Three factors that will improve housing affordability in 2022

If housing affordability improves it will support SG’s covered bonds.

Housing affordability in Singapore to improve in 2022 but only if these three conditions will be met: higher households incomes, cooling of property prices, and accommodative interest rates, Moody’s Investor Service said in a report.

Last year, these same factors, particularly rising property prices and declining household incomes were the reasons for the worsening of housing affordability.

This year, however, Moody’s said there will be a turnaround.

The expert said household incomes will increase on the back of the recovery of Singapore's economy and job market; forecasting GDP to grow 4.0%, and the unemployment rate to stay low at around 2.6% in 2022.

“We expect Singapore’s economy to continue its recovery in 2022, which will support broad wages increases and higher household incomes,” Moody's said.

As for property prices, Moody’s said it will still increase but at a slower pace given the government’s cooling measures.

In the last quarter of 2021, private residential property prices increased 5.0%—the sharpest quarterly gain in five years.

To temper the property price gains, the government has increased real estate tax, imposed tighter mortgage lending regulations and higher stamp duties for property purchases, amongst others.

“The real estate tax increases, tighter mortgage lending regulations and higher stamp duties will curb property price gains in 2022. This will, in turn, reduce the risk of an unsustainable price bubble that could implode and lead to losses on mortgages backing covered bonds,” the analyst said.

Last February, the government also announced an increase in tax rates for non-owner-occupied residential properties to 12%-36% from 10%-20% starting in 2023.

Property tax rates for owner-occupied residential real estate, meanwhile, will increase to 6%-32% from 4%-16% for the share of properties' annual value that exceeds $30,000.

“Whilst the tax changes will not apply until next year, their looming introduction will curb property price gains this year,” Moody’s explained.

According to Moody’s these new measures “will also help reduce speculative demand for residential properties and increase banks’ loan-level loss-absorption buffers, providing protection if and when property prices fall significantly.”

Just like property prices, mortgage interest rates will “rise slightly” from low levels in 2022 as the “global economic recovery stabilizes and central banks in advanced economies start to normalize monetary policy.”

“We expect global benchmark rates to rise this year as major advanced economies begin normalizing their monetary policy positions in response to stabilizing growth conditions and elevated inflation,” Moody’s said.

Despite the rises, however, Moody’s said mortgage interest rates will still be “accommodative,” given that they dropped significantly over the first half of 2020 and stayed low after that.

Housing affordability is measured as the share of average monthly household disposable income households need to meet monthly home loan repayments on a typical new mortgage.

In December 2021, first-time private residential homebuyers in Singapore needed 19.7% of the average monthly household disposable income to meet monthly mortgage repayments on new loans, up from 15.5% in December 2020.

If housing affordability improves in 2022, it will be "a credit positive for Singapore’s covered bonds," Moody's said.