Singapore banks will benefit from tighter regulations to cool property market

The Monetary Authority of Singapore (MAS), Ministry of Finance, Ministry of National Development and Ministry of Trade & Industry instituted new regulations to cool Singapore’s (Aaa stable) property market price appreciation and transaction volume. Higher minimum cash down payments, an additional buyer’s stamp duty and lower loan-to-value (LTV) limits will reduce speculative demand for residential properties and increase banks’ buffers if and when property prices fall significantly. We believe the new measures reduce the risk of a property price bubble, future price shocks and losses from mortgage loans, which is credit positive for Singapore’s banks.

Private residential property prices began to climb in June 2017 and price appreciation accelerated in the first half of this year. By 30 June, property prices were up 9.1% from a year earlier, reaching a four-year high. Transaction volume has also increased sharply since June 2017, reflecting strong demand driven partly by brisk collective apartment “en-bloc” sales. In the first half of this year, the demand for private residential properties led to diverging price trends between the private residential property market and the government housing market (also known as HDB), which is less prone to speculation.

We expect that the new measures will dampen bank loans for residential property purchases and the resurgence of investment and speculative purchasing. We also expect the measures will improve banks’ newly originated housing loans asset quality amid Singapore’s rising interest rate environment and strong supply pipeline.

At the end of March 2018, the three large Singaporean banks, DBS Bank Ltd. (Aa1/Aa1 stable, a15 ), Oversea Chinese Banking Corp. Ltd. (Aa1/Aa1 stable, a1) and United Overseas Bank Limited (Aa1/Aa1 stable, a1) had 42%-50% of their loan portfolio exposed to the property sector, including housing loans.

We expect household loan delinquencies to remain low because macro-prudential measures (particularly the introduction of the total debt-service ratio cap of 60% in June 2013) have constrained household credit growth and excessive borrowing. Singapore households as a whole have a very strong net asset position, which, at least for asset-owning households, will provide an extra buffer to service their debt. At the end of 2017, total household financial assets were more than 3.5x household liabilities.

The system-wide nonperforming loan ratio for mortgages was 0.4% at year-end 2017, with banks having a low average mortgage LTV ratio of 53%. Fewer than 5% of mortgages currently have LTV ratios exceeding 80%, and banks in Singapore have not been allowed to originate housing loans at such high LTV ratios since 2013.

Re-disseminated by The Asian Banker

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