Thursday 25 July 2013

One in 10 borrowers overstretched, warns MAS

Hike in rates and fall in property prices may pose risks to financial stability
By Yasmine Yahya, The Straits Times, 24 Jul 2013

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.

Full-year inflation forecast lowered to 2-3%
By Alvin Foo, The Straits Times, 24 Jul 2013

CHEAPER cars and slowing accommodation cost prompted the Monetary Authority of Singapore (MAS) to lower its full-year inflation forecast, although June consumer prices still inched up.

It now forecasts that inflation will come in at 2 per cent to 3 per cent, down from the 3 per cent to 4 per cent it tipped previously.

"For the first time in three years, CPI (consumer price index) inflation has come down closer to historical trends and within MAS' comfort range," said managing director Ravi Menon at the release of the central bank's annual report yesterday.

But MAS kept its core inflation forecast at 1.5 per cent to 2.5 per cent. Mr Menon said the figure, which excludes private transport prices and accommodation costs, will show a moderate rise to about 2 per cent or slightly higher by the year end due to continuing tightness in the labour market.

Private sector economists agreed, saying that inflation is no longer a major threat, although they also cautioned about rising wages and rents.

Bank of America Merrill Lynch economist Chua Hak Bin said: "Inflation remains subdued and is no longer a major threat, despite some remaining concerns about rising wage costs."

Numbers out yesterday show that consumer prices rose 1.8 per cent last month over the same month last year. This is up from the 1.6 per cent recorded in May due to costlier petrol, which rose on the back of the recent pick-up in global oil prices.

Despite the slight rise, inflation still remains close to a three- year trough, with April's 1.5 per cent the lowest reading since February 2010.

Core inflation stayed at 1.7 per cent last month.

Overall inflation for the first six months of the year hit the bottom one-fifth income bracket the hardest. This group experienced a 3.1 per cent rise in prices, compared with 2.7 per cent for the richest one-fifth of households and 2.9 per cent for the remaining households, Singapore Department of Statistics data showed.

But excluding imputed rentals, which are not actual cash expenses, inflation for the poorest households would have been slightly lower than for other groups.

Imputed rentals are expected rents home owners have to pay if they are tenants of their own homes, and do not actually figure in home owners' cash spending.

Several economists lowered their full-year forecasts. OCBC economist Selena Ling said easing inflation comes as a relief for lower-income earners, noting that the inflation gap between the highest and lowest income groups has narrowed.

Mr Menon also said yesterday that the economy will "comfortably meet" the growth forecast of 1 per cent to 3 per cent this year, due to a gradual recovery in the global situation. He added that growth was estimated at 2 per cent in the first half and should pick up further in this half.

Mr Menon also noted that the asset management industry has reached a new peak, and that Singapore is now "clearly the insurance and reinsurance hub in a growing Asia".

He said: "The key drivers of future growth in our financial centre are showing good promise."

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