The Monetary Authority of Singapore (MAS) is confident that despite rising interest rates, there are no heightened risks that households cannot service their loans.
Instead, household debt remains “generally healthy”. With the US Federal Reserve hiking rates recently, the repercussions have been felt directly by some home owners compelled by their banks to pay more than 3% interest for their loans.
Singapore has among the strictest limits in the world on household borrowing, says Ravi Menon, managing director of MAS. “Stress tests by MAS suggest that most households should be able to service their debts even under scenarios of sharp interest rate hikes and significant income losses.”
Singapore has put in place a series of property cooling measures. The most recent was on Dec 15, when additional taxes were imposed on buyers of second and subsequent residential properties. The government undertakes what it says are “periodic policy reviews” as well.
For example, with effect from May 8, buyers are to pay a stamp duty of 35% on properties they park in a living trust. According to MAS, the median Total Debt Servicing Ratio (TDSR) for new loans issued over the past year is 43%, and the median loan-to-value (LTV) ratio for the outstanding stock of mortgages as of 1Q2022 is less than 50%.
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The proportion of non-performing mortgages “has remained low” at less than 1%, says Menon. Managing debt during this period is “critically important”, says Menon. “It will create strains across the board. The question is: What is the capacity and resilience to withstand those strains?”
He adds: “Our assessment is that most households in Singapore will be in pretty good shape. Borrowing in Singapore has generally been prudent. I think that reflects prudence on the part of households and a value system, as well as the potential safeguards that we put in place. We’ve got some of the tightest rules on household borrowing in the world. It can’t get much tighter than this.”
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Nevertheless, Menon reiterates that MAS is closely monitoring any systemic risk to the financial system arising from both consumer and corporate debts. “MAS subjects all major banks to rigorous stress testing to assess any vulnerabilities in their portfolios. Regulatory limits on sectoral exposures, such as for property, and to single borrowers help to ensure that banks’ corporate credit risk profiles are diversified,” he says.
So, even as property prices in Singapore hit record highs, MAS does not see an unhealthy market. “As a result of property cooling measures, the private property price index actually displayed rates that were much lower than the growth in nominal GDP domestic market,” says Edward Robinson, deputy managing director (economic policy) and MAS’ chief economist.
Robinson adds: “Quarter to quarter, month to month, you will see volatility. That’s the nature of assets and property markets. But if you take a long-term horizon, what we mean by property prices growing in line with economic fundamentals is that prices must have some relationship to incomes so that houses are affordable. That is the anchor.”
Menon points out that rising property prices are not necessarily bad. Since 2013, the residential property market in Singapore has been on a sustainable path, where prices have moved in line with nominal income growth, unlike many other cities. “If we see a divergence that persists over a period of time, then it’s misaligned and we need to bring it back, which is what we do proactively with our cooling measures,” he says.
Photos: Albert Chua/The Edge Singapore
