Property love affair drives up debt levels

Singaporeans' obsession with property has pushed their debt levels to a steep 75 per cent of gross domestic product (GDP), doubling from 38 per cent in 2000.

Household leverage at 75 per cent of GDP is high relative to other countries in the region, says a Standard Chartered report on leverage in 12 Asian countries.

Only Australia, Korea and Malaysia are more leveraged than Singapore, it said.

Housing loans here account for the bulk of household debt, at 74 per cent of total consumer loans.

Of concern is the pace of home loans growth which has been galloping in double digits since 2000, and which has accelerated in the past six years.

The government announced last Friday additional moves in an effort to ensure prudent borrowing, which bankers said may have some impact on loan volumes.

"The tightening of credit in the market due to the measures may reduce overall transaction volumes," said Peng Chun Hsien, Citibank Singapore business director, secured finance and e-business.

Phang Lah Hwa, OCBC Bank head of consumer secured lending, said it is still early days to quantify the level of impact on property loan volumes.

Latest data on home loans growth showed they slowed for a second straight month to rise 15.2 per cent in May from a year ago, down from 16 per cent in April. In month-on-month terms, total housing loans were 0.5 per cent higher. In April, they were up 0.8 per cent from the previous month.

The StanChart report said home loans grew at a compound annual growth rate (CAGR) of 12.1 per cent from 2000 to 2012; this accelerated in recent years, to 15.8 per cent CAGR for 2006-12.

The report said the more highly leveraged countries do not necessarily face solvency risk. Instead, it's the rapid pace of credit growth which can cause problems.

"Economists are concerned about credit growth, even when a country's absolute level of debt remains moderate, because credit booms have historically been associated with financial crises, especially in emerging markets," it said.

It said pockets of excessive growth in the past few years in some Asian countries were due to very loose monetary policy.

"Extremely low interest rates, generally high money supply growth, and the prospect of carry-trade inflows if rates were to rise or the currency strengthen have encouraged a rapid increase in borrowing.

"Much of this has been used to finance purchase of real estate and other financial assets. This has not yet led to a widespread incidence of asset bubbles, but pockets of vigorous price inflation - Hong Kong and Singapore real estate, for example - are potential harbingers," it said.

StanChart looked at the potential household exposure to rising interest rates.

On a $390,000 loan, (about 80 per cent of the median price of a 4-room HDB flat in 2012) with a 30-year tenor, based on the current 0.875 per cent interest rate, the monthly instalment is about $1,232. The debt service ratio (DSR) based on the monthly household income in the 41st-50th decile of $7,608 is 16 per cent.

If interest rates rise by 3 percentage points, the instalment will jump to $1,834 or a DSR of 24 per cent.

"This does not appear overly stretched, but it is based on the assumption that household income remains stable," the report said.

It also noted the low average loan-to-value (LTV) ratio, which moderates the risk of overleverage in the household sector. As of Q4 2012, the average LTV was only 48 per cent. The current low level of non-performing loans (0.3 per cent as of Q4 2012) in housing and bridging loans also reflects still benign conditions.

In addition, the risk of the household sector is mitigated by HDB's role in disbursing mortgage loans. As of Q4 2012, about 20 per cent of total mortgages were under HDB, with the rest from financial institutions. This reduces risk, as HDB is not as financially sensitive as banks.

However, due to the lower market interest rates offered by banks (HDB currently charges about 2.6 per cent, versus about one per cent for banks), HDB's share of mortgages has fallen by more than half from about 46 per cent in 2005.

The current debt service ratio is manageable but the rise in leverage should be monitored.

"Pockets of overleverage are inevitable," the report said.

Source: Business Times - 3 July 2013

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Property love affair drives up debt levels

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