Property cooling measures slow banks' loan growth

UOB could be hit the hardest as 27.6% of its total loans are home loans.

As a surprise move, the Singapore government raised the rates for the Additional Buyers’ Stamp Duty (ABSD) and tightened Loan-to-Value (LTV) limits on home purchases as a way to cool the market. This has prompted panic buying as well as developer stock corrections upon the announcement.

Due to the market’s reaction, various watchers have said this will significantly affect loan growth and some of Singapore’s largest banks. LTV limits have been tightened by 5% for all home loans granted by financial institutions.

In his speech during the launch of the Monetary Authority of Singapore (MAS) annual report, a day before the announcement, managing director Ravi Menon even mentioned how housing loans have risen by 34% YoY.

Redbrick Mortgage Advisory director Eugene Huang explained that loan growth has been driven by new launches in the market due to rejuvenation. “Developers have been snapping up collective sale sites for redevelopment; homeowners are displaced as a result and are required to seek new housing options,” he said.

Menon then noted that market recovery is welcome but it should not decouple from economic fundamentals. “Households will have to take on more leverage than they are able to manage; this risk will be compounded as interest rates rise over time,” he said.

Also read: Should Singapore's housing market anticipate more cooling measures?

DBS Equity Research analyst Sue Lin Lim noted that property prices started to rebound after the government relaxed the Seller’s Stamp Duty (SSD) in March 2017, and prices have increased by 8-9% whilst transaction volumes rose by 40% since then.

“With rising interest rates, we gather that the government is trying to instil caution to property buyers to avoid over-leveraging,” she said.

Mortgage Supermart Singapore broker Keff Hui concurred with Lim and said, “The new cooling measure is a very strong dose of medicine for the resurgent recovering residential property market and sends a clear strong signal that the government may not favour any further upside increments above 2013 peak residential property prices.”

Huang also said, "Increase in stamp duties for developers will also make the entry barrier higher and curb developers’ buying sprees. Cash outlay by developers for any project will increase 15% – 20% if they are taking financing. Hence, it’s likely for developers to take a step back from the fervent acquisition of residential land sites."

Moreover, since there are increased costs on land acquisition, developer bids on land might be more conservative, Huang added. "Alternatively, land bids may remain at current levels and developers choose to pass on the costs to end buyers, resulting in more expensive new properties."

Banks are then expected to take a hit. RHB Research analyst Leng Seng Choon noted that the new ABSD requirements should lower investment demand whilst LTV limits imply that buyers get reduced financing for their purchases.

Hui echoed this and added, “The new stamp duty increments will effectively slash investment demand for second property purchases onwards or from foreigners whilst the cut in loan-to-value ratio to 75% even for first housing loan borrowers could curtail demand for owner-occupied first time home buyers.”

Huang also agreed with Leng and said, "As LTV has been reduced to 75%, this would refer to a higher initial outlay, especially so for first property buyers that form the bulk of transactions. As such, growth of loans might be expected to slow down slightly."

Sherry Leong, head of secured finance solutions in Citibank Singapore noted that new housing loans taken up with Citibank Singapore in the first five months of 2018 have doubled as compared to the same period last year, a reflection of the housing market recovery.

"In tune with market changes, Citi’s mortgage packages are designed to help our customers continually enjoy competitive rates for the long term. For instance, the Citibank Home Saver comes with a checking account: cash balance in that account will earn a high-interest rate that will be automatically used to offset up to 50% interest payable on the mortgage loan. Clients in the affluent segment especially appreciate the offset as they can save on interest and pay off their loans faster," she said.

Leng and Lim both expect UOB to get hit the hardest by the direct effects of the cooling measures. “UOB has the highest exposure to housing loans, at 27.6% of its total loans. DBS has the least exposure, at 22.1% of its loans. It would appear the measures are more negative for UOB than DBS,” Leng said.

Also read: This Singapore bank is best-placed to cash in on the property boom

Lim noted that inclusive of building and construction loans at another 23%, UOB’s total property-related loans make up 50% of total loans. “Historically, UOB’s share price has been correlating well with the property price index,” she said.

Meanwhile, OCBC’s head of group of corporate communications Koh Ching Ching said the bank expects subdued demand for home loans. “Given the extent of the new cooling measures, we expect the home loans demand to be subdued. Our interest rates will continue to be competitive to the market,” she said.

Lim said in a separate report that OCBC is also expected to take a hit from the new property cooling measures and revised forecasts from 8% to 7% in 2018. Still, the uplift to net interest margin (NIM) in still more visible in 2018. “Loan demand appears apparent for Singapore companies investing abroad. Every 1-ppt rise in loan growth leads to 0.9% increase in net profit,” she added.

However, these drastic effects are only expected in the short- to medium-term. “Mortgage growth might still stay relatively stable over the next few quarters from existing drawdowns,” Lim said. The analyst cut her loan forecast for 2018 from 8% to 7% and from 7% to 6% for 2019.

Leng echoed Lim’s analysis but maintained his growth forecasts of 8% and 6.5% for both DBS and UOB in 2018 and 2019. “The impact on banks’ housing loan growth over the next few quarters is likely to be muted, as most of these housing loans would be the drawdown of loans already approved earlier,” he said.

Hui is also positive on the market’s fundamentals. “In the short-term, home loan growth is likely to be subdued. In the mid to long-term, demand and supply should recalibrate itself and allow fundamentals to catch up and should be view as a positive in the long run,” he added.

Huang noted that despite the slight increase in interest rates, the overall interest rate environment in Singapore is still considered low on a global scale. “Singapore being a gateway city is still within the radar of the more affluent market and international investors,” he said.

“The outlook of the property market will always differ based on whether you are a homeowner or an investor, but it is always important to choose a loan package that will suit your needs, financial circumstances and risk appetite or threshold,” he added.