FITCH Ratings on Thursday said that Singapore property prices will likely continue to fall in 2015-2016 by around 3 per cent per annum for both public and private homes, which are highly correlated with each other.
In tandem with Singapore’s benchmark rates, mortgage rate indices will also increase slightly this year, albeit still reaching low levels of around 2 per cent, from current levels of less than 1.5 per cent.
In part, abundant liquidity will help to keep funding costs low, and cheap funding should also limit downside risks to house prices, it said.
And as mortgage costs increase, delinquency rates for the three local banks too will likely rise by 0.3 percentage points to 0.8-0.9 per cent this year.
This is still “comfortably low”, thanks to Singapore’s strong labour market and manageable debt burdens. Debt burdens have been contained by a rule since mid-2013 that borrowers’ monthly debt repayments cannot exceed 60 per cent of their gross monthly income.
Fitch said that it “expects Singapore’s macro-prudential policies to be successful in cooling the property market by trimming access to finance by borrowers at the margins”.
“Mortgage demand will most probably stem from property purchases for owner-occupation purposes rather than investment … Fitch expects new lending volumes to grow modestly at around 3-5 per cent.”
It added that Singapore, itself being a small and open economy, may face global market risks such as uncertainties in long-term foreign interest-rate movements.
For now, gradual rate rises are expected in the US and the UK, and Singapore, Australia and Hong Kong are markets that have shown themselves to be quite sensitive to rates.
This was from Fitch’s Global Housing and Mortgage Outlook report, which includes forecasts and comparative analysis of house prices, arrears, and mortgage lending volumes for 22 of the world’s major housing markets, including Australia, Japan, Korea, and for the first time, Hong Kong, New Zealand and Singapore.
A Citi report last week said that a huge projected supply of completed homes for the next 2-3 years coupled with the US normalisation of rates and the government’s firm stance on limiting immigration (thus weakening rental demand) all contribute to further cool the property market this year.
More speculatively, the banking sector may also play a deeper role in unwinding the property market further. This has to do with the “risk weights” afforded to mortgages from the viewpoint of computing banks’ capital adequacy in Singapore. These average just 6-13 per cent – among the lowest globally. According to Citi, banks elsewhere in the world are moving to place risk weight “floors” on mortgages of 15-20 per cent.
“Should such a floor be applied to Singapore banks’ mortgages, it would have negative consequences for banks’ capital ratios, and in turn the provision of mortgage loans could fall, and mortgage pricing rise, which would be another reason that the property cycle could remain subdued,” it noted.
To this, Mizuho economist Vishnu Varathan said that the reason why Singapore banks’ risk weights on mortgages are low could be tied to the banks’ fairly resilient loan-to-value ratios and loan curbs already in place.
“So we probably don’t have the same extent of sub-prime mortgages in our overall mortgage portfolio compared to other countries. The credit standards here are rather exacting. The leeway allowed for more marginal borrowers is less.”
He gauges the odds of the central bank raising mortgage risk weights to be quite low.
Rather, banks would probably adjust interest rates to reflect the risks, and bolster their capital by taking more deposits, he added.