Singapore’s high property prices and increasing household debt pose a significant risk to its financial system, according to the Monetary Authority of Singapore (MAS).
“The combination of low interest rates, growing leverage and surging property prices poses significant risks to financial stability,” said Ravi Menon, Managing Director of the central bank.
Despite the city-state’s sound banking system, the mounting household debt is “worrying”, noted Menon, adding that a sizeable number of households have overborrowed in their mortgages due to low interest rates and long repayment terms.
Menon estimated that five to 10 percent of all Singaporean mortgagors may have borrowed more than they can afford, meaning their total debt servicing ratio (TDSR) is more than 60 percent of their monthly income.
Those who overborrowed, especially low-income households and those with small savings, may struggle to repay their mortgage if interest rates rise.
“When interest rates rise, long before any bank gets into trouble, some households will,” he explained. “Banks must therefore practise responsible lending, and consider the ability of borrowers to service their debt in a sustainable manner.”
Mortgage lending by banks climbed by 18 percent in the past three years. At present, housing loans as a percentage of Singapore’s GDP is at 46 percent, up from 35 percent three years ago, added Menon.
Last week, credit rating agency Moody’s downgraded its forecast on Singapore’s major banks from “stable” to “negative”. It said rising property prices and rapid loan growth have increased the chance that lenders’ credit profiles may deteriorate if there are adverse conditions in the future.
Source – PropertyGuru – 24 Jul 2013