One in 10 borrowers overstretched, warns MAS

[reporter2]

http://www.straitstimes.com/premium/...s-mas-20130724

One in 10 borrowers overstretched, warns MAS

Hike in rates and fall in property prices may pose risks to financial stability

Published on Jul 24, 2013

By Yasmine Yahya


HOUSEHOLDS here are borrowing more amid low interest rates and combined with soaring home prices, the mix poses "significant risks" to Singapore's financial stability, the Monetary Authority of Singapore (MAS) has warned.

The central bank said 5 per cent to 10 per cent of borrowers here have likely taken on too much debt to buy a home. In other words, their total monthly debt repayments exceed 60 per cent of their income, said MAS managing director Ravi Menon yesterday.

This proportion of "at risk" borrowers could hit 10 per cent to 15 per cent if mortgage rates rise by 3 percentage points, he added.

While Singapore households as a whole have more cash and deposits than debt, individual households may not be in such good financial shape, Mr Menon said at the release of the MAS annual report. Households with lower income, less savings or longer loan periods may find it a strain to repay debts if interest rates rise.

"The combination of low interest rates, growing leverage, and surging property prices poses significant risks to financial stability," Mr Menon said.

"When interest rates rise and if property prices fall, any risks built up will materialise."

He added: "So when interest rates rise, long before any bank gets into trouble - and they won't - some households will."

Bank housing loans here have risen 18 per cent a year in the last three years, and home loans as a share of gross domestic product (GDP) have jumped from 35 per cent to 46 per cent in the period.

This has led Singapore's debt as a share of GDP to rise from 200 per cent to 270 per cent over the last three years, while resident debt to GDP has risen from 125 per cent to 155 per cent, Mr Menon said.

Economists have sounded similar alarms. Standard Chartered noted this month that Singapore households are among the most indebted in Asia relative to what they earn, while Moody's Investors Service recently downgraded its outlook for Singapore's banking system due to mounting debt.

Barclays economist Joey Chew pointed out that Singaporeans have one of the highest savings rates in the world. OCBC economist Selena Ling added that while debt is not a major problem now, the MAS wants to ensure that people do not assume interest rates will be low forever.

The MAS last month unveiled a new framework for home-buyers' loans, to ensure that a borrower's repayments on all his debt does not exceed 60 per cent of his gross monthly income. The move came as MAS wants banks to practise responsible lending. It had noted some "worrying practices" during bank inspections.

One couple with a total monthly income of $6,000 were granted a new home loan of $400,000 on top of their existing debt, as they had a savings deposit of $90,000. But their total monthly loan repayments came to more than 90 per cent of their income.

Some car buyers also borrowed almost the full car price, which is not prudent as cars are depreciating assets, Mr Menon said.

While the MAS is concerned about household debt, it is less worried about the local banks as they are financially strong and have healthy buffers against home price falls. The average housing loan-to-value ratio for banks is just under 50 per cent, he said.

A report yesterday by the National University of Singapore's Risk Management Institute said the probability of default for each of the local banks is now near lows not seen since early 2011.

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http://www.businesstimes.com.sg/prem...sound-20130724

Published July 24, 2013

MAS: household debts worrying; banks sound

Many over-extended households at risk if interest rates rise

By Siow Li Sen


[SINGAPORE] It is the mushrooming debt pile of households, more so than banks' exposure to it, that has driven the Monetary Authority of Singapore (MAS) to action.

As it stands now, 5 to 10 per cent of households already "have probably over-leveraged their property purchases"; ie, their total debt servicing payments exceed more than 60 per cent of their monthly income.

Speaking at the MAS annual report 2012/13 briefing yesterday, MAS managing director Ravi Menon said: "It is so tempting and easy to borrow when interest rates are so low.

"Many households could have over-extended themselves, fuelled by low interest rates and stretched loan tenures. The vast majority of mortgage loans in Singapore are on floating rate packages, which means households will face higher monthly repayments when interest rates normalise."

If mortgage rates were to rise by three percentage points, the proportion of borrowers at risk could reach 10-15 per cent, from an estimated 5-10 per cent now who are already over leveraged on their property purchases, he said.

While on an aggregate level, household balance sheets are resilient - cash and deposits exceed household debt - "the health of balance sheet is not uniform across all households," Mr Menon added.

Last month, MAS introduced the total debt servicing ratio framework where a borrower's total monthly debt payments must not exceed 60 per cent of monthly income.

Turning to the other side of household debt, Mr Menon said Singapore's banking system remains sound, and local banks have strong financial positions, and are well capitalised with prudent provisions against loss. The assurance comes after Moody's Investor Services last week revised its outlook for Singapore banks to negative from stable.

"They have a healthy buffer against property price reductions. Average housing loan-to-value ratio in the banking system is just under 50 per cent," he said.

Housing loans and loans for building and construction made up 28 per cent of total non-bank loans. Of the housing loans, 70 per cent are for owner-occupied property.

Housing loans by banks grew 18 per cent each year over the last three years. Housing loans as a percentage of GDP stands at 46 per cent, up from 35 per cent three years ago.

"When interest rates rise and if property prices fall, any risks built up during this period will materialise," he said.

MAS has subjected banks' balance sheets to a combination of stresses - including sharp rise in interest rates, decline in property prices, and rise in unemployment rate.

"They have enough capital to see them through," he said. "So, when interest rates rise, long before any bank gets into trouble, some households will."

In the case of a default, banks can take back the house; "it is the household we are concerned about," he said.

Urging banks to practise responsible lending, Mr Menon revealed some worrying practices picked up during inspections, with most in property loans.

One couple with a combined monthly income of $6,000 got a home loan of $400,000, MAS found. Monthly instalments on this new loan plus their other existing debt payments exceeded more than 90 per cent of their income. The bank's decision to approve the loan was based solely on the fact that the couple had savings of $90,000.

As for the economy, Mr Menon believes it will grow stronger and inflation will be lower this year compared with 2012. Barring shocks, gross domestic product (GDP) will comfortably meet the growth forecast of 1-3 per cent for 2013.

Inflation, on the other hand, has been revised down to 2-3 per cent from 3-4 per cent, but core inflation pressures will persist, he said

[Arcachon]

While the MAS is concerned about household debt, it is less worried about the local banks as they are financially strong and have healthy buffers against home price falls. The average housing loan-to-value ratio for banks is just under 50 per cent, he said.

[chrischocolates]

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[Arcachon]

Inflation, on the other hand, has been revised down to 2-3 per cent from 3-4 per cent, but core inflation pressures will persist, he said

SGD 1,000,000 inflation of 1 % is SGD 10,000 a year.

Anyone bank deposit give you more than SGD 10,000 a year need not invest in property.

If you are the high income group than 20% personnel tax if you declare the bank interest as personnel income.

[teddybear]

The 2 sentences don't seem to gel?
If banks no problem, why worry about household debt?
MAS can look after every household to ensure they don't over-leverage or squander their money or ???

While the MAS is concerned about household debt, it is less worried about the local banks as they are financially strong and have healthy buffers against home price falls. The average housing loan-to-value ratio for banks is just under 50 per cent, he said.

[Rosy]

The 2 sentences don't seem to gel?
If banks no problem, why worry about household debt?
MAS can look after every household to ensure they don't over-leverage or squander their money or ???

Trying to talk down the market?

Perhaps in future, private property buyers may need to get a bank loan approved and signed before they can exercise the option. Just like hdb.

[Rosy]

Is asset based loan still available?