A second round of cooling measure has been put in place to curtail the rising property prices since the pandemic as announced by MAS last night. Since the start of the pandemic in 2020, property prices has since increased dramatically from its PPI of 152.1 in Q1 2020 to 180.9 in the Q2 of 2022. This is even after a first round of cooling measure was introduced in December 2021 with an increased ABSD, lower HDB LTV limits and tighter TDSR thresholds. Despite that, property prices continued to soar as demand continue to outstrip supply. This is especially so when many new constructions and BTO flats were significantly delayed. So, what has changed this time and what does it mean for home owners and new buyers?
The first is the implementation of a 15 months wait out period for any purchase of a non-subsidized HDB resale flat for private property homeowners. The wait out period will start when they have sold their property. This is a drastic change from the previous rule of simply having to sell their private property within 6 months of their purchase. This crowds out demand from private property “downgraders” which we expect to rise due to rising interest rates and a possible global recession. On top of that, these “downgraders” would already have to wait 30 months to purchase a subsidized HDB (i.e. BTO, grants, HDB loan etc.).
The second is the lowering of the loan-to-valuation (LTV) for HDB loans which are considered as subsidized. This is reduced from 85% to 80%, meaning that one would have to have 20% of the property value now in cash or CPF. If we were to do some quick calculations, a purchase of a 5-room HDB with an average cost of $600,000 would require one to have an additional $30,000 in cash or CPF. This is a second cut from December 2021 when the LTV was reduced to 85% from 90%. However, it will not impact buyers taking up bank loans with the LTV maintained at 75%.
Third is the raising of the medium-term interest rate floor which is used to compute the total debt servicing ratio (TDSR) and the mortgage servicing ratio (MSR) by 0.5%. This means that the interest rates used to calculate bank loans will be at 4.0% now and HDB loans at 3%. While 0.5% does not seem much, it could have significant impact on those already struggling to meet the already low MSR calculation capped at 30% of the gross monthly income. A 0.5% increase could raise monthly obligation by about $300-$500 a month which means that homeowners will need to have an increase of about $1,000 in gross monthly income just to qualify for the same loan.
Public housing might appear less affordable for new buyers or low-income buyers. As you can see, these regulations seem to have the largest impact on HDB flats, which are likely the key focus for the government. This is to ensure that public housing remains affordable after we observed multiple million-dollar HDB sales in the past year. The key issue that we foresee is the impact of LTV and the rising medium term interest rate, which might create some affordability issues for young new first-time buyers when they are buying a HDB unit.
As for private property, the new measures are unlikely to impact its prices from experience. Impact of TDSR is not a key driver for property prices as observed since December 2021 when it was reduced from 60% to 55%. On the other hand, reduction of LTV did cool the market slightly as evidenced in 2018 when it was reduced from 80% to 75%. While resale HDB prices do affect upgraders ability to purchase private properties, the property market as a whole continues to face a supply crunch. Coupling that with a rising population and the government’s possible plans to raise Singapore’s population to 6 mil as per their white paper, we should expect private property prices to remain robust until significant cooling measures are further implemented.
Still, one significant impact from the rising benchmark rate is for private residential owners looking for a home equity cash out and finding that they do not meet the TDSR threshold with the new benchmark rates. In such cases, one can explore alternative financiers offering property-backed loans who can structure balloon repayments or interest paying only structures that can help reduce your monthly instalment. To understand more, read our guide on property-backed loans or speak to our property loan specialist for a free consultation. What’s even greater is if you finance a loan with Lendingpot you get access to exclusive cashback and rewards that are unavailable in the market.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
