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Housing Finance Market Overview
Singapore has a remarkable housing finance system and housing market. In 2009, 88.8 per cent of all households were homeowners, whereby 80 per cent were "public homeowners" and only the remaining 8.8 per cent private ones. Public homeownership comes under the purview of the Housing Development Board (HDB), a housing finance agency that is wholly government owned and under government control. HDB housing units are 99-year leasehold properties but even private property is usually built on leasehold land. Though this would mean that the land/property will revert to the government when the lease on the land expires, HDB has so far not given a clear statement to this matter (Singapore is an independent state since 1965).
In Singapore, mortgage loans are available to homebuyers from both the HDB public finance sector and private financial institutions. Buyers of HDB units have the possibility to take out subsidised HDB loans insofar they are eligible. The remaining market is clearly dominated by private commercial banks; the market share of special finance companies is less than 2 per cent. The private housing finance industry has seen in the last years only a modest growth in relative terms. From 2000 to 2008 the ratio of outstanding mortgage debt (issued by the private sector) to GDP increased from 25.9 to 30.9 per cent.
However, the subsidised loans of the HDB are not included in this number, though they are considerable. In 2000, the amount of outstanding HDB loans was even 50 per cent higher than the amount of outstanding mortgage loans issued by private financial institutions. And although HDB has reduced its commitment since 2002, outstanding HDB loans still equaled to 60 per cent of the amount of outstanding mortgage loans issued by private financial institutions in 2008. By taking also the subsidised HDB loans into account the mortgage debt to GDP ratio would be around 50 per cent.
The Market from the Perspective of the Demand Side
The HDB or private banks generally loan up to 80 per cent of the property value, in certain cases the loan-to-value (LTV) ratio can be even as high as 90 per cent. Yet, most of the loans (60 per cent) have an LTV ratio of less than 70 per cent.
Almost all loans are variable rate loans. The high consumer acceptance of variable rate loans is also due to the fact that in Singapore the exchange rate serves as an anchor for monetary policy. This, in general, enables the central bank to keep interest rates (and inflation) over a long time period quite stable.
Interest on mortgage loans is deductible from tax.
As already mentioned in the upper section, subsidised loans are available from the HDB to eligible buyers of HDB housing units.
In addition, the government provides CPF Housing Grants. The CPF Housing Grant can be used for the initial payment or to reduce the mortgage loan for the flat purchase. It is available to buyers of HDB flats whose income is below a set income ceiling and meet further eligibility conditions.
House Price Development
By looking on the annual average growth of house prices from 2002 to 2009, the movement of house prices could be conidered to be still moderate with 4.5 per cent per annum. But in fact, the price development was very volatile. From 2000 to 2003 house prices were declining by almost 20 per cent. Then, house prices started to rise again, in 2006 by 10 per cent and in 2007 even by more than 30 per cent. In the wake of the financial crisis prices fell again by 5 per cent, only to increase in 2009 again by modest 2 per cent.
The most remarkables features of the Singaporean housing finance system and housing market has been mentioned already in the first paragraph.
Another unique feature for housing finance in Singapore is the role of the mandatory saving scheme, the Central Provident Fund (CPF). The CPF was established in 1955 as a social security savings scheme for workers in retirement. Today it is more comprehensive and the CPF takes care of members' needs in retirement, healthcare, home ownership, family protection and asset enhancement. The use of retirement funds for homeownership has been allowed in Singapore since the 1970s.
The CPF may be used for down payment on a property purchase as well as for regular monthly debt service. The majority of the home purchases in Singapore are financed through the use of CPF. Until 2002, a first charge over the property was always created in favour of the CPF board. Now banks may hold the first charge for the property ahead of CPF.
In the year 2000 the CPF withdrawals for housing finance equaled to 5.4 per cent of the GDP and in 2008 to 2.2 per cent of the GDP.
As a Singaporean government organisation the HDB is mainly financed by government grants. Furthermore, the HDB borrows also from the government and banks at favourable rates, and it issues bonds.
Banks fund their mortgage market activites mainly with customer deposits but also with the issuance of debt and bank bonds.
The development of mortgage backed securities has been slow and lagging, and they have therefore only a minimal role.