Tag Archives: Total Debt Servicing Ratio

Based on the latest URA private property price index (PPPI) flash estimates, we know that the PPPI, which represents the overall real estate price trend, dipped in Q4 2013. This is the first dip the market has seen in the last two years.

At present, there are numerous views that the real estate market will stay stagnant for some time. I agree and here are 4 reasons why we think 2014, and maybe even 2015, could be a turbulent year for stakeholders of the Singapore property market.

Reason 1: More new properties are going to flood the market

By now, we already know that there will be a large number of private properties being completed in the next few years. However, to give you a sense of the numbers, you can see from Figure 1 that the supply of completed properties from 2014 to 2017 is more than 15,000 annually.

To give you some perspective, the total number of private properties in Singapore (including executive condominiums) was 297,689 as at Q3 2013. Based on the projection that there will be 19,302 units completed in 2014, the increase in residential units works out to be more than 6%. With so much new supply, buyers will be spoilt for choice and this in turn will lead to their reluctance to pay a premium for potential units.

Figure 1: Supply of private residential units by type, development status and expected year of completion as at Q3 2013

Reason 2: More resale units can be expected when the 4-year Seller’s Stamp Duty duration expires

In the last few quarters, the resale volume has dipped quite significantly. Based on Figure 2, it can be seen that for 2013, the resale volume dropped to as little as 25.6% (in Q1 2013). In terms of resale volume, Q3 2013 is the lowest with only 1,340 transactions.

Figure 2: Number of units transacted in the whole of Singapore up to Q3 2013

Putting things into perspective, this does not come as a surprise as the resale volume is muted due to the Seller’s Stamp Duty (SSD). SSD was first introduced in Feb 2010 and policy stipulated that sellers who flipped their units within 1 year had to pay the additional tax. On 30 Aug 2010, the SSD duration was increased to 3 years. On 13 Jan 2011, the duration was revised to 4 years. Based on these conditions, Figure 3 shows the number of transactions for each time period and when they can sell without being penalised by SSD.

Figure 3: Dates that owners can sell their units without being penalised by SSD

Date when the unit was bought	Transaction volume	SSD duration	Date owners can sell their units without having to pay SSD
Prior to Feb 2010	NA	NA	Can sell anytime
Feb 2010 to Aug 2010	24,120	1 year	Feb 2011 to Aug 2011
Sep 2010 to Jan 2011	15,214	3 years	Sep 2013 to Jan 2014
Feb 2011 to Dec 2013	96,237	4 years	Feb 2015 to Dec 2017

Source: URA & Ascendant Assets Pte Ltd

The biggest unknown is how many people, who acquired private properties in the last few years, do not have the financial means or intention to hold on to their units for the long term.

Nonetheless, I reckon that there could be a sizeable number of people wanting to sell their units over the next 1 to 2 years, as many of them are likely to be affected by the Total Debt Servicing Ratio (TDSR) measure. So how does TDSR affect some owners? This brings us to the third reason…

Reason 3: Owners who overstretched themselves financially will have a hard time securing refinancing

In the past few years when interest rates were low, liquidity was ample and banks were keen to extend favourable lending conditions, some Singaporeans could have over-stretched themselves by buying multiple properties or borrowing beyond their means.

Back then, numerous banks offered low interest rates of around 1.5% for the first few years followed by a spike in interest rates to more than 3% beyond the third or fourth year. Before TDSR was introduced, these owners could avoid paying higher interests by simply going to another bank to refinance their loans (and get better rates). However, with the introduction of TDSR, it is now much harder for these owners to get refinancing as the lending criteria has become more onerous.

To provide you with some perspective of how much more installment an owner has to pay for a S$1 million loan: based on an interest rate of 1.5% and tenure of 30 years, the monthly installment works out to be about S$3,451 per month, if he does not get refinancing and interest rates increase to 3.5%, the monthly amount payable is S$4,490 per month. This works out to be an increase of about S$1,000 per month in loan repayment.

Ultimately, owners are now left with a choice of holding onto the property and paying significantly higher interest rates or selling their unit. Looking at how much more an owner will have to pay to maintain his unit, it is definitely conceivable that those who had stretched themselves will consider selling their units to minimise their financial strain. Naturally, the next question is whether there are still property buyers in the market and how many there are.

Reason 4: The pool of potential property buyers has shrunk significantly

Taken in totality, the various cooling measures implemented by the Singapore government are intended to achieve two things – prevent property speculation and encourage financial prudence by making it hard for those who already own one property to buy another. In other words, if you are Singaporean and a first-time buyer, you are almost not affected by the measures and can buy under favourable conditions (i.e. 80% financing as well as pay only 5% for your deposit).

Hence, to see how the market will perform in 2014 and beyond, we should try to determine how big the pool of first-time buyers is. Logically, if there is a huge pool of first-time buyers, we can expect property prices to remain stable or even increase. Conversely, if the demand is not there, it will be unsustainable for prices to remain high for long.

To answer that question, let us take a look at the home-ownership rate for Singaporeans and Singapore residents. Based on data from the department of statistics, it can be seen that the home-ownership rate in 2012 is 90.1%. In other words, 9 out of 10 Singaporeans and Singapore residents own at least one property (i.e. their home). Only 1 out of 10 does not currently own their home and can potentially still buy properties without many restrictions.

Figure 4: Home ownership rate of Resident Households

Conclusion

Based on this analysis, the outlook for the real estate sector is definitely not as rosy as it used to be. In fact, the warning signs have been around for some time and we have been cautioning buyers since September 2013 that the market was reaching a turning point.

That said I concede that I may have made some assumptions and oversimplified some considerations in this article. Moreover, the situation could change overnight if the government steps in to lift some of the cooling measures. Nonetheless, this article is meant to put some context to the lacklustre market performance that we have been seeing for the past few months.

I have definitely misread the property market before and this is one occasion where I am hoping my assessment is wrong. But looking at the current situation, I reckon that we are still in the early days of a government induced property market malaise. So expect a bumpy road ahead…

By Getty Goh

Source : PropertyGuru 7 Jan 2014