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Why and when growing mortgage debt alarms policymakers


Real estate may suffer the most from changes such as the withdrawal of fiscal and monetary stimulus and higher interest rates.PHOTO: ST FILE


Ovais Subhani


Dec 7, 2021, 6:20 pm SGT

SINGAPORE - Singapore's property market is set to wrap up 2021 as one of its best years in recent times.


But as the economic recovery at home and abroad moves forward, new risks to growth and employment are emerging. And as policymakers move to confront these risks, market dynamics for all assets are likely to change.


Real estate, being the best performing asset since the onset of the Covid-19 pandemic, may suffer the most from changes such as the withdrawal of fiscal and monetary stimulus and higher interest rates.


Low home-loan borrowing cost was key in kick-starting the housing boom last year when unemployment rose, incomes fell and the world economy suffered its worst recessions in decades.


Now with inflation in many major economies running at its fastest pace in decades, interest rates are likely to rise worldwide and subsequently push up the borrowing cost here as well.


Central banks - the guardians of financial stability - have hence started to issue warnings on what could go wrong with the property market and how that could hurt both borrowers and lenders.


They are worried that a sharp correction in asset prices could impair household wealth and bank loan portfolios.


What could go wrong

To be sure, the Monetary Authority of Singapore (MAS) does not believe that overall household debt, driven mainly by growth in mortgages, is at a dangerously high level.


In fact, the MAS in its recently published Financial Stability Review report said that as a share of gross domestic product (GDP), household debt has eased to 70 per cent in the third quarter of 2021, from its high of 72 per cent in the first quarter.


Also, credit quality of housing loans has improved over the past year and stayed healthy, helped by rising property prices.

Meanwhile, the proportion of non-performing or bad housing loans in the financial system, after a brief spike in the second quarter of 2020, has fallen to below pre-pandemic levels and is now broadly in line with the 10-year historical average.


However, household debt increased by 6.8 per cent over the past year - and in the event of a shock to the property market, the correction in property prices could impact domestic demand across the economy, the MAS said.


There is enough data to show froth in the real estate market.


Private home prices have climbed 8.7 per cent since the start of the pandemic in the first quarter of last year, outpacing the 5.3 per cent growth in Singapore's GDP before adjusting for inflation.


In fact, property prices from 2015 to 2020 have risen by 2.1 per cent, faster than the median income growth of 1.2 per cent, according to a DBS Bank research report.


New private home sales in the first 10 months of this year have surpassed full-year sales in 2018, 2019 and last year, suggesting that more people are buying.


PropertyGuru's biannual consumer sentiment study in August showed that despite rising home prices, 74 per cent of Singaporeans still intend to purchase a home.


The negative wealth impact from a correction in property prices cannot be underestimated, given that residential properties and loans account for the bulk of the household balance sheet - representing about 40 per cent of assets owned and 75 per cent of liabilities.


The consequent rise in bad loans would also affect banks, as housing loan exposure forms a significant share of their overall non-bank loan portfolio, and may curtail their capacity to extend credit to other sectors in the economy.


The MAS is therefore advising households to exercise caution in taking on large new debt commitments, and to be mindful of their ability to service long-term mortgage obligations.


It added that highly leveraged households should refrain from taking on more debt and try to build up financial buffers to cushion against possible stress.


What should home owners do?

DBS warned in its research report published in October that as transactions rise and prices continue to outpace incomes, the authorities will show their concern.


Mortgage payments typically make up the largest component of a household's monthly recurring expense.


Thus, for starters, borrowers should seek counsel from a financial adviser at their respective banks to reassess their mortgage-to-income ratios under higher interest rate scenarios.


They should also retest their total debt servicing ratio (TDSR), mortgage servicing ratio (MSR) and loan-to-value ratio under the worst-case scenario.


That should give them an idea of what quantum of financial buffer they may need to be able to service their debt obligations even if the market and economic conditions turn against them.


Interest rates are not expected to rise in the immediate future. Most analysts believe major monetary authorities like the United States Federal Reserve and European Central Bank may start to raise their benchmark rates some time in the second half of 2022.


Also, the results of an MAS stress test show that household MSRs remain manageable under a conservative scenario of shocks to income and interest rates.


Specifically, the observed median MSR remains below the maximum threshold of 60 per cent for the TDSR guideline, even if income falls by 10 per cent from the lows seen during the Covid-19 pandemic and the interest rate increases by 2.5 percentage points.


However, economic growth setbacks, including from a resurgence of the pandemic, or policy risks such as misjudgments in the pace of withdrawing support measures or missteps in the normalisation of monetary policy, could exacerbate both growth and inflation risks, the MAS said.


And that, in turn, could hurt households' ability to service their mortgage obligations.


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