Singapore’s central bank yesterday expressed concern at the growing mountain of household debt and surging property prices in the city-state, saying they posed “significant risks” to the Singaporean financial system.
While the city-state’s banking system remains sound, the build-up in household debt was “worrying,” Monetary Authority of Singapore Managing Director Ravi Menon said.
He said a growing number of households have borrowed excessively 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 ratings 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 5 percent to 10 percent of borrowers in Singapore “have probably overleveraged 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 practice responsible lending and consider the ability of borrowers to service their debt in a sustainable manner.”
Housing loans by banks have risen 18 percent each year over the past three years, he said.
Home loans as a percentage of GDP 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 capitalized with prudent provisions against loss,” Menon said.
Separately, Menon said Singapore will “comfortably meet” its economic growth forecast of 1 percent to 3 percent this year as demand from the eurozone and the US picks 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 US,” he said.