Property market vulnerable to sharp pullback: Nomura

Mortgage repayment could now be 24-45% higher than before.

On 5 October, the MAS announced the latest round of cooling measures for the housing market, imposing a cap on mortgage loan tenures at 35 years as well as a lower LTV for mortgage tenures exceeding 30 years or extending beyond the age of 65 years.

Nomura property analyst Sai Min Chow has noted that the measures are imposed on first-time home-buyers for the first time and he detects a slightly more hawkish tone from the MAS statement: “we will do what it takes to cool the market”. 

According to the MAS, “more than 45% of new residential property loans granted by financial institutions have tenures exceeding 30 years”.

Nomura property analyst notes that unless home buyers have ample equity capital, he estimates that mortgage repayment could now be 24-45% higher than before, which theoretically should have some impact on housing demand. The most likely outcome, in his view, is a month or two of lower transaction volumes before activity starts to pick up again. He, therefore, thinks that the government may have to implement new curbs if the property market remains buoyant.

Nomura's concern is that additional measures may be the straw that breaks the camel’s back.

Here's more from Nomura:

To the extent that the measures implemented in the past have had limited effect, especially on transaction volumes, the property market will likely be vulnerable to yet more measures if the new curbs do not work.

What is worrying, in our view, is the increase in investment demand from Singaporeans who still believe that they can get a reasonable return on their investment properties when completed.

With vacancies on the rise and rentals declining, we see risk that many “investors” may have difficulty securing adequate cash flow to service their debt. especially on transaction volumes, the property market will likely be vulnerable to yet more measures if the new curbs do not work. What is worrying, in our view, is the increase in investment demand from Singaporeans who still believe that they can get a reasonable return on their investment properties when completed.

Sooner or later, we believe that the fundamentals of increasing supply, a sluggish economy and prices at an all-time high will inevitably put pressure on prices, with a concomitant impact on sentiment. Observers continue to point to the low unemployment numbers as a key determinant underpinning sentiment.

Should unemployment start to rise as a result of weakening global economic conditions or Singapore’s economic restructuring, the property market may become vulnerable to a sharp pullback. This would have negative wealth effects on the economy in addition to affecting corporate earnings.