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Mortgage takers beware the twin risks of 2015
There will be higher interest rates, large supply of homes
By: Siow Li Sen
WATCH out for 2015. That's when home-loan borrowers face higher interest rates just as an abundant supply of newly completed units comes on the market.
The Singapore economy's exposure to the property market is now at a record high level, posing greater risks to the financial system, said DBS Bank economist Irvin Seah.
"Total mortgage loans as a percentage of SGD banking sector deposits has reached a new high at 30 per cent," he revealed.
The previous peak was hit in 2004, when mortgages made up 28-29 per cent of deposits.
"In addition, outstanding mortgage loans as a percentage of GDP rose to 44 per cent as of end-2012," he said.
Estimated total home loans and gross domestic product (GDP) at end-2012 were $151 billion and $348 billion, respectively.
Mortgages are an important driver of loan growth and account for about 31.2 per cent of the total amount of outstanding loans in the economy, he noted.
While the level of exposure here may not be as high as other economies, Mr Seah said the threshold any country can tolerate varies from place to place.
In Hong Kong, the property sector accounts for half of outstanding loans, with additional risks coming from the use of real estate as collateral.
Commenting on Singapore's 44 per cent mortgage exposure to GDP, Mr Seah conceded that while he did not know what the government's "comfort" level of exposure was, he felt a ratio of about 30-40 per cent was more sustainable in the longer term.
The latest round of property-cooling measures announced earlier this month indicates that exposure levels have started to cross the comfortable zone, he said.
"The latest move marks a deliberate shift to de-risk home-buyers, the financial system as well as the overall economy from the potential risk of a property bubble.
"As the recent US experience with housing shows, the best way to address a crisis is to prevent one from occurring.
"Lowering consumer leverage and financial system risk will remain the focus in this aspect. And that implies moderate loan growth numbers going forward," said Mr Seah.
It's not clear if the latest measures are enough to remove 2015's two main risks - higher interest rates and the supply of plentiful housing.
Low real mortgage rates have been a key driver of the property market here. "Our interest rate strategist has recently pointed out that steepening pressures are building up on the USD yield curve. This could drive longer-term interest rates higher across Asia, including Singapore, in the coming quarters," he said.
Markets have already priced in the first US fed rate hike, which is expected in mid-2015.
Mr Seah said it was important for borrowers to do the necessary "stress-testing" to take into account potentially higher interest rates and determine whether their properties will remain affordable under higher-rate scenarios.
Secondly, there is a large supply of new housing, which will hit the market in the next three years.
"Some 128,100 new housing units that will hit the market in the coming three years, with a peak likely in 2015," he said.
"The combination of rising interest rates and abundant supply by 2015 argue for more than the usual amount of caution and the latest round of property cooling measures should be viewed against this backdrop. Whether more is required remains to be seen."