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After a lot of angst over whether Singapore's property
market faces a crisis, the city-state's efforts to rein in household
debt and home prices appear set for their first test as local rates
begin to rise.
"Consumer demand has been quite weak already, weighed by the household debt issue," said Michael Wan, an economist at Credit Suisse. "Any incremental rise in interest rates will be more negative for private consumption demand."
Local rates have already started ticking up. Sibor, or the Singapore interbank offered rate, used as the basis for setting mortgage and other loans, climbed around 15 basis points in early January, to its highest since April 2010 after years of stability, Maybank-Kim Eng noted in a report this week.
The bank estimates a one percentage-point rise in Sibor increases monthly mortgage payments by 12 percent, under certain conditions. It expects Sibor will rise to 1.0 percent by
the end of this year and 2.0 percent by the end of 2016, compared with 0.46 percent at end-2014.
Read More Singapore property: Are foreigners about to bail?
While the rate is still relatively low -- the three-month Singapore-dollar Sibor was at 0.639 percent Thursday -- analysts expect it could continue to push higher. They lay the rise at the feet of U.S. dollar strength against the Singapore dollar spurring fund outflows from the city-state, a situation unlikely to reverse anytime soon. Once the U.S. Federal Reserve begins a rate hike cycle, Sibor is likely to push even higher, they said.
Mortgage payment test
Whether most households can handle a big bump in mortgage payments will be a key policy test. Singapore's central bank, the Monetary Authority of Singapore (MAS), introduced a total debt servicing ratio (TDSR) in mid-2013 to help contain property prices and limit how much debt households could take on.
"Consumer demand has been quite weak already, weighed by the household debt issue," said Michael Wan, an economist at Credit Suisse. "Any incremental rise in interest rates will be more negative for private consumption demand."
Local rates have already started ticking up. Sibor, or the Singapore interbank offered rate, used as the basis for setting mortgage and other loans, climbed around 15 basis points in early January, to its highest since April 2010 after years of stability, Maybank-Kim Eng noted in a report this week.
The bank estimates a one percentage-point rise in Sibor increases monthly mortgage payments by 12 percent, under certain conditions. It expects Sibor will rise to 1.0 percent by
the end of this year and 2.0 percent by the end of 2016, compared with 0.46 percent at end-2014.
Read More Singapore property: Are foreigners about to bail?
While the rate is still relatively low -- the three-month Singapore-dollar Sibor was at 0.639 percent Thursday -- analysts expect it could continue to push higher. They lay the rise at the feet of U.S. dollar strength against the Singapore dollar spurring fund outflows from the city-state, a situation unlikely to reverse anytime soon. Once the U.S. Federal Reserve begins a rate hike cycle, Sibor is likely to push even higher, they said.
Mortgage payment test
Whether most households can handle a big bump in mortgage payments will be a key policy test. Singapore's central bank, the Monetary Authority of Singapore (MAS), introduced a total debt servicing ratio (TDSR) in mid-2013 to help contain property prices and limit how much debt households could take on.
"Despite moderation in household leverage, the level of
debt among highly leveraged households poses a risk; reducing their
level of debt will take time," the MAS said in its annual Financial
Stability Review in November. It noted the household debt-to-income
level has risen from 1.9 times during the 2008 Lehman crisis to 2.3
times in 2013.
Read More Has Singapore's property bubble already burst?
Consumers' debt is still growing, rising 5.6 percent on-year in the third quarter, although that's down from an average 9.2 percent over the past five years, the MAS said.
Housing loans accounted for around 74 percent of household liabilities in 2014's third quarter, the data show.
Cracks begin to show
Despite a lot of handwringing forecasts for property price declines of as much as 20 percent, official data show private residential prices fell just 4 percent in 2014, although the number of transactions fell around 50 percent in the year-to-November. But analysts generally expect property price declines to continue this year.
Other cracks have begun to show in the property market, such as indications some buyers may have found ways to skirt the TDSR to get approval for larger mortgages. This week, local bank UOB filed a 181 million Singapore dollar (around $136 million) lawsuit against a unit of Indonesian company Lippo Group and some individuals, claiming a conspiracy to obtain inflated mortgages for 38 units at a luxury development on tony Sentosa island. All but one of those 38 loans have defaulted. Lippo has reportedly denied involvement in a conspiracy.
UOB claims it wasn't informed the buyers received discounts of 22-34 percent in the form of "furniture rebates," one of the developer incentives that have become common to lure in buyers without cutting their headline prices. In addition, UOB claims funds were transferred into buyers' bank accounts to give the impression they had the at least 200,000 Singapore dollars required to grant the loans.
The MAS declined to comment on whether it is concerned about how widespread similar efforts to skirt the TDSR might be. Overall, the ratio of non-performing housing loans is low, coming in at 0.36 percent in the third quarter, although it ticked up from 0.28 percent in 2014's first quarter on "a handful of high-end housing projects," the MAS said.
Read More Has Singapore's property bubble already burst?
Consumers' debt is still growing, rising 5.6 percent on-year in the third quarter, although that's down from an average 9.2 percent over the past five years, the MAS said.
Housing loans accounted for around 74 percent of household liabilities in 2014's third quarter, the data show.
Cracks begin to show
Despite a lot of handwringing forecasts for property price declines of as much as 20 percent, official data show private residential prices fell just 4 percent in 2014, although the number of transactions fell around 50 percent in the year-to-November. But analysts generally expect property price declines to continue this year.
Other cracks have begun to show in the property market, such as indications some buyers may have found ways to skirt the TDSR to get approval for larger mortgages. This week, local bank UOB filed a 181 million Singapore dollar (around $136 million) lawsuit against a unit of Indonesian company Lippo Group and some individuals, claiming a conspiracy to obtain inflated mortgages for 38 units at a luxury development on tony Sentosa island. All but one of those 38 loans have defaulted. Lippo has reportedly denied involvement in a conspiracy.
UOB claims it wasn't informed the buyers received discounts of 22-34 percent in the form of "furniture rebates," one of the developer incentives that have become common to lure in buyers without cutting their headline prices. In addition, UOB claims funds were transferred into buyers' bank accounts to give the impression they had the at least 200,000 Singapore dollars required to grant the loans.
The MAS declined to comment on whether it is concerned about how widespread similar efforts to skirt the TDSR might be. Overall, the ratio of non-performing housing loans is low, coming in at 0.36 percent in the third quarter, although it ticked up from 0.28 percent in 2014's first quarter on "a handful of high-end housing projects," the MAS said.
"Considering many developers have adopted incentive
schemes such as furniture rebates, rental guarantees and stamp duty
absorption over the past few years, it will not be a surprise if banks
decide to move against other developers, especially if more home owners
were to default on their mortgages as a result of higher interest
rates," Min Chow Sai, an analyst at Nomura, said in a note Thursday.
He expects bigger headline declines in housing prices will start to show, especially as the government will now require developers to publish "net" prices, including incentives.
"As people feel less wealthy because property prices are declining, I think we're going to see a negative wealth effect on the economy. But I think that is the price of slowing the property market down to prevent a bubble," Lim Say Boon, chief investment officer at DBS Wealth Management, said. "I don't think it will significantly damage the Singapore economy."
That's in part because higher rates aren't a surprise, he said.
"You would have to be living on another planet to not know U.S. Federal Reserve was going to hike rates sometime this year," Lim said.
Cause for concern
However, lower property prices will limit financially troubled households' ability to sell their homes as a means of exiting debt.
Another worry is the around 3 percent of credit card holders with unsecured debt greater than their annual incomes, although the MAS plans policies this year to prevent these people from getting further credit.
"Increasingly, [there are] more people who are taking on more debt. That's a big concern. [But] from a macro or big picture [perspective], it's not the majority of consumers… it's not a systemic issue," Credit Suisse's Wan said.
But he added, "A big problem will come if people start getting unemployed, if the labor market starts to deteriorate and people start to lose their jobs."
So far, Singapore's labor market has held up, with the unemployment rate around 2.0 percent in the third quarter despite more layoffs, in part because the government has made it more difficult for foreign workers to enter the country.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1
He expects bigger headline declines in housing prices will start to show, especially as the government will now require developers to publish "net" prices, including incentives.
"As people feel less wealthy because property prices are declining, I think we're going to see a negative wealth effect on the economy. But I think that is the price of slowing the property market down to prevent a bubble," Lim Say Boon, chief investment officer at DBS Wealth Management, said. "I don't think it will significantly damage the Singapore economy."
That's in part because higher rates aren't a surprise, he said.
"You would have to be living on another planet to not know U.S. Federal Reserve was going to hike rates sometime this year," Lim said.
Cause for concern
However, lower property prices will limit financially troubled households' ability to sell their homes as a means of exiting debt.
Another worry is the around 3 percent of credit card holders with unsecured debt greater than their annual incomes, although the MAS plans policies this year to prevent these people from getting further credit.
"Increasingly, [there are] more people who are taking on more debt. That's a big concern. [But] from a macro or big picture [perspective], it's not the majority of consumers… it's not a systemic issue," Credit Suisse's Wan said.
But he added, "A big problem will come if people start getting unemployed, if the labor market starts to deteriorate and people start to lose their jobs."
So far, Singapore's labor market has held up, with the unemployment rate around 2.0 percent in the third quarter despite more layoffs, in part because the government has made it more difficult for foreign workers to enter the country.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1
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