Singapore's central bank expressed concern Tuesday at the growing mountain of household debt and surging property prices, saying they posed "significant risks" to the country's financial system.
While the city-state's banking system remains sound, the build-up in household debt was "worrying", said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS).
He said a growing number of households have overborrowed in the property market, largely due to low interest rates and stretched loan tenures.
"The combination of low interest rates, growing leverage and surging property prices poses significant risks to financial stability," Menon said at a news conference.
Global credit rating agency Moody's last week downgraded its outlook on Singapore's main banks from "stable" to negative", citing rapid loan growth and rising real estate prices.
Moody's said these "have increased the probability of deterioration in the banks' credit profiles under potential adverse conditions in the future".
Menon said an estimated five to 10 percent of borrowers in Singapore "have probably over-leveraged on their property purchases, that is, they have total debt service payments at more than 60 percent of their income".
Lower-income households and those with lesser savings could be strained if mortgage rates rise.
"When interest rates rise, long before any bank gets into trouble, some households will," he said.
"Banks must therefore practise responsible lending, and consider the ability of borrowers to service their debt in a sustainable manner," he added.
Housing loans by banks rose 18 percent each year over the past three years, he said.
Home loans as a percentage of gross domestic product currently stand at 46 percent, up from 35 percent three years ago, he added.
Menon said the central bank was closely watching the situation.
Singapore's three homegrown lenders undertake regular stress tests coordinated by the central bank, and are "well capitalised with prudent provisions against loss", Menon said.
Separately, Menon said Singapore will "comfortably meet" its economic growth forecast of 1.0-3.0 percent this year as demand from the eurozone and the United States pick up.
"The advanced economies are in a better shape this year. The tail risks have receded and there is less likelihood of a eurozone break-up or fiscal cliff in the United States," he said.