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Taking stock of the Total Debt Servicing Ratio

A year since the Total Debt Servicing Ratio was introduced, property watchers expect smaller units and moderated prices in the private residential market going forward. 

SINGAPORE: The Total Debt Servicing Ratio (TDSR) was introduced in June 2013 to ensure financial prudence among borrowers and strengthen credit underwriting practices among banks. The ratio determines how much an individual can borrow from the banks.

Under it, total monthly debt payments including home and car loans cannot exceed 60 per cent of the property buyers' income. These debt payments are wide-ranging and can include home and car loans, study loan, and even credit card debts.

In the private residential market, the impact of the TDSR on sales volume quickly became apparent. There were 482 new units bought in July 2013, a drop of 73.3% compared to 1,806 unit) in June 2013.

In total, 9,115 new homes were bought since the TDSR was implemented - that's half the amount bought in a year-on-year comparison from Jul 2012 to May 2013.

Analysts we spoke to say the suburban homes were the hardest hit. Numbers compiled by Knight Frank Singapore showed that 63 per cent fewer new homes in the suburbs were bought in the second half of 2013, compared to the first half of the year.

"The TDSR basically impacts on mortgage loan eligibility and affordability of private homes and the mass market segment typically caters to upgraders and middle-income home buyers," explained Knight Frank's Director of Consultancy and Research, Ms Alice Tan.

She added that these buyers might have ended up forgoing their purchases when their loan requests were rejected.

"I think the strong performance of the Outside Central Region was one of the reasons why the TDSR was introduced. The Core Central Region was already affected by Additional Buyers' Stamp Duty, where we saw a lot of foreigners opting out, because they have to pay 10 to 15 per cent in terms of stamp duties," said Mr Desmond Sim, Head of CBRE Research in Singapore.

As for prices, the effect of TDSR was seen later that year. The Urban Redevelopment Authority's residential property price index slipped 0.9% in the fourth quarter of 2013, the first decline in almost two years.

Prices dipped again in the next quarter - this time by 1.3 per cent. making it the largest drop since the second quarter of 2009, when prices fell by 4.7 per cent.

In boosting sales, some developers have turned to cutting prices. One of the latest to join the fray is the Panorama condominium in Ang Mo Kio, which relaunched in May at a median price of about $1,241 per square foot.

That is about 8 per cent lower than the median price when it was first launched in January this year. But property watchers we spoke to say the discounts are typically for bigger or "less prime" units, and developers are unlikely to lower prices across their projects.

"Developers also have limited room to adjust their prices due to the high land prices they have committed to, earlier on," said Ms Tan. This is especially so for those who bought their land two to three years back.

Developers may also be creating smaller units, to balance between offering palatable prices for buyers, and maintaining their profit margins. According to figures from CBRE, the median size of units in the suburbs declined from 753 square feet in the third quarter of 2013, to 732 square feet in the first quarter of this year.

The impact of the TDSR was also felt in the private residential resale market. CBRE's numbers showed that sales volume in the secondary market dropped by 50 per cent in the first half of this year, compared to the same period last year.

"Fortunately enough, mortgage rates still remain relatively low, so home owners, or investors, can still put their units into the leasing pool," said Mr Sim. "But at the same time, low mortgage rates have not pressured them into putting the units back onto the market for sale."

But it may be increasingly difficult to find tenants, as the Government tightens its foreign labour controls and more new homes enter the market in the coming months.

The Urban Redevelopment Authority estimates that a total of 18,350 units will be completed this year, while another 21,738 units, excluding executive condominiums, are expected to be completed in 2015.
 

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