Last Friday, the MAS announced 35-year limits on all residential loans for both individual and non-individual borrowers, as well as refinancing loans. For loans >30 years and extending beyond the age of 65 years, the LTV ratio is lowered to 40% for those with outstanding residential loans, and 60% for those with none. In our view, after similar measures in Hong Kong last month, the market has, to some extent, anticipated loan tenures limits. Given that the average loan tenure in Singapore is still at a relatively acceptable 29 years currently, we see these measures as mostly preventive, rather than punitive, in nature, and that other key drivers of demand, such as low forward rates, easy loan access and healthy system liqudity, would likely continue to be conducive for new home sales. Therefore, all considered, we expect these measures to have a somewhat muted impact on equities and physical prices. Maintain OVERWEIGHT on the residential sector. Our top pick is City Developments [BUY, FV: S$13.18] for its sharp execution, strong balance sheet and mass-market segment exposure.
Limits on residential loan tenures
The MAS announced last Friday that that it would limit all residential loan tenures to 35 years effective 6th Oct 2012. This would apply to both individual and non-individual borrowers, as well as refinancing loans. For loans exceeding 30 years and those extending beyond the retirement age of 65 years, the loan to valuation (LTV) ratio is lowered to 40% from 60% for those with one or more outstanding residential loans, and 60% from 80% for those with none. The LTV ratio for non-individual borrowers is also lowered to 40% from 50%. MAS indicates that it is taking this step because long tenure loans “may lead borrowers to over-estimate their ability to service the loans, and take a bigger loan than they can really afford.”
New measures were anticipated
In our view, the market has, to some extent, anticipated measures limiting loan tenures. In Aug 2012, Minister Khaw publicly warned against taking on 50-year mortgage loans offered by a domestic bank. In addition, after QE3 was announced in Sep 2012, Hong Kong authorities imposed a 30-year cap on new mortgages, and it was widely expected that Singapore could follow suit.
Preventive, not punitive, in nature
Given that the average loan tenure in Singapore is still at a relatively acceptable 29 years currently, we see the latest measures as mostly preventive, rather than punitive, in nature. They would curtail the (already burgeoning ) role of loan tenure structuring, as interest rates bottom out, in propogating leverage and a meaningful second wing to housing price appreciation. However, other key liquidity drivers, such as low forward rates, easy loan access and healthy system liqudity, would likely continue to be conducive for housing demand.
Expect limited impact on equities and physical prices
All considered, we expect these measures to have a somewhat muted impact on equities and physical prices. We also note healthy sales at new launches, such as eCO at Bedok South, over the weekend after the announcement. MaintainOVERWEIGHT on the residential sector. Our top pick is City Developments [BUY, FV: S$13.18] for its sharp execution, strong balance sheet and mass-market segment exposure.
The MAS announced last Friday that that it would limit all residential loan tenures to 35 years effective 6th Oct 2012. This would apply to both individual and non-individual borrowers, as well as refinancing loans. For loans exceeding 30 years and those extending beyond the retirement age of 65 years, the loan to valuation (LTV) ratio is lowered to 40% from 60% for those with one or more outstanding residential loans, and 60% from 80% for those with none. The LTV ratio for non-individual borrowers is also lowered to 40% from 50%. MAS indicates that it is taking this step because long tenure loans “may lead borrowers to over-estimate their ability to service the loans, and take a bigger loan than they can really afford.”
New measures were anticipated
In our view, the market has, to some extent, anticipated measures limiting loan tenures. In Aug 2012, Minister Khaw publicly warned against taking on 50-year mortgage loans offered by a domestic bank. In addition, after QE3 was announced in Sep 2012, Hong Kong authorities imposed a 30-year cap on new mortgages, and it was widely expected that Singapore could follow suit.
Preventive, not punitive, in nature
Given that the average loan tenure in Singapore is still at a relatively acceptable 29 years currently, we see the latest measures as mostly preventive, rather than punitive, in nature. They would curtail the (already burgeoning ) role of loan tenure structuring, as interest rates bottom out, in propogating leverage and a meaningful second wing to housing price appreciation. However, other key liquidity drivers, such as low forward rates, easy loan access and healthy system liqudity, would likely continue to be conducive for housing demand.
Expect limited impact on equities and physical prices
All considered, we expect these measures to have a somewhat muted impact on equities and physical prices. We also note healthy sales at new launches, such as eCO at Bedok South, over the weekend after the announcement. MaintainOVERWEIGHT on the residential sector. Our top pick is City Developments [BUY, FV: S$13.18] for its sharp execution, strong balance sheet and mass-market segment exposure.
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