S'pore 'not at risk of credit bubble'

Financial system is robust, says MAS in response to Forbes article

By Yasmine Yahya, The Straits Times, 15 Jan 2014

SINGAPORE'S central bank has said the country is not in danger of being caught in a credit bubble that puts it or the banking system at any risk of crisis.

In a statement underlining the strength of the financial system, the Monetary Authority of Singapore (MAS) said "serious observers and investors" have no doubt over the nation's financial health.

It said three facts stand out: The property market is stabilising; household balance sheets are strong; and the financial system is robust. The statement was in response to media queries that the MAS received on an online Forbes article published on Monday.

In it, Forbes columnist Jesse Colombo said Singapore is headed for an Iceland-style meltdown, as low interest rates have encouraged households and firms to take on more debt and fuelled an unsustainable surge in property prices.

This has led to bubbles in the construction and financial services sectors, he said. Mr Colombo, who has the nickname "bubbleologist" for his preoccupation with credit bubbles, recently warned that Malaysia, Thailand, the Philippines and Indonesia are caught up in a massive one.

In its response, the MAS said it has already taken steps to cool the property market and prevent households from taking on too much debt. The property market is now stabilising, it added, and new housing loans are declining.

Household balance sheets are, on the whole, strong. "Property asset values are significantly higher than debts incurred. The average loan-to-value ratio of outstanding housing loans stands at a healthy 47 per cent as of the third quarter of 2013, implying a large buffer in asset values," it said.

The recent Financial Sector Assessment Programme by the International Monetary Fund has also found that Singapore's financial system would remain sound even under severe stress scenarios.

"Singapore's triple-A rating from all the major rating agencies is not an aberration. It attests to the country's economic and financial strength, including its sizeable foreign reserves," MAS said.

Barclays economist Leong Wai Ho noted the article's flawed assumptions about Singapore's ability to deal with major shocks to the economy. It said the Government is limited in its ability to bail out banks here due to a high public debt, but Mr Leong said that this is not true as Singapore has significant surpluses.

S'pore headed for meltdown? Forbes article flawed: Experts
No bubble as economy is healthy, debt levels still low, say economists
By Yasmine Yahya And Fiona Chan, The Straits Times, 16 Jan 2014

ECONOMISTS here have said an online Forbes article that argues Singapore is headed for a meltdown is alarmist and flawed.

They said property prices and debt levels have accelerated in recent years, but this does not mean the country is in a bubble or headed for a crisis.

Singapore's economy is diversified and still growing, unemployment is near zero amid a tight labour market, and loan levels remain low relative to asset values and savings, they added.

The article, published on Monday, predicted an Iceland-style meltdown for Singapore, drawing parallels between the two countries' large financial sectors and reputations as safe havens.

Columnist Jesse Colombo, who started warning in 2004 about the looming housing debt crisis in the United States, wrote that Singapore is in the midst of a bubble that will eventually pop and put its banks and sovereign wealth funds at risk. Mr Colombo, a self-styled "anti-economic bubble activist", has never visited Singapore but has been writing a series of articles foretelling economic bubbles across South-east Asia.

Economists whom The Straits Times spoke to described his claims as sensationalist. They said while Singapore must be mindful of the risks of interest rates rising, the Government has taken steps to curb over-borrowing.

"The rate of credit growth has been at a pace which would normally set alarm bells ringing, but it's not an inevitable collapse," said Capital Economics economist Daniel Martin.

"Big does not mean it must burst," added Standard Chartered economist Edward Lee, referring to Singapore's debt levels. Mr Lee, who was one of the first to flag Singapore's rising household debt last year, pointed out that recent stress tests have demonstrated the resilience of banks here.

Mr Colombo also warned that the property and banking sectors here would collapse when interest rates rise and households are unable to service their mortgages.

But OCBC economist Selena Ling said even if interest rates rise or property prices drop significantly, the Government has said the proportion of borrowers at risk would likely rise to just 15 per cent. "There is probably little systemic risk to the banking industry even if any significant property correction will be painful."

The Monetary Authority of Singapore, responding to media queries on Tuesday, said Singapore is not facing a credit bubble that puts it or its banking system at any risk of crisis. It said the property market is stabilising, household balance sheets are strong and the financial system is robust.

Economists also noted flaws in Mr Colombo's arguments, such as his claim that the Government's high public debt limits its ability to bail out banks in a crisis.

Bank of America Merrill Lynch economist Chua Hak Bin noted: "The high public debt is not because of fiscal deficits. About two-thirds are CPF funds, which are guaranteed by the Government but are deployed for investments abroad."

Assets held by sovereign wealth fund GIC and Singapore's foreign reserves amount to several times the public debt, he added.

Mr Martin said he was surprised the article pointed to the Government's investments in public infrastructure as a reason for a supposed construction bubble.

"When you have a country like Singapore where the population has been growing rapidly, it's understandable that you'd invest in its transport network," he said.

"And it's not just that these investments are sensible - the Government can very much afford them."

Chilly reception to S'pore's 'Iceland' tag
By Victoria Barker, MyPaper, 16 Jan 2014

AFORBES article on the state of Singapore's economy which has gone viral has raised a storm, with economists here offering differing views on its credibility.

American economic analyst Jesse Colombo claimed that the Republic is facing a dangerous credit bubble fuelled by low interest rates and heading towards an "Iceland-style meltdown".

On Tuesday, the Monetary Authority of Singapore categorically refuted this. "Singapore is not facing a credit bubble that puts the country or its banking system at any risk of crisis," a spokesman said, adding that "serious observers and investors are not in doubt about the country's financial health".

Among Mr Colombo's claims:

- Singapore has a credit bubble, which started soon after interest rates fell below 1 per cent. Outstanding private-sector loans have risen 133 per cent since 2010.

- It also has a property bubble, with prices up 60 per cent since 2009. Mortgage loans have grown at 18 per cent each year for the past three years.

- Seventy per cent of Singapore's mortgages have floating interest rates.

- Cheap credit is also fuelling a construction bubble.

- The financial-services industry grew 163 per cent between 2008 and 2012, which is not sustainable.

- Singapore's bubble will pop if the bubbles in emerging markets and China, where Singapore has invested heavily, pop, and interest rates rise.

CIMB economist Song Seng Wun disagrees. "To say the authorities are blind to the risk (of overleveraging) is a bit excessive," he told MyPaper. "This region has gone through the (1997) Asian financial crisis... measures taken by regulators suggest they are much more mindful of the risk of excesses brought about by cheap lending."

Mr Yeoh Lam Keong, a senior adjunct fellow at the Institute of Policy Studies, called the article "insightful in many ways" and said it "correctly" points out the dangers of real-estate-based asset bubbles in Asia.

These, together with overinvestment in construction due to depressed global interest rates and debt-fuelled expansions, are "very likely to lead to crashes in these sectors when prices of real estate and construction activity take a deep fall", he said.

Though the risk of the real-estate bubble popping is high, he said "a recession here is very unlikely and, thus, a banking crisis is also unlikely".

The article raised doubts about the Government's ability to handle cyclical shocks to the economy, noted Barclays Capital economist Leong Wai Ho. "We are not invulnerable to such shocks," he said. "(But) the key is to stabilise the labour market quickly, which heralds the quick return of confidence...Singapore has (previously) managed to do this."

In a Facebook post, Lee Kuan Yew School of Public Policy senior fellow Donald Low called the article "far too sweeping".

Property prices may fall 10 per cent this year, said Mr Low. But even if they fall 20 per cent, the health of the banks and households will not be affected.

"There will be households that have negative equity, but as long as they have the cash flow to service their mortgages, it will not precipitate a financial crash," he said.

Still, he mostly agrees with Mr Colombo's point that booms led by real-estate development and the financial sector are "mostly illusory". "They create the impression of economic dynamism without creating any real productive capacity in the economy," said Mr Low.

Bubble? Depends on where and how you look
There's no housing bubble in Singapore, but only if people buy within their means, says Cai Haoxiang
The Business Times, 21 Jan 2014

A BUBBLE can provoke fear or outrage.

Fear, because if a speculative bubble rising on nothing but hot air bursts, the resulting sudden plunge in asset values can bode ill for the economy and cause unemployment and personal hardship. Outrage, because the continued existence of such a bubble implies the failure of regulators to protect the man on the street from rushing headlong towards disaster.

To say a bubble exists in Singapore means that there is a lack of control by the powers that be, which is anathema to the government's perception of itself as a forward-looking architect of a well-planned and orderly economy.

So one can very well imagine the reaction of Singapore's central bank when Jesse Colombo, a French-born, American independent economic analyst who just turned 28, wrote a widely circulated column last Monday warning that there is not just a low interest rate-fuelled credit bubble here, but also a residential property bubble, construction bubble, financial-sector bubble, wealth bubble and population bubble.

Mr Colombo did not only see bubbles all around Singapore and surrounding emerging markets, he went on to argue that the foundations of the Republic's wealth - sovereign wealth funds Temasek Holdings and GIC - were at stake, and that Singapore's current prosperity was illusory.

The Monetary Authority of Singapore's (MAS) response was swift.

"Singapore is not facing a credit bubble that puts the country or its banking system at any risk of crisis," the central bank said last Tuesday evening.

While MAS said that unusually low interest rates have caused credit growth and a rise in property prices in Singapore and other countries, the government has "taken decisive steps to cool property demand and prevent excessive leverage".

MAS added that the property market is stabilising, new housing loans have been declining, household balance sheets are strong, and the financial system here is strong, as reflected by Singapore's AAA rating from major credit rating agencies.

Mr Colombo replied that the MAS was in denial, just like other governments in the region. Household balance sheets might be strong now when interest rates are low, but not so when they rise, he said.

Low interest rates might stay for a few more years and delay the burst of Singapore and the region's wealth bubble, he said. But "it also means that the city-state's asset and credit bubbles are likely to grow even larger and more threatening than they currently are".

What is a bubble?

Bubbles are a nebulous concept. There is a difference between the temporary insanity of a bubble and the normal ups and downs of a market, when assets are just overpriced. Hence, to decide whether Singapore is indeed caught up in a bubble, it is important first of all to define what a bubble is.

Bubbles have a psychological element that make them dangerous. The building of a bubble requires a kind of spontaneous optimism characterised by British economist John Maynard Keynes as "animal spirits", and later by former Fed chairman Alan Greenspan as "irrational exuberance". While property showrooms may still be packed here, an element of caution has crept in, with the property market by all accounts slowing down. The animal spirits are subsiding, in no small part due to a debt servicing framework introduced in mid-2013.

In a bubble situation, prices of assets deviate significantly from their fundamental values. What constitutes "significant" is arguable. Given sufficient historical data, a possible starting point for a bubble call is when financial ratios deviate from their long-term averages by, say, more than two standard deviations.

A recent instance of a bubble was the dot-com boom of the late 1990s. Then, the long-term cyclically adjusted price to earnings (PE) ratios of America's S&P 500 index went up to more than 40 times, more than three standard deviations from the 130-year average of 16.5 times and even the post-war average of 18.4 times. In Singapore, the Straits Times Index (STI) is trading at roughly or just under its long-term average of about 15 times earnings. Using our definition, we can safely say there is no bubble in our equity markets.

Moving on to property, a common indicator of value is the ratio of median house prices to median household yearly incomes. By various accounts, this ratio peaked in America in 2006, almost hitting five times and deviating more than two standard deviations from its long-term average of about 3.5 times. Median household incomes were around US$50,000 then, so median house prices were about US$250,000.

In Singapore, one might very well ask if there is a residential property market bubble. In the HDB resale market and the private property market, average prices have doubled from a decade ago. Incomes have increased by only about 60 to 70 per cent.

Mr Colombo cited a statistic from cost-of-living comparison website Numbeo that showed Singapore's price-to-income ratio at 25 times, which is the third-highest in the world. On the surface, the number makes sense: The typical price of a suburban condominium is $1.2 million, with the implied median household income at $48,000.

These statistics are flawed, however. The latest household income data show that households earning $48,000 a year belong to the bottom third of income earners, who live in much cheaper, subsidised HDB flats anyway.

More than 80 per cent of Singaporeans live in HDB flats. This puts those who live in condos in the top fifth of wage earners. One cannot benchmark a typical Singaporean to a condo unit.

There should thus be at least two separate price-to-income ratios for Singapore when measuring whether the market is in a bubble: one for the private property market, and others for various segments of the HDB market.

Assuming the top fifth of households buy condos, the next fifth buy five-room HDB flats, and so on, back of the envelope calculations using latest data show the price-to-income ratio for HDB five-room flats at about 4.2 times, and 4.3 times for condos - both very far from the statistic of 25 times used in Mr Colombo's piece.

By comparison, at the property market trough 10 years ago, the equivalent ratios would be about 3.3 times for five-room flats and 3.6 times for condos.

More data could be crunched to find out whether Singapore's price-to-income ratio differs significantly, or outrageously, from historical averages. But that does not seem to be the case from an initial reading of the data - with a caveat that people must buy within their means.

Basically, between 2003 and now, homes cost about 0.6 to one year's worth of household income more at the most, from trough to peak. This means people have to take two to three more years to repay their loans, assuming they use a third of their incomes every year to do so. If they only use a fifth of their incomes, then they will take three to five years more.

If Singaporeans buy property within their means, three or four extra years of paying the mortgage, given later retirement ages and longer lives, seem to be reasonable.

Interesting tidbits can be gleaned from the analysis. If people aim beyond their wage bracket, house prices become pricey. A typical median-income household buying a five-room resale flat, or even an 81st to 90th percentile household buying a suburban condo, will see their price-to-income ratio shoot up from three-plus to six times - which is arguably unsustainable. If a family can only use 20 to 30 per cent of its income to pay the mortgage, this easily means an extra 10 years of work.

It is therefore not surprising that with increased expectations, even the middle and upper middle-income groups would complain that houses have become unaffordable. Going by the data, the average Singaporean household can aim for a $500,000, four-room resale flat to keep the affordability ratio within four times annual income.

Mr Colombo is not wrong in warning Singapore of the dangers of rising asset prices, if they are not backed by productivity gains or economic growth.

However, the situation confronting Singapore's residential property market now is more inflated expectations and less runaway prices.

Commentators pointing out numerical increases in any statistic should define what makes something a bubble and what does not. Overusing the word can obfuscate rather than illuminate.

Related

It's Not A Bubble Until It's Officially Denied, Singapore Edition