Households should be prudent when considering taking loans to buy property, in light of interest rate increases and the upcoming supply of new units in the medium term, said the Monetary Authority of Singapore (MAS) on Friday (23 November).
In its annual Financial Stability Review, the central bank advised households to continue to take into account their ability to service their debt, given headwinds of rising interest rates flowing from ongoing US monetary policy normalisation, and with rental yields expected to remain weak.
Household debt grew 3 per cent year-on-year in the third quarter, with housing loans being the main growth contributor with a 3.4 per cent rise. The growth in household debt remains in line with income growth over the past year.
MAS noted that as of July 2018, the value of new housing loans grew 30 per cent year-on-year, in tandem with a pick-up in residential property demand. It noted that household debt and the debt-to-GDP ratio could increase and reach unsustainable levels, should price momentum and buying activity continue unabated.
“Over-leveraged households could also see a rapid deterioration in their balance sheet indicators if there is a sharp correction in property prices,” MAS said.
The agency added that since the market cooling measures announced in July, property developers have been more cautious with their bids for government land sales, with transactional land sales moderating over the past few months. En-bloc activity has also slowed significantly, while transaction volumes have fallen.
The moderation of aggressive land bids on the back of the recent round of property measures should benefit the long-term stability of the property sector and encourage prudence among property firms, said MAS.
Following the July measures, property prices increased by 0.5 per cent in the third quarter, significantly lower than the 3.4 per cent gain in the previous quarter. Some developers have reduced prices at selected projects.
Nonetheless, continued vigilance is called for amid rising interest rates and the upcoming supply of new units in the medium term, the MAS said.
Financial risks ahead
The central bank also said near-term risks to global financial stability have increased amid tighter financial conditions and global trade tensions.
Rising interest rates and pressure on currencies could weaken the debt servicing abilities of sovereigns, corporates and households, particularly those who have borrowed in foreign currencies, according to the review.
MAS said that while stress tests results showed the resilience of the banking system, banks should actively monitor their foreign currency liquidity risks as they continue to expand their cross-border lending activities.
“While trade tensions have had limited impact on Singapore thus far, the negative spillovers could weigh on future corporate profitability through lower earnings,” the report said. Tightening financial conditions could also strain the debt servicing ability of over-leveraged firms, which should exercise financial prudence and take steps to reduce balance sheet vulnerabilities.
MAS Deputy Managing Director, Ong Chong Tee added, “Corporates and households should be mindful of higher interest rates on their debt obligations, while banks should maintain strong underwriting standards and adequate provisioning buffers.”
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