If you have been looking around for a car, a home, or anything that may require a bank loan, you should have heard of the term TDSR by now. Especially during this Covid-19 period, TDSR sounds like a big word that is being thrown around often in the property market.
So what exactly is TDSR and why are so many people talking about it?
TDSR represents the Total Debt Servicing Ratio framework by the Monetary Authority of Singapore (MAS), first introduced in 28 June 2013 to encourage home buyers to borrow within their means, aka “financial prudence”.
Under the TDSR guideline, a borrower shall not obtain a loan (set @ 3.5% p.a. interest) greater than 60% of his monthly income, including all his existing debt obligations, e.g. car & renovation loans etc.
For commission-based earners, a 30% haircut on the variable portion will be factored in to account for the income variation. The table below shows a brief idea of this framework:
Example of how TDSR affects your loan eligibility
Since most people would have a fairly good idea of how it works already, we shall not dive into the exact mechanics of how it works. If you need an instant calculator for estimated figures, click here for one.
Do note that it is always best to contact a banker directly for more accurate numbers. For today we will focus on its effects on us and the property market.
Let’s take a look at the many introduction and removal of cooling measures that the Singapore Government has implemented over the past three decades.
(Private) Property Price Index: Red spots represents Cooling Measure, while Green spots are the opposite
For relevance, let’s focus on measures after the Global Financial Crisis from Year 2008 & beyond.
TDSR: Mother of All Cooling Measures?
From 2009 to 2013, a total of 12 cooling measures & adjustments were implemented by the Singapore Government, up until the TDSR was slapped onto the real estate market as the 12th and final effort for a long time to come.
Ever since, about 5 years lapsed before the next cooling measure came up in July 2018, but not before the easing of the Seller’s Stamp Duty in March 2017 that set off the en-bloc fever by property developers.
Ironically, the MAS didn’t see the TDSR as a cooling measure.
Then again, our authorities are experts in “branding” their problems and solutions, such as:
It is NOT flooding, mind you.
Pretty sad, considering the massive success that TDSR had in curbing the draconian property market.
Now this sounds familiar..
The Mother of Dragons wasn’t exactly a “dragon”
Which leads us to conclude…Yes the TDSR is not cooling measure.
It is “The Mother of Cooling Measures”.
Mind-blown 🤯.
Jokes aside, let us examine why TDSR was so effective in shutting the raging market after GFC.
Why was TDSR so successful?
First, we acknowledge that it is possible that the shutdown of the previous property bull run was a result of all the various cooling measures combined (ABSD, LTV, SSD, “TDSR”), and may not just be only TDSR alone.
As for TDSR, what it does is that people were restricted to a strict 60% total debt-to-income ratio, with variable income earners facing even lower loan eligibility. As such, the amount of loan (or “risk”) that they can take is greatly restricted, especially if they have other loans such as car and renovation loans.
Previously, as long as you can cough up the 10% downpayment for whichever property you wanted to purchase, it is much easier to get the loan you need from most banks. After all, why would they wanna turn down business when they can also seize the property if you default?
This leads to risk-takers taking massive loans to ride on property bull markets in order to leverage on the banks’ money, or OPM (Other People’s Money). Of course, great risks comes with great rewards, but not everyone is able to stomach those risks.
Just a sneak peek at how insane the market used to be:
Pure genius
Can you imagine making $800,000 in just less than 1.5 months…minus the long work hours & countless dreadful projects?
Unfortunately, where there are winners, there are also losers in the game of wealth..
Not fun when you’re on the other end
In order to stop the private property prices from spiraling out of control and following in Hong Kong’s footsteps, the Singapore Government knew they had to find a way to curb reckless risk-taking in terms of loans, before eventually stumbling onto the TDSR.
Once people realized that their bank loans were greatly restricted with TDSR, they knew this was a major stumbling block that would take years to adapt and overcome before they can get speculating again.
(Yes, human beings are naturally adaptable creatures, and people are always trying to figure out all sorts of ways to work their way around obstacles, albeit with more time this round perhaps.)
Why Must You Understand TDSR?
Back in the heydays, if you were a little more cash-rich, you can try going for a $3 million property with $300,000 as 10% downpayment, while the rest being from a bank willing to entrust you with their money.
Now, assuming you are aged 30 and earning even up to $10,000 fixed income a month:
Despite having $300,000 cash on hand, you are only able to borrow $1.33 million from the bank as loan, which gives you a maximum property price eligibility of up to $1.78 million.
As if to rub salt onto wound, the $300,000 is not even enough to pay for the upfront costs required for the hypothetical $1.78 million.
Now that hurts.
Is TDSR A Bad Thing Then?
It can be both a boon or a bane, depending on what your aims are in the real estate market.
To put it shortly, it is a bane if you are looking to make some quick, big bucks through speculation in the market.
However, for people who are genuinely looking to build wealth and upgrade towards private properties one step at a time (high-five if you’re from the same camp), it is definitely a boon.
With TDSR in place, the market is subdued and prices appreciates over the past few years in a highly-controlled manner, which allows genuine demand to keep up with the supply available.
Possible (Private) Property Price Index in blue without TDSR
Just imagine instead of upgrading now to a 3-bedroom OCR condo at $1.4 million, you face paying $2.5 million, or $1.1 million more for the same unit, thanks to a speculation-rampant market, which could have been especially vulnerable towards a global recession like the current one by Covid-19, and possibly leading to an extreme collapse in the property market as indicated in the blue line above.
Contribution in Covid-19 Period
With our economy in the worst ever recession since our founding back in 1965 due to the Covid-19 pandemic, most would expect our property market to follow the substantial dive in our SGX stock market, as it usually does.
However, according to the research figures from PropNex, it seems that only the Core Central Region (CCR) properties took a rather significant hit at -3.4%. This is understandable, given that the CCR tends to be the preferred playground of the rich and hence slightly more speculative in nature.
What’s surprising is that despite the lockd…”Circuit Breaker” from the start of April 2020, property transactions were still going strong, which was made possible by technological advancements in the form of virtual meetings such as Zoom. All these contributed to the appreciation of RCR, OCR as well as Landed properties.
So why are we talking about this?
As you know from earlier on, TDSR limits borrowing up to 60% of a person’s income and spares the remaining 40% for savings and day-to-day expenses. This leads to a huge build-up of cash reserves in many Singaporean households, who have been sitting on the fence waiting for a crisis to arrive, and then snap up good deals with their available funds.
The following chart shows the Gross National Savings figures for almost the past 10 years, where there is a significant rise in savings amounts in the Post-TDSR era after 2013.
Gross National Savings Figures from 2010 to 2019
What happened was that the financial prudence that the TDSR has promoted since 2013 is starting to bear fruits by allowing people in Singapore to be well-prepared and ready to weather through a financial crisis.
Given that so many cooling measures and restrictions are hovering around the market these days, Singaporeans only have very limited chances in selecting the right property. Hence, it is only natural that they take their time to wait for the best deals for what is possibly the biggest purchase of their lives.
However, since property prices are showing no signs of weakening even in our worst-ever crisis, it comes as no surprise that those who are qualified and ready to make a purchase are seeing no further reason to wait longer in hope for a big price drop.
How Does TDSR Affects Us?
So why should we bother about TDSR?
Whenever the majority of us talk about upgrading to a private property, we’ll get defensive and cook up various remarks like “I don’t need a condo lifestyle”, “I’ll wait till I save enough then I’ll consider”.
Don’t get me wrong. These comments are not incorrect by any means, since everyone is entitled to their opinion.
However, we address the issue about waiting till you’ve accumulated more savings then start considering moving into a private property.
Suppose, we have Tom, who is aged 35 years old and earning $10,000/month at the moment. He is able to afford a $1.78 mil 3-bedroom new condo due to his earning power at this stage, but he chose not to, preferring to save up his money to do so when he reaches age 50.
Once he reaches age 50, assuming the same salary for illustration purpose, Tom realizes he can only afford a $1.12 mil condo as compared to a $1.78 mil one just 15 years ago.
Why is this so?
Sadly, it is due to the much shorter loan tenure that he can service till the maximum age of 65 years old if he desires to loan up to 75% of the purchase price to leverage on his funds.
We don’t think anyone in their right mind would want to throw down their lifelong savings as full cash payment for a million-dollar house, unless they happen to share the same name as a certain billionaire in Singapore who built a business around bagless vacuum cleaners.
On top of that, we are sure that everyone expects property prices in Singapore to be soaring sky-high in 15 years’ time.
Based on research figures by PropNex on average residential property types and prices in the various regions, just a small span of 5 years saw RCR properties climb 66.7% from a ceiling of $1500 psf in 2015 to $2500 psf in 2020.
Can you imagine how much higher it will go up in the next 15 years?
What type of property would you think that $1.12 mil will be able to afford you in 15 years’ time?
Now what?
Well hold your horses… this does NOT mean that you should panick and start rushing down to showflats or resale units the very next day.
Not every private property has potential to appreciation substantially to keep up with inflation in the future, and choosing the WRONG one will put yourself back further than where you even started.
You should always communicate your goals and priorities with a trusted real estate professional who has your interests at heart. From there, discuss possible options that are aligned with your objectives and find out the pros and cons of each options, before finally making a well-informed decision to take that step towards
A good consultant would be able to make you feel at ease and guide you along each and every step of your real estate journey.
And if you feel that I can be of any help in guiding you towards the best decisions for yourself, do drop me a text at 9149 9929 and I’ll be glad to assist you to the best of my abilities.