On Feb 10, 2014, The Monetary Authority of Singapore (MAS) announced to ease the restrictive Total Debt Servicing Ratio (TDSR) on certain property buyers.
What it says is that some of those who bought a residential property before the TDSR measure (introduced on June 29, 2013) will be exempted from the TDSR threshold of 60% so they can refinance their house.
Why is TDSR important to the homeowners?
Mortgages in Singapore typically have a lower spread to the Singapore interbank offer rate (Sibor) in the first two or three years. Rates tend to spike from the fourth year dramatically. Due to the years of Quantitative Easing (QE) and low-interest-rate environment, refinancing is the lifeline for many property speculators. If they had to pay the high-interest rate starting from the 4th year, many cannot afford the loan.
Under the original TDSR structure, homeowners with debt levels close to the 60% TDSR threshold would be unable to refinance. Even if they can, mortgagees aged above 35 would be forced to refinance at a shorter loan tenor (cannot extend beyond age 65)
How bad is the situation?
Just google Total Debt Servicing Ratio, or check any financial textbook, you will know that if a person’s Debt Servicing Ratio is more than 40%, the amount of debt is deemed to be excessive.
However, high debt servicing ratio in Singapore in a norm. In the December 2013 Financial Stability Review, MAS notes that 5% to 10% of households have a debt servicing repayment burden of more than 60% of monthly household income, and the number could increase to 10% to 15% if mortgage rates rise 3%.
In addition to the 20% borrowers whose TDSR of 40% to 60%, 25% to 30% of existing borrowers may already have TDSR more than 40% at the current low-interest-rate environment!
Why is this disappointing?
If anything we can learn from the US Subprime crisis and Euro debt crisis, is that bailout the bubble makers never solve the problem, it just encourages the bailout mentality. The let-go of Lehman Broker and the “unofficial default” of Greece may well be the reason for the global recovery in the past couple of years.
When US government keeps raising their debt ceilings so they don’t have to default, do the debtors, who keep on borrowing money and enjoy their life, suffer? No, it is those who were prudently saving their nested eggs seeing their purchasing powers drop every day. Just take a look at the stock markets. The US equity has hit all-time high but our Asian equities were still sluggish for the past few years.
In my article “How much Cash-Over-Valuation (COV) should you pay for your HDB flat?” in Jan 2012, I said
Singaporeans are lucky that the tragedy of US subprime did not happen here. However, that is not because Singapore property owners are more prudent. In October 2008, some 33,000 flat owners owed HDB arrears of three months or more. They make up less than 8 per cent of the 420,000 households with outstanding HDB loans, nearly reached US housing default rate of 9% at that time.
Fortunately, HDB is much more lenient than the banks and they did not force sell those houses; but unfortunately, the lesson was never learnt. Why blaming the government where you could be the person who paid the high COV just because it was asked for? How many people have been living beyond their means?
True enough, not people become less prudent but more greedy and demanding. High property price becomes acceptable and a new norm. People were willing to pay $900,000 for an executive condominium and yet blaming the government for “subsidy not enough”.
The chart below shows the Singapore private property index since 1975. When the Asia financial crisis struck in 1997, the property bubble was burst. The government did not, or might not have the ability to “bailout” the property speculators. the property markets crashed for more than a decade, but guess what? Singapore stock market, indicating Singapore’s economy and represented by the Straits Times Index, has hit an all-time high.
What happened after the Global Financial Crisis 2008? The property markets were saved (you did not hear often that people were chased out of their house because they could not pay the loan right?), the stock market and economy are still struggling.
Why? Because people started to ask themselves, why should I work when property flipping is the fastest way of making money? Just like the Sure Win Scheme investing in Gold, people started to play the greater fool’s game. After all, how bad can it be by investing in property since Singapore is always short of land?
How bad can it be? Well, the new rich generation may have to ask their grandparents who have gone through the Asian Financial Crisis. But even so, they may not fully accept it. If you never eat a lemon, you won’t know how sour it is.
Clearly, the regulators are also concerned about a sharp correction of the property market and the spiral effect. Balancing the interest of the minority and keep the health economy for the nation is indeed challenging on the road ahead, but I strongly believe that the supporting the property market will do more harm to Singapore in the long run.