MAS announced new property cooling
measures on 5 October that took the market by surprise. Will this
herald the start of a correction in property prices? For the
uninitiated, the following are the new restrictions:
- Loan tenures of more than 35 years will no longer be allowed
- For loan tenures that exceed 30 years or if the the loan period extends over 65 years old for the borrower
- maximum loan-to-value (LTV) will be 60% for people with no existing home loan
- maximum LTV will be 40% for people with one or more home loans
Let's start off by taking a look at the
monthly instalment figures for a loan of $800,000.
Interest Rate (%)
|
Monthly Instalment ($) - 20 yrs
|
Monthly Instalment ($) - 25 yrs
|
Monthly Instalment ($) - 30 yrs
|
Monthly Instalment ($) - 35 yrs
|
|---|---|---|---|---|
1
|
3679
|
3015
|
2573
|
2258
|
1.5
|
3860
|
3199
|
2761
|
2449
|
2
|
4047
|
3391
|
2957
|
2650
|
2.5
|
4239
|
3589
|
3161
|
2860
|
3
|
4437
|
3794
|
3373
|
3079
|
3.5
|
4640
|
4005
|
3592
|
3306
|
Depending on the interest rate, the difference between the monthly instalment for a 30 and 35 years loan is around 10% to 15%. This will increase by about 2% for every subsequent 5 years reduction in the loan tenure. e.g. difference in monthly instalment between 30 and 25 years tenure is around 12% to 17% and 25 to 20 years, 14% to 19%. The percentage difference is more or less the same, regardless of the loan amount (don't take my word for it - use this home loan tool for a look at the figures).
For people who find it hard to fork out
the additional monthly instalment, they have the option of buying
cheaper properties to bring down the monthly instalment. Folks with
enough money to take up loans with lower LTV can also proceed with
their purchases and opt for a longer loan tenure if they wish to. And
the new measure will have practically no impact for citizens buying
HDB flats and taking up the HDB concessionary loan, as the maximum
tenure of a HDB concessionary loan was and still is 30 years or up to
65 years, whichever is shorter.
So who are the people affected?
Essentially people who will face difficulty servicing their monthly
instalments if they cannot opt for a monthly instalment that is past
the retirement age of 65. This group of property buyers are treading
on thin ice for a couple of reasons. Even though signs are pointing
to a later retirement age down the road and the property may also
fetch a decent rental income, there is no certainty that this will
happen. Counting your eggs before they hatch is never prudent.
Furthermore, the artificially low interest rate environment is not
here to stay.
Referring back to the table above, when
interest rate increases, the monthy instalment can quite easily
increase by more than 10%. What will happen if this group of people
are allowed to proceed with their purchases and interest rate
increases? They will be forced to sell their properties if they
cannot service the monthly instalment. This in turn can cause turmoil
in the property market and unncessary distress to these property
owners. The number of people in this group are few and far in between
however, and MAS appears to be simply exercising prudence in the
matter. How could they not when Minister Khaw
Boon Wan has communicated clearly to the press that a
50-year housing loan is a gimmick.
If previous market reaction to MAS's
property cooling measures is anything to go by, property volumes will
be subdued for a few months and prices may go down slightly. But
judging by how this measure is not going to affect most people, it
alone is not going to cause any long term impact on property
transaction volumes and prices. In fact, mass market properties is
likely to face greater demand as there will be more potential buyers
with tighter purse strings. So the answer to the earlier question
“Will this herald the start of a correction in property prices?”
- highly unlikely.
