Tighter lending limitations may increase demand for smaller apartments, hike rental rates even higher, and reduce total buying

Oct 03, 2022

Tighter loan limitations imposed late Friday night would reduce homeowners' purchasing power and put a strain on affordability, according to industry analysts. This might lead to increased demand for smaller apartments, notably resale 4-room Housing Development Board (HDB) flats, as well as higher rental prices and a decrease in private property demand.

"Overall, the new rules create market frictions and likely impede resale HDB price increases," said Wong Xian Yang, head of research, Singapore at Cushman & Wakefield. However, given the solid underlying housing demand, low unemployment rates, and an expected shift in demand from the private market, HDB price growth could continue to be positive in the fourth quarter of 2022, albeit at a considerably slower pace than in prior quarters."

"Aside from immediately cooling the HDB resale market, these measures would indirectly chill the private residential market, since it will decrease the pool of HDB upgraders earning from higher HDB prices," said Catherine He, director and head of research, Singapore at Colliers. As a result, mass market projects may be the most affected, as this segment is most reliant on upgraders. Buyers with a lot of cash, such as high-net-worth people, will be less affected since they need less borrowing."

He noted that, because the new loan limits did not apply only to residential property, "non-residential property likely to be most affected by the latest measures would be commercial properties purchased by individuals for investment - these include shophouses, strata office and retail units, as well as smaller industrial properties."

To maintain cautious borrowing and moderate demand, the government increased the medium-term interest rate floor used to calculate the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) for real estate by 0.5 percentage points beginning today. It is presently at 4% for residential properties and 5% on non-residential properties.

For public housing apartments, an interest rate floor of 3% will be applied to calculate the permissible loan amount accessible to borrowers seeking HDB loans for public housing, while the Loan-to-Value (LTV) ceiling for HDB housing loans would be reduced from 85% to 80%.

Furthermore, private residential property owners and previous private property owners must now wait 15 months before purchasing a non-subsidised HDB resale apartment. Prior to today, private property owners may buy a non-subsidised HDB resale unit on the open market if they sold their private properties within 6 months of purchasing the HDB flat.

The wait-out time will not apply to seniors 55 and over who are relocating from their private home to a 4-room or smaller resale apartment.

Analysts were not surprised by the hike in the interest rate floor, noting that the recent policies are mainly focused at the public housing market.

"The calibration of the medium-term stress test interest rate is widely expected, as mortgage rates have already exceeded 3% in recent months and are likely to exceed the pre-measure stress test rate of 3.5% going into 2023, vanquishing any meaningful buffer to safeguard borrowers' ability to service property loans in a rising rate environment," said Lam Chern Woon, Edmund Tie's head of research and consulting.

According to CBRE estimates, assuming a 20- and 30-year loan duration, a 0.5 percentage point rise in the TDSR interest rate floor reduces the maximum permitted loan and the affordable property price by 4.3 and 5.9 percent, respectively, independent of LTV levels and income.

Affordability will surely be impacted in the private property market, where S$2 million prices are more frequent, especially in the suburban segment, according to Edmund Tie's Lam.

"A S$1.5 million loan with a 30-year term would now need a higher monthly income of around S$13,000, up from S$12,200 previously, assuming no other debt commitments." A household earning around $12,200 per month would now be eligible for a loan of up to S$1.41 million to cover a S$1.88 million property purchase, down from S$2 million earlier."

According to Huttons Asia's senior research director Lee Sze Teck, the hike in the interest rate floor "probably indicates the Monetary Authority of Singapore's judgement at this juncture that rates may peak in the next months and not approach near to their medium-term floor rate of 4%."

According to Christine Sun, senior vice-president of research and analytics at OrangeTee & Tie, there are signals that the HDB resale market may be overheated due to record prices recorded in numerous areas and more million-dollar units being transferred.

"Over the last month, about 1 to 2 flats have sold for a million dollars every other day," she said, adding that the latest measures were likely implemented to tame HDB resale flat prices by reducing competition from private homeowners and making it easier for first-time buyers to purchase their homes.

According to HDB statistics, the prices of bigger resale flats, such as 5-room flats and executive flats, have risen more quicker than smaller flats in the last year, likely because they are largely purchased by private property downgraders who can afford to pay higher prices.

The limits may also have an impact on the market for new executive condos (ECs), according to Ismail Gafoor, CEO of PropNex Realty. "The 0.5 percentage point rise in the medium-term interest rate may likely weigh heavier on the sale of new ECs because EC purchasers face a stiffer MSR of 30%, compared to 55% for private house buyers under the TDSR."

Gafoor also stated that for ECs, purchasers with a monthly family income of S$16,000 will be able to borrow around S$909,300 at the revised medium-term interest rate of 4%, which is roughly S$50,000 less than the prior loan amount of S$958,800. The EC buyer would subsequently be limited to purchasing an EC unit valued at S$1.212 million, as opposed to S$1.278 million under the prior system.

Because buyers of HDB apartments utilising HDB housing loans may only borrow a reduced loan quantum today, some may downgrade to smaller flats, according to Nicholas Mak, head of research and consultation at ERA Singapore, who added that 4-room HDB flats will become even more popular.

"A normal family of parents, children, and potentially a maid would require a family-sized flat with at least three bedrooms, with four-room HDB flats being the smallest with three bedrooms."

According to Leonard Tay, Knight Frank Singapore's head of research, the fact that the wait-out period does not apply to seniors transferring from their own home to a 4-room or smaller HDB resale apartment would also assist spark a rise in the prices of HDB 4-room resale flats.

This is especially true given that many of these flats are in mature estates with good locations and were built earlier when HDB 4-room units were larger at 100-110 square metres.

With the 15-month wait-out term in place, private property downgraders who still want to buy a HDB resale apartment may have to rent one in the meanwhile, driving up existing residential rental costs even further.

Given that additional completions are expected in 2023, Tricia Song, CBRE's head of research for South-east Asia, believes the wait-out period will benefit both private and public housing rental markets.

"As of Q2 2022, 17,394 private residences are scheduled to be finished in 2023, the most in a single year since 2016," she stated. "Residential rents are at an all-time high right now, and with this news, they may continue to rise and remain elevated through 2023."

With the wait-out period removing one alternative accommodation option for en bloc sellers, collective sale price expectations could potentially be driven up as well, further discouraging developers, according to Song, who added that this will ultimately reduce private home supply in the medium to long term.

In the following 6-12 months, the pace of new house sales is projected to moderate, as will price rise. Lee of Huttons predicts that new private residential sales transactions will total about 8,000 units in 2022, down from his previous projection of up to 9,000 units.

However, he believes that prices will be unaffected because most previous launches have sold 80% or more of their units, and he retains his projection of an 8% increase in private residential property prices in 2022.

Sun of OrangeTee & Tie believes that pricing increase would be negative in Q4. "We expect that price increase will be between 0% and 2% in Q4 2022," she added, adding that sales volume may suffer a more immediate impact and decline by more than 10%, particularly for bigger flats.

According to Edmund Tie's Lam, the property market is at an inflection moment as a result of slowing economic growth, rising living expenses, and interest rates. "An outright recession affecting employment and income, or other cooling measures, would be the ultimate straw that breaks the housing camel's back."

The Real Estate Developers' Association of Singapore stated in a statement that it supports the government's position on cautious borrowing, "which promotes a sustainable property market that expands in sync with economic fundamentals," and that the TDSR and MSR calibrations are monitored.