. Century 21 Singapore estimates their value to be $9.4 billion assuming each unit is worth roughly $900,000. This takes the total value of completed private residences, which includes all private homes with and without mortgages, to $495.2 billion.

Based on the total asset value and loans, the country-wide LTV of completed private residential assets falls to about 26.3 per cent for Q2-2013.

As for the public housing segment, we can infer the average LTV from SingStat's Household Balance Sheet survey which shows that HDB flats owned by Singapore households stood at a total value of $421.7 billion in Q2-2013.

According to SingStat, loans taken from HDB stood at $37.5 billion. We add to that the 10 per cent of utilised loans from banks which we previously excluded from private residential segment ($16.3 billion), and we have a total of $53.8 billion of loans backed by HDB flats. That is, the LTV ratio is a mere 12.8 per cent. Most of the current 870,000 HDB flat owners have long repaid their loans.

Taken together, the total value of completed HDB and private residential units in Singapore is $495.2 + $421.7 = $916.9 billion. As the home loans backed by these residential units total $130.2 + $53.8 = $184.0 billion, the national home-LTV ratio stands at a very safe 20.0 per cent.

So it might be appropriate to rephrase our question to: Are we under-borrowing against our homes?

Residential supply under construction: The risks we worry about may lie with the past three years of record high residential sales from developers. As at Q2-2013, there were 54,534 units of private residences and 9,629 units of ECs sold by developers that are in various stages of construction. Almost all of these properties have already secured their loans but the loans are being drawn down progressively, depending on the stages of completion. Even though the deferred payment scheme still exists for ECs, most EC buyers would have secured their loans when they purchased their ECs, i.e. the loan limits have been granted, but not utilised.

Based on the above premise and using assumptions consistent with completed residences, we estimated that the value of private homes (including ECs) sold and under construction, is about $76.6 billion.

Earlier, we estimated that 10 per cent (or $16.3 billion) of the loans utilised belong to residences under construction. In addition, there is $30.9 billion of loans granted but not utilised. It is reasonable to conclude that the total of $16.3 + $30.9 = $47.2 billion loans are secured against the homes under construction. This brings the LTV of residential properties (including ECs) under construction to 61.6 per cent. (Chart 1)

A very real problem

The widening gap in Chart 1 shows a higher proportion of loans granted for new properties that are under construction.

This is a result of record-high new home sales in the past three years, with record high dollar per sq ft prices achieved by 99-year leasehold residences concentrated in the outskirts of Singapore.

With valuations being very rich for mass market properties that are under construction, and at high average LTVs, the risks of overstretched households clearly lie in those who invested in mass market new launches, including ECs.

If not for a series of MAS curbs on mortgages in the past two years, which reduced LTVs and shortened loan tenures for borrowers, the situation would be worse.

Targeted cooling measure needed: Mass market residential sites and EC sites brought revenues of more than $5 billion in 2012 under the Government Land Sales (GLS) programme. If specific and targeted measures were introduced to prevent investors from over-borrowing and over-paying for mass market new launches the impact on GLS revenue may be significant.

Perhaps the authorities prefer to keep up the strong GLS revenue to boost national reserves. In that case, the rich valuations and record high dollar per sq ft prices in the mass markets are required to keep GLS prices up.

Our data analyses show the nationwide household debt and LTV levels are within safe levels. If our over-arching concern is about the stretched borrowing limits of a specific group of "upgrader" households and investors with HDB addresses who paid top dollar for mass market new launches, then what we need is a very precise mechanism to reduce risks and liabilities for these segments.

Sledgehammer-like measures such as ABSD (additional buyer's stamp duty) and TDSR (total debt servicing ratio) have not produced the desired results. A more targeted approach would be more appropriate.

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

Targeted cooling measures would be more effective

Curbs such as ABSD and TDSR do not seem to have produced the desired results

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