12. |
Where is the excessive borrowing?
18 October 2013, The Business Times |
The two parts of this chapter looks at the macro picture of home mortgages in Singapore and questions whether the fear of over-borrowing and rising interest rates are overplayed. Part 1 reviews the Singapore household debt that has come under some bad press recently while Part 2 looks at the overall loan-to-value ratio (LTV) of Singapore’s private residential market.
‘Tormenting tapers’, ‘tapering jitters’, ‘QE3 tapering’ and many other terms have been used to describe the potential reduction of the massive money printing and bond purchases by the US government in recent years. Chairman of US Federal Reserve, Ben Bernanke, stated in May 2013 that if there is sustained confidence and improvement in the US economy, the pace of purchasing bonds can be stepped down.
That was immediately followed by a slew of almost-doomsday predictions about rising interest rates and a big selling of bonds which, lo-and-behold, increased bond yields and interest rates. New bond issues in the past four months had to offer higher coupons at IPO in order to ensure full subscription. The panic bond dumping seemed to indicate that the word ‘tapering’ meant a reversal or a complete halt to the bond buying program.
It is neither. The current consensus is for the US Fed to step down its bond purchase activities from a colossal US$85 billion per month (US$1 trillion dollars a year) to a mammoth US$70 billion a month (still close to US$1 trillion dollars a year). Medication is still required, but the gigantic dosage is trimmed by 20 per cent because the patient is somewhat less sick.
No one ever promised that quantitative easing will last till eternity. It is well known that the bond-buying program has to stop entirely some time in the future. How soon and how fast depends on the pace of the economic recovery in the US and the implementation has to be a measured process such as not to create economic shocks and market disruptions. Based on recent weak employment data, it seems that the answers to ‘how soon’ and ‘how fast’ are ‘later rather than sooner’ and ‘over a period of more than a year to slow down bond purchases to a complete stop’. And that is just for QE3 — bond purchases. After that there is still QE2 and then QE1, to be unwound, by stopping the excessive money printing.
Just last week, with nine votes for and one vote against, the US Fed ruled that the economy is too weak for them to slow down the bond purchases. Immediately a new term popped up — ‘taper hoax’. I hope we have woken up to reality: near-zero interest rates may last well into 2016 as the US struggles along.
Amidst the fear around tapering, the Singapore brand suffered some collateral damage as the economists of several international banks put out papers pointing to our worrisome ‘household debt to GDP’ ratio. One major ratings agency also issued a warning about the expanding mortgage-loan books of Singapore’s banks.
A common worry pointed out by the economists: Singapore’s household debt to GDP ratio is at 75 per cent in second quarter of 2013, up from 63 per cent in first quarter of 2010. I am puzzled and I wonder about the relevance of this household debt to GDP ratio. Why compare household liabilities (which are accumulated over time by family units in Singapore) to the total market value of Singapore’s goods and services produced (which measures Singapore’s annual economic output, in large contributed by multi-national companies, Temasek-linked companies and the government)?
The household debt to GDP ratio is irrelevant. The criticisms against Singapore’s household finances are misleading.
During the period of second quarter of 2013 versus first quarter 2010, household debt increased by 41 per cent: mortgages increased 40 per cent while personal loans (which include car loans, credit/charge cards) increased by 45 per cent. Mortgages accounted for 74 per cent of household debt in second quarter 2013 so mortgages take the blame. Extrapolate that to the doomsday predictions about housing supply and we have criticisms that Singapore’s economic foundations might be shaken.
Allow me to paint the other half of the household balance sheet picture (see Table 1 on the following page). For the period under consideration, while total household debt grew by 41 per cent, or $78 billion, total household assets grew by $420 billion (+33 per cent) of which ‘Currency and Deposits’ grew by $77 billion (+33 per cent) and CPF funds grew by $70 billion (+41 per cent).
As for the residential segment, mortgages increased $57 billion (+40 per cent) while the value of residential assets increased $229 billion (+38 per cent). Asset value grew four times that of liabilities. Ask accountants if this is healthy for household balance sheets.
There is a gap in the data because residential asset values refer to households in Singapore but the residential loans include loans on condominiums owned by foreigners and Singaporeans overseas who are not considered a household unit.
There is a base effect that we should not forget about when we analyse statistics. Percentages can distort the truth unless we show the absolute figures that lead to the percentage changes.
The nationwide household balance sheet is solid. Net worth increased $342 billion (+32 per cent) during the three years of second quarter 2013 and first quarter 2010. However, fingers are still stuck pointing at the risks of a housing market collapse. Residential asset values may drop faster than mortgage liabilities due to rising interest rates, reduced rental demand and the oversupply of housing units. However, we should not forget that in a downturn, when property values fall due to lower transacted prices, each property sold wipes out the mortgage on that property. So it is not merely a drop in assets without a corresponding drop in liabilities.
The Monetary Authority of Singapore (MAS) sounded alarm bells about certain households over-stretching their finances and taking on high mortgages. To curb the herd mentality in property investments and to instill further prudence in taking on mortgages, the MAS imposed further restrictions on property loans with the Total Debt Servicing Ratio (TDSR) framework (www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/2013/MAS-Annual-Report-2012-13-Press-Conference.aspx).
Commentators and analysts also chimed in about household debt and the impending interest rate hikes. Families might not be able to service their loans if interest rates increase.
I tried to find out what this ‘impending increase’ might lead interest rates to but failed to find forecasts beyond the end of 2014, the highest of which has three-month SIBOR at below 1 per cent pa. MAS, in sharing its concerns about the possibility of increased interest rates, does not share what its forecast for the three-month SIBOR might be in 2014, in 2015 nor in 2016.
I often ask people who are worried about rising interest rates, “What is your forecast for the three-month SIBOR?” Some say that interest rates may triple or quadruple in the next two years. That still brings three-month SIBOR to a mere 1.6 per cent p.a. With unemployment hovering at 2 per cent, the risk of families defaulting on their mortgages, which may by then be priced at around 2.5 to 3 per cent per annum, remains low.
Table 1: Household sector balance sheet 1Q 2010 versus 2Q 2013. As at end of each quarter, in millions.
Source: SingStat, Century 21 Singapore
In looking at the forward risks of rising interest rates (how soon and how high) we can tell the banks’ views by the fixed rate mortgages they offer. Even before last week’s admittance of the taper hoax, when there was consensus around interest rates rising in early 2015, one bank offered a five-year fixed rate home mortgage at 2.18 per cent per annum on up to half of the loan. That means one will be paying 2.18 per cent right up till Sept 2018. A few banks offer three-year fixed rate home loans of between 1.55 per cent to 1.7 per cent per annum in the third year. If we signed up on these loan packages today, we would be paying 1.7 per cent interest in the third year, that is from September 2015 till September 2016. Most mortgage banks offer two-year fixed rate packages priced around 1.7 per cent p.a. in the second year, or till the end of 2015.
Table 2: Examples of fixed rate home mortgages
Source: Survey of various banks done in end August 2013, Century 21 Singapore
Banks are in the business of making money. These fixed rate loans are clear indications that the lending banks are confident that their future costs of funds will be lower that these loan rates in the years till 2018. Or could the treasuries of these banks be ignorant about the worrisome rise in interest rates next year?
On one hand, the economists of some banks express their concerns with the impact of rising interest rates on high household debt. But on the other hand, several lending banks offer fixed rate packages that indicate their outlook on interest rates remain low, at least up till late 2016.
I hope to put to rest the irrelevant concerns about rising household debt versus GDP growth. Singapore’s household net worth remains on solid growth and a steep increase in interest rates is not likely to happen in the next three years.
While the absolute household debt has increased, contributed in large by mortgages, the numbers merely capture household sector numbers. The Department of Statistics defines the household as “all household institutional units, including Singapore citizens, PRs, foreigners and unincorporated enterprises (eg. sole proprietorships), which engage in economic activities in Singapore for at least a year.”
Residential properties owned by investors that are not in Singapore do not get included in the residential asset value (although loans are included in the total liabilities — Table 1). Residential asset values and their associated liabilities presented in the household sector survey do not represent the total net worth (asset value minus outstanding mortgages) of our residential segment.
The next part of this chapter explores the total private residential market value versus the outstanding mortgages. Hold your thoughts. You might be surprised by the excessive borrowings.
Part 1 of this chapter concluded that the Singapore household balance sheet is rock solid. Household debt is climbing, but not at the same magnitude as household assets, such as shares, CPF, currencies and savings. Which means that the household net worth is increasing.
However, the pace of increase in mortgages is a major concern for the authorities. There is fear that the extended period of low interest rates may be over soon and overstretched borrowers may find it tough to service their monthly repayments. Once these stretched borrowers find it challenging to keep up with mortgage payments, they might sell their properties at a significant discount to current market value. Market valuations will then drop.
For borrowers who have taken the maximum mortgage limit of 80 per cent Loan-to-Value (LTV) ratio, a 10 per cent drop in the property Value would imply an increased LTV of 89 per cent, and a 20 per cent drop would bring the LTV up to 100 per cent. The maximum mortgage limits on each home loan range from 20 per cent to 80 per cent, depending on the age of the borrower, the number of home loans of each borrower, the loan periods and whether the borrower is an individual or a corporation. Under the Total Debt Servicing Ratio (TDSR) regime, those without sufficient regular income will be limited at even lower LTVs.
A significant drop, say 20 per cent, in residential valuations is dangerous as it could trigger banks to call on existing homeowners who have exceeded their allowed LTV limits to cough up more money to pay down the principle of the mortgages and restructure the loans. However, the difficulties of restructuring a home loan are made more challenging under the TDSR regime: the borrower’s age and, under a negative scenario, reduced income, may not qualify for a loan restructure.
Put in another way, is the overall LTV of Singapore’s homes too high? Is it high enough for the policy makers to implement strong measures and make public statements about?
According to the MAS, the average LTV for housing loans is 47.5 per cent in second quarter 2013. This is based on a quarterly survey of financial institutions which accounts for more than 90 per cent of the housing loans in Singapore. As at second quarter 2013, the total home loans granted is $193.7 billion, out of which $162.8 billion has been utilised (including partial drawdown for properties in various stages of construction).
The average LTV of 47.5 per cent refers to the homes which have mortgages and included homes which are under construction. Homes which are unencumbered, in having no loans attached, are not included in the LTV ratio.
Table 3: Total outstanding housing loans granted by banks for public and private residences
Source: MAS Data on Housing and Bridging Loans, Century 21 Singapore
An average LTV ratio of 47.5 per cent is by itself not worrisome. As a benchmark, the authorities allow Real Estate Investment Trusts (REITs) gear up to 60 per cent if their debt were independently rated. The authorities also allow a maximum LTV ration of 80 per cent for an individual’s first home loan.
Let’s analyse the data further. The $162.8 billion of home loans utilised with an average LTV of 47.5 per cent implies that the total value of homes backing these loans stood at about $342.7 billion. Of the $162.8 billion of home loans, I estimate that about 10 per cent of the loans are backed by HDB flats and another 10 per cent are backed by properties that are in various stages of construction.
That is, only 80 per cent or $130.2 billion of mortgages are backed by private residential properties that are completed. Century 21 Singapore estimates that the total value of private residences which are completed to be about $485.8 billion (Table 4).
Table 4: Total value of completed private residences as at 2Q 2013
Source: URA, Century 21 Singapore
In addition, there are 10,430 units of Executive Condominiums (ECs) which are completed and whose loans are with the financial institutions. Century 21 estimates their value to be $9.4 billion assuming each unit is worth roughly $900,000. This takes the total value of the completed stock of private residences, which includes all private homes with and without mortgages, to $495.2 billion.
Based on the total asset value and loans, the country-wide LTV of completed private residential assets falls to about 26.3 per cent for second quarter 2013.
As for the public housing segment, we can infer the average LTV from SingStat’s Household Balance Sheet survey which shows that HDB flats owned by Singapore households stood at a total value of $421.7 billion in second quarter 2013.
According to SingStat, outstanding loans taken from HDB stood at $37.5 billion. We add to that the 10 per cent of utilised home loans from banks which we previously excluded from private residential segment, ie. $16.3 billion, and we have a total of $53.8 billion of loans backed by HDB flats. That is, the LTV ratio is a mere 12.8 per cent. Most of the current 870,000 HDB flat owners have long repaid their loans. Taken together, the total value of completed HDB and private residential units in Singapore is $495.2 + $421.7 = $916.9 billion. As the home loans backed by these residential units totals $130.2 + $53.8 = $184.0 billion, the national home-LTV ratio stands at a very safe 20 per cent.
If a large listed corporation was operating at this level of debt-equity ratio or loan-asset ratio, I would be wondering if the corporation was adequately using its capital.
So we might rephrase our question to: Are we under-borrowing against our homes? And at this level of gearing for completed homes, what are we worrying about?
Let us consider if the risks may lie with the past three years of record high residential sales from developers. As of second quarter 2013, there were 54,534 units of private residences and 9,629 units of ECs sold by developers that are in various stages of construction. Almost all of these properties have already secured their loans but the loans are being drawn down depending on the stages of completion. Even though the deferred payment scheme still exists for ECs, most EC buyers would have secured their loans when they purchased their ECs, ie. the loan limits have been granted, but not utilised.
Based on the above premise and using assumptions consistent with completed residences, we estimated that the value of private homes (including ECs) sold and under construction, is about $76.6 billion. In an earlier paragraph, we estimated that 10 per cent (or $16.3 billion) of the loans utilised belong to residences under construction. In addition, there is $30.9 billion of loans granted but not utilised. It is reasonable to conclude that the total of $16.3 + $30.9 = $47.2 billion loans are secured against the homes under construction. This brings the LTV of residential properties (including ECs) under construction to 61.6 per cent.
Chart 1: Rapid rise in loans granted to homes under construction — home loans granted by financial institutions between 1Q 2011 and 2Q 2013. The growing gap refers to the increase stock of residential properties under construction.
Source: MAS, Century 21 Singapore
Now this is a number that is perhaps worthy of concern. The widening gap in Chart 1 shows a higher proportion of loans granted for new properties that are under construction.
We have seen record high numbers of transactions from developers in the past three years. We also know that most of the properties sold in the last three years were concentrated in the outskirts of Singapore and that record high dollar-per-sqft prices have been set and then smashed by investors of 99-year new launches.
So with valuations being very rich for mass market properties that are under construction, and at higher than average LTVs, the risks of household mortgages clearly lie in the domain of mass market new launches, including ECs.
If not for a series of MAS’ curbs on mortgages in the last two years, which reduced LTVs and shortened loan tenures for borrowers, the situation could be worse.
However, even the most recent cooling measure, TDSR, has not addressed this specific concern about mass market new launches and the loans granted to investors betting on record high prices. Small sized apartments priced with rich valuations in new launches are still selling briskly. The TDSR is more like a multiple launch rocket system that carpet bombs the entire residential borrowers’ market. It does not penetrate the actual target and damages innocent bystanders instead.
Based on tenders for government land sales (GLS), mass market residential sites and EC sites brought in revenues of more than $5 billion in 2012. If specific and targeted measures were introduced to prevent investors from overborrowing and overpaying for mass market new launches, including ECs, the impact on GLS revenue may be significant.
Perhaps the authorities deem that maintaining the current level of GLS revenue and boosting our national reserves is high in priority. In that case, the rich valuations and record high dollar-per-sqft prices in the mass markets are required to keep GLS prices up. Broad sweeping measures such as ABSD and TDSR do not work well because mass market prices are still rising despite eight rounds of cooling measures. Furthermore, ABSD and TDSR also penalise conservative families whose homes are purchased for their own stay.
Our data analyses show the nation-wide household debt and LTV levels are within safe levels. If our overarching concern is about the stretched borrowing limits of a specific group of ‘upgrader’ households and investors with HDB addresses who paid top dollars for mass market new launches, then what we need is a very precise mechanism to reduce risks and liabilities for these segments. For the sledgehammers have not produced the desired results.