New home loan curbs: Bigger impact on resale market than on older buyers

The consensus among property watchers appears to be that older buyers will be worst hit by the new home loan curbs, especially those in their 40s and 50s, but the impact of the latest cooling measures will likely be felt more acutely in the resale market.

Certainly, the mathematics will show older borrowers to be at a disadvantage, everything else being equal. But everything else is not equal. The commonly-held view assumes that most home buyers leverage to the hilt and it ignores the important fact that older home buyers – many of whom may have experienced more than one property cycle – have a lot more cash resources than younger ones.

Last Friday, the Monetary Authority of Singapore set a maximum tenure of 35 years on all home loans. And the loan-to-value ratios for new mortgages have been lowered for tenures exceeding 30 years, or if the loan extends beyond the retirement age of 65.

If older buyers are still buying investment properties, this suggests that they are the ones who have made money from the previous housing cycles.

Taking a longer-term mortgage also does not necessarily mean that buyers have raised their leveraged position to the maximum. Most buyers will try and build in a buffer in their home loans in case they need cash urgently. So, they take a longer term loan than necessary. In times of high inflation as is the case now, it makes more sense to have a bigger debt even if the borrower does not need to borrow more.

I would say the impact of the latest loan curbs is bigger on the resale market for completed properties than on older buyers. If there is any significant impact on older buyers, the effect is secondary.

If you are looking for any kind of froth or price exuberance in the housing market, you are likely to find it in the resale segment. Compared to the overall 0.5 per cent rise in housing prices for the third quarter, prices for non-landed completed properties gained 3.2 per cent over the same period. The latter figure is from the SRX Residential Property Flash Report released late last week.

The newly-released figures also showed that the Rest of Central Region posted the strongest quarterly gain of 7.1 per cent, followed by a smaller gain of 3 per cent in the Outside of Central Region. Meanwhile, the Core Central Region registered a muted 0.75 per cent price gain.

The Real Estate Developers’ Association of Singapore (REDAS) said the new loan curbs “will not have a significant impact on the property market” – or as I read, on new launches. It added that “based on past experience, not many buyers take long tenure loans”. I tend to agree with its assessment.

Homes sold at launches are usually those under construction or where the developer has been quick to secure approval to begin sales, even if foundation work has not started.

Aside from down payment, the developer collects according to the progress payment construction schedule. This means the full loan does not kick in till completion, which may be three years or more from the launch date.

Even with the higher mortgage rates from shorter term tenures, the absolute amount of interest payable will still be significantly lower than for a resale home where the full loan kicks in almost immediately.

When analysed over the entire period of the loan, the difference is minimal but it is critical in the early stages of the loan. We all know how myopic home buyers can be. They do not look further than a few years ahead. If they did, they would have heeded the frequent warnings of a huge impending supply in the pipeline a few years ago.

It looks like developers may have escaped the chop again, if they were the intended target of the cooling measures. It could be a blessing in disguise for them if the new curbs drive more sales towards the primary market.

There may also be more demand for smaller apartments in the suburban areas. If not, even more monies could be diverted into the non-housing segments of the property market.

We shall have to see.

By Colin Tan – Head of Research and Consultancy at Chesterton Suntec International

Source : Today – 12 Oct 2012

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