Rising level of household debt worrying, says MAS

Rising level of household debt worrying, says MAS
The MAS has penalised 22 financial institutions over the past three years for failing to comply with rules to prevent money laundering and terrorism financing. TODAY file photo
Many consumers may have overextended themselves when buying property
Published: 4:01 AM, July 24, 2013
Updated: 9:50 PM, July 24, 2013
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SINGAPORE — The rising level of household debt here is worrying and it is important that the Monetary Authority of Singapore (MAS) “act now” to curb excessive borrowing, the central bank said yesterday.

It warned that many consumers may have overextended themselves because of the cheap cost of funds and stretched loan tenures.

While the banking system remains sound, the “combination of low interest rates, growing leverage and surging property prices poses significant risks to financial stability”, MAS Managing Director Ravi Menon said at a press conference for the release of the central bank’s annual report.

Property loans are the main cause of growing household debt, with mortgages accounting for 46 per cent of Singapore’s gross domestic product (GDP), up from 35 per cent three years ago, said the MAS. Housing loans by banks have grown by 18 per cent each year over the last three years, it added.

The MAS estimated that 5 to 10 per cent of borrowers may have over-extended themselves to fund property purchases, with total debt service payments accounting for more than 60 per cent of their income. If mortgage rates were to go up by 3 percentage points, the proportion of borrowers at risk could reach 10 to 15 per cent.

A “vast majority of mortgage loans are on floating-rate packages, which means households will face higher monthly repayments when interest rates normalise,” Mr Menon said.

“In particular, lower-income households and those with smaller saving pools may find this a strain. Those with longer tenure loans will also be adversely affected,” he added.

UOB economist Francis Tan said that while a rise of 3 percentage points in mortgage rates is possible, it is not likely to happen in the near term.

“Long-end bond yields are already rising in the United States, but Singapore’s housing loans are tied to the short-end bond yields, which are still low as the US has not achieved its target of lowering unemployment rate to 6.5 per cent, and inflation to reach 2 per cent,” said Mr Tan.

“Based on current unemployment rates and inflation, we think that short-end bond yields would probably start rising at the end of 2014,” he added.

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