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TDSR tweak a lifeline for stretched owners: analysts

Property cooling measures to stay, reversal unlikely until 2015

[SINGAPORE] This week's tweak in the total debt servicing ratio (TDSR) framework is targeted at a small group of stressed households that are struggling to get mortgage refinancing, analysts said in reports yesterday.

They were referring to the move on Monday by the Monetary Authority of Singapore (MAS) to exempt owner-occupiers from the TDSR cap of 60 per cent - specifically those looking to refinance the homes they bought before TDSR took effect last June 29.

The cap mandates that a borrower's monthly instalments for all debt-servicing - including mortgage payments - must not cross 60 per cent of his gross monthly income.

Analysts commented that the revision to the rule, designed to prevent people from over-extending themselves, may suggest that the group of "fringe households" - those with a debt-servicing ratio (DSR) of 40-60 per cent - may be larger than earlier anticipated.

However, they say that in light of the small numbers affected, the tweak hardly foreshadows a rollback of property cooling measures. Instead, they expect the measures to stay, with some predicting a reversal only next year.

The exemption also applies to investment property loans, though the borrowers must go through with refinancing by June 30, 2017, and commit to a debt-reduction plan at the point of refinancing.

Last year, the MAS said that 5-10 per cent of borrowers here risk being over-leveraged - defined as having a DSR of more than 60 per cent - and that this proportion could rise to between 10 and 15 per cent if mortgage rates edge up three percentage points.

HSBC analyst Pratik Ray said in a report: "Refinance holds will be problematic if the TDSR framework is applied - and an increase in interest rates or loan margins would increase their repayment burden, resulting in possible forced sales."

Citi analyst Adrian Chua said in a note that stretched borrowers have been held to ransom by lenders in the post-TDSR period.

Credit Suisse analysts Yvonne Voon and Anand Swaminathan, concurring, wrote in a report: "Post-TDSR, banks raised their spreads, taking the view that the borrower would have no choice but to stay with the current bank", given that refinancing could mean a breach of TDSR.

Credit Suisse estimates that 40 per cent of property-owners qualify for the TDSR exemption, which took effect immediately on Monday. However, under 20 per cent of them are actually hit, because, given the low interest rates in the last three years, most of them would have already refinanced their loans.

Mortgage rates typically have a lower spread to the Singapore interbank offered rate (Sibor) in the first two or three years, but jump from the fourth year, noted Citi economist Kit Wei Zheng in a report. This has prompted borrowers to undertake refinancing in the third year to enjoy "teaser" rates again.

He questioned whether there was a larger proportion of borrowers deep in debt than earlier envisioned. The MAS had said this year that one in five borrowers (20 per cent) has a DSR of 40-60 per cent.

Mr Kit believes the proportion to be higher; as much as 25-30 per cent of existing borrowers may already have a DSR of more than 40 per cent at the current low interest rates, he said.

"Even if household balance sheet data suggests more cash than debt on aggregate, the new exemption may hint at a skewed distribution of debt."

As a whole, analysts predict that regulators would create a cushion for a "soft-deleveraging". Since short-term interest rates are still low, any "meaningful policy reversal" would come only late next year, HSBC said.

Looking at the impact on banks, Credit Suisse analysts said that the TDSR tweak should boost refinancing volumes - which has historically made up a third of the new-loan market - but may also hit the banks' margins.

Still, DMG & Partners Securities said in a report that these exemptions are unlikely to stem the decline in new property transactions.

Recent bank-lending data has signalled weakness in the housing loan market. The net gain in value of all Sing-dollar denominated housing loans was 9.5 per cent in December last year, compared to a year ago, according to preliminary estimates by the MAS. This is poorer than the 15.9 per cent year-on-year growth at the end of 2012.

DMG & Partners remains "neutral" on the banking sector. Shares of DBS closed flat yesterday at $16.38; UOB was up 0.2 per cent at $19.87, and OCBC gained 0.3 per cent to end at $9.40.

Credit Suisse likes developers with more overseas and less residential exposure, such as CapitaLand and CapitaMalls Asia (CMA). Shares of CapitaLand rose 1.4 per cent to $2.88, and CMA gained 0.3 per cent to $1.745.