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Rising level of household debt worrying, says MAS

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.

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

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

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.

A Standard Chartered report released earlier this month found that Singapore households are among the most heavily-indebted in Asia, with debt accounting for around 75 per cent of GDP, up from 55 per cent in 2010.

The report came just days after the MAS announced tighter property loan rules to “encourage prudence among borrowers” and help strengthen credit underwriting practices by financial institutions.

Under the Total Debt Servicing Ratio (TDSR) framework, which took effect on June 29, financial institutions must ensure property loans that they grant do not push a borrower’s total debt obligation to above 60 per cent of his or her gross monthly income.

Property analyst Colin Tan said the MAS could have flagged the risks of high debt levels even earlier. “We did not arrive at this level overnight. The Government did send warning signals, but the urgency could have come earlier … considering there were two consecutive years of record-high transaction volumes in the property market in 2011 and 2012,” said Mr Tan, who is Head of Research and Consultancy at Suntec Real Estate.

The MAS said it had introduced measures over the last three years to contain excessive borrowing amid highly loose monetary conditions. These include higher minimum cash down payments and the TDSR framework for mortgages, and tighter loan-to-value ratios and caps on loan tenures on both property and car loans. “It is important that we act now to limit build-up of leverage. It is much harder to do so later, when growth might be weaker, interest rates higher, and property prices lower,” Mr Menon warned.

On the economy, the MAS said Singapore’s growth would “comfortably meet” the forecast of 1 to 3 per cent this year, as there are improving economic signs in the West. Japan’s expansionary macroeconomic policies will also lift private consumption and net exports, it added.

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