In very recent times, there were several policy changes to the Loan To Valuation (LTV) for home loans and car loans have been revised. It is largely seen by many, as a curb to help first time home buyers, as well as making it inaccessible to ordinary people to own a car.
The policy on the property market is much labelled as, "Cooling Measures", to curb the run away price on properties. No doubt prices of properties have risen at an alarming level, prompting many changes in policies.
Where car purchase are concern, sometime in early 2003, car loan policy was changed to allow 100% purchase price (not LTV) and maximum tenure of 10 years (or remaining years of COE). The latest change (25 Feb 13, Budget 2013) saw car loan to be reduced to 60% LTV and tenure down to 5 years maximum.
Both the Property Loan and Car Loan policies makes me wonder, "What is the health of the global economy? Are we heading for a very turbulent and long bad ride ahead?"
A little history on loan's LTV
In the mid-2000s, when economy was recovering, the LTV for homes were 80%, and in the economy started to recover in about 2006, LTV for homes went up to 90%.
Car financing policy before 2003 were, 70% LTV and 7 years loan (max). From around Mar/Apr 2003, it was relaxed to 100% LTV and 10 years loan (or remaining years of COE).
A worrying sign
With low LTV, it seems like a sign that, if the economy drips into prolonged recession, valuation of big ticket items will drop. When that happens, where 100% or even 80% LTVs are concern, banks will be financing negative value assets (lower in value than the loan amount).
The Risk On Banks
Cars, depreciates immediately upon obtaining it. If economy dips, the car market 'dies'. A lot of car owners who can't afford the car anymore, will be forced to sell, flooding the market, and with low demand and high supply, the banks will be caught with more and more bad debts.
Homes, if the buyer purchased a property at $500,000 and took 80% LTV $400,000 loan, and if the valuation of the property dips to $400,000, the banks are faced with 100% LTV. If the valuation dips further, it becomes negative asset, as what happened in the early 2000s in Singapore, as well as US Sub Prime in 2007.
New Policies - The Assurance To Banks
Thus, with low LTV, even if the economy weakens or dips, the value of these assets will still remain above oustanding loan, eg, the scrap or export value of these cars will be able to cover the outstanding loan.
Take a $150,000 car (with COE price of $80,000) for example. If the LTV is 60%, the buyer can only loan $90,000 ($60k downpayment). Given that LTV being 60% and loan tenure being 5yrs, there is almost no risk on the banks even if buyer drives out the car and at that very moment, he totalled the car. WHY? Outstanding COE being nearly $80,000, PARF minimum would be about $10,000 (illustration purpose). Besides, insurance usually pays out about 70% of the car's open valuation.
Is That A Sign?
Monday, February 25, 2013
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