Have Singaporean households become overly extended in terms of their exposure to several residential mortgages?
As Singaporeans, attracted by lower interest rates and prices, continue to show interest in the property market, we decided to look at how Singaporean households are managing their debt levels.
By: Tay Hock Meng
Mortgages as a percentage of household debt is an important economic indicator, and one that is susceptible to external influences such as US Federal Reserve policy. As Singaporeans, attracted by lower interest rates and prices, continue to show interest in the property market, we decided to look at how Singaporean households are managing their debt levels.
The good news
Since the Total Debt Servicing Ratio (TDSR) was introduced by the Government on 28 June 2013, home mortgage utilisation levels (Quarterly home mortgage values as a percentage of total loans granted by financial institutions) have been falling on a year-over-year (yoy) basis.
A chart depicting the impact is as follows:
Source: Singapore Property Watch (SPW), Monetary Authority of Singapore (MAS); Note: LHS (Left-hand scale); RHS (Right-hand scale).
For this chart, we look into the median price per square feet ($ psf) for the condominium market because we believe that most of the second or third mortgages being taken out by property investors are used to finance the purchase of apartments and condominiums.
The first sign of the drop off in housing loans utilised took place during the first quarter of 2013, when the government announced further property cooling measures on 11 January 2013. Despite the year-over-year (yoy) drop in housing loans utilised, the median price per square feet ($ psf) for the condominium market generally remained relatively elevated, and largely unchanged from the previous quarters before additional cooling measures were announced in January 2013. We attribute some of the potential home price appreciation (HPA) factors due to each condominium development’s location in terms of convenience, accessibility to amenities, availability of public transport options such as the MRT, and buses, among others.
The moderating median price per square feet ($ psf) for the condominiums market could also serve as an indication of good credit quality among many mortgage borrowers, as many financial institutions (FIs) are using the industry-wide standard Loan-to-Value (LTV) credit metric to evaluate the mortgage borrower’s ability to service his/her mortgage payments. In fact, the MAS Financial Stability Report (FSR) 2013 pointed out that before the property cooling measures were introduced in 2013, LTV ratios were hovering close in the upper 70.0 percent. Since the measures were introduced, the ratio has remained stable at around 40.0 percent, which was one of the intended goals by the government to enforce strict lending limits among FIs.
An illustration of borrowers taken on two or more mortgage loan obligations is as follows:
According to excerpts from the 2013 MAS Financial Stability Review (FSR) Report, the central bank pointed out that the share of new loans accounted by borrowers taking on second or subsequent housing loan (and who might be taking on greater risk) was about 30.0 percent in 2011.
If one were to look closely at the ‘3 and more loans’ segment, the proportion of borrowers that fall into this category has shown some declines. We attribute most of the drop off in the proportion due to the impact of the Total Debt Servicing Ratio (TDSR). These measures proved to have an effect in preventing many households from becoming overly extended into more than one mortgage loan.
MAS also pointed out in the 2013 FSR report that it estimates that approximately 5.0 – 10.0 percent of mortgage borrowers with monthly debt-servicing burden greater than 60.0 percent could increase to 10.0 – 15.0 percent should mortgage rates rise by 300 basis points (bps) or 3.0 percent (1 basis point is equivalent to one-hundredth of a percentage point).
By this fact, the potential risks for any short-term spike in interest rates could have severe impacts on the amount of monthly mortgage payments each household might have to foot. It is also highly dependent on each individual household’s overall credit assessment when determining the amount of monthly mortgage payments.
The potential risks if home mortgage debt loads are not monitored closely
MAS noted in their 2013 Financial Stability Report (FSR) that although the financial position of many households are generally healthy on an aggregate basis, it cautioned that the amount of floating rate mortgages taken out by many households could lead to greater difficulty in servicing their monthly mortgage payments should interest rates rise. With this, we decided to analyse the potential effect of the decline in household incomes and the ability to service their monthly mortgage payments going forward.
An interesting finding we noted from the data obtained from MAS is as follows:
Source: Monetary Authority of Singapore (MAS), Department of Statistics (Singstat.gov.sg)
The above chart depicts the ratio of households using their work income, and other income sources to service their monthly mortgage payments. On a historical basis, there has been a downtrend in the ratio which might suggest that the majority of the households in Singapore are increasingly finding difficulties in servicing their mortgage payments with their existing sources of income. The possible causes for the downtrend could be the fact that the majority of the mortgage borrowers were taking on more than one loan obligation (the denominator effect in the ratio), and are probably comprise of mostly floating-type loans.
The MAS pointed out its 2013 Financial Stability Report (FSR) that housing loans account for about three-quarters of total household liabilities, and it poses a significant source of risk for households. The TDSR measures have addressed many of the issues relating to relatively high household leverage ratios, but given that some households would still need to finance their floating loan payments, on top of their additional second or third mortgage debt loads, or worse, overseas property loan obligations, the inability to make timely monthly mortgage service payments could pose greater risks for these group of households. Unless this group of households are able to refinance their mortgage payments quickly to ‘lock’ into fixed-rate type mortgages, the potential impacts of unnecessary delays in rectifying the issue could pose additional risks if one chooses to assume that the current low interest rate environment is sustainable going forward.
Summary
We feel that as a consumer-focused website, there is a need to create awareness among households on the risks of assuming that the low interest rate environment is going to last forever, and households should take into account the potential risks involved if they choose to ignore the warning signs of the potential slowdown in the global economy. The TDSR measures serve as a check on the household debt loads, and are not intended to bring about sharp falls in housing values in Singapore, or to create obstacles among many HDB upgraders from owning private properties. We believe that the TDSR measures were introduced to protect the interests of many households who have taken on more than one mortgage debt in the past, including other loan obligations. It serves as a deterrent for many households in becoming too overly extended in their mortgage debt loads. If credit conditions do deteriorate further, many households could find themselves in potential bankruptcy situations. These costs and inconveniences can be avoided if one were to embrace the TDSR measures in a positive manner, and view them as a form of a self-check against over exuberance when it comes to property investing. Issues such as affordability; careful selection of property investments in view of each individual’s overall financing circumstances, among others play a part before one searches a property for living or investment purposes.
We have a variety of property financing tools available for investors, including our real-time refinancing calculators for those borrowers who are seeking for lower-rate mortgages, or fixed rate mortgages. As for homeowners impacted by TDSR measures, they might want to sample our TDSR calculator which will help to guide homeowners in a step-by-step process, including an assessment of the loan amount, down payment, stamp duty, and other relevant loan details, and determining whether they will be qualified for a mortgage loan after the assessment has been completed.
