By Mr. Propwise
The MAS announcement on October 5, 2012 of the new restrictions on mortgages has been well covered by the media. In this article I will focus more on my thoughts on the impact of these measures on the market, and also present some concrete illustrations of how these measures will impact different groups of buyers in the market.
A quick recap of the measures
From October 6, 2012:
1. All residential property loans will be limited to a maximum tenure of 35 years.
2. The Loan-to-Valuation (LTV) for mortgages will be lowered to 40% (for borrowers with one or more mortgages) or 60% (for borrowers with no outstanding mortgages) if the loan tenure is greater than 30 years OR the loan period extends beyond 65 years of the borrower’s age.
3. LTV for mortgages to non-individual borrowers will be lowered from 50% to 40%
The thinking behind the measures
The aim of the new rules is to “curb continued upward pressure on residential property prices, driven by low interest rates and rapid credit growth.” The MAS believes that as the current low interest rate environment will be a medium to long term phenomenon, this could cause property prices to increase beyond “sustainable levels”, i.e. create a bubble.
Other than to stop the continued upward rise of property prices, the MAS also aims to reduce systemic risk to the banking system. To create continued demand for property loans amidst decreasing affordability, banks have been stretching out the mortgage tenures to lower the monthly repayments for borrowers, thus making properties with a higher total cost more affordable.
According to the MAS, over the past three years, the average tenure for new mortgages had increased from 25 to 29 years, and more than 45% of new mortgages had tenures exceeding 30 years. The longer tenures of these loans increase the risk to the banks and makes it harder for them to do their Asset-Liability Management.
Case studies to illustrate the impact on different groups of buyers
The new measures will impact all buyers who were thinking of taking a mortgage loan with a tenure greater than 30 years. For example, for a 30-year old first time buyer looking at a $1 million condo, previously he could take a 40-year mortgage at 80% LTV. Assuming a 1.5% interest rate, his monthly repayment would be $2,217 per month. But now unless he has another $200,000 to put into the property, he will have to go with a 30-year mortgage to qualify for the 80% LTV, and his monthly mortgage repayment will go up to $2,761, a 25% increase.
One group that is particularly hard hit are older investors looking to buy a second or greater property. For example previously, for a $1 million condo, a 45 year old investor who already owned a property could probably take a 30-year loan at a 60% LTV. Assuming a 1.5% interest rate, his monthly repayment would be $2,071 per month. Now unless he has and wants to use up another $200,000 of capital, to maintain a 60% LTV he can only take a 20-year loan, which would result in a monthly repayment of $2,895, a 40% increase!
With these changes, buyers who were previously counting on a longer tenure mortgage loan to be able to afford property will be priced out of the market. There will also be fewer properties that can generate “positive cashflow” from rental income as the monthly outlay for many investors will have increased. The impact of this policy is likely to be broad – remember that more than 45% of new mortgages over the past three years had tenures exceeding 30 years.
Impact on the property market
Relative to Hong Kong, where the maximum mortgage tenure has been capped at 30 years, the MAS rules are relatively less strict. But thanks to the way the new rules are structured, going forward most mortgages will have a tenure of 30 years or less. The pool of buyers thus shrinks further as affordability is reduced, both for first time homebuyers and investors. More investors will find the residential property segment an unattractive asset class due to the lower ROI. But as interest rates and vacancy levels remain low, prices are not likely to fall sharply.
Refinancing will become less attractive, as in many cases it won’t make sense to refinance mortgages with tenures more than 30 years as the monthly repayments could end up higher. This is bad news for mortgage brokers.
But I do not think this latest tightening move will kill the bullishness in the market. The fundamental cause of the strong demand for property, low interest rates and the resulting positive yield spread, will not be going away anytime soon. If the strong demand for property is not curbed, then what may happen as has happened in the previous rounds of property control measures is for transaction volumes to fall sharply for a month or two before rebounding. Demand may once again shift to new launches by developers, as the payments during the construction period will still be relatively low.
Also with each round of measures the market becomes more and more desensitized to it, and the impact may shrink. If this is the case, the government may soon have to scratch its head to figure out what the next round of cooling measures will be.