MAS cautions property investors as risks emerge

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MAS cautions property investors as risks emerge

Nov 30, 2016

Rental income may not be enough to service the loans; bonds flagged as another concern

Yasmine Yahya

Assistant Business Editor


The uncertain economy ahead means Singaporean households should review their investments and take note of emerging risks such as those in property and corporate bonds, the Monetary Authority of Singapore (MAS) said yesterday.

The warning comes amid prolonged weak growth, low interest rates and rising political risks, which have raised concerns about global financial stability, the MAS noted in its latest Financial Stability Review.

"In particular, before investing in property, investors should be aware that rising vacancy rates, declining rentals and impending interest rate increases mean that they may not always be able to rely on rental income to service their investment property loans."

Currency fluctuations and shifting monetary policies in foreign economies could also affect the cost of debt obligations and rental returns for overseas properties, the MAS added.

Bonds were also highlighted by the MAS. It noted that some firms with debt coming due could face repayment difficulties amid sluggish growth and an impending rise in interest rates.

"Notably, a number of issuers in the shipping and oil-related sectors have defaulted in recent months, while others have moved to restructure upcoming debt payments," the MAS said.

Still, the MAS said the bond market is expected to remain resilient overall, with defaulted bonds comprising just about 1.5 per cent of outstanding non-financial corporate bonds.

MAS stress tests also suggest that most companies here would remain resilient to interest rate and income shocks, the regulator said.

Credit Suisse economist Michael Wan noted that aside from rising interest rates, there will be challenges as Singapore pushes on with a structural transformation of the economy, away from manufacturing towards services, and up the value chain.

"Progress has been quite slow and we haven't seen the fruits of that labour yet. 2017 will continue to be a year with labour pangs in structural transformation."

MAS noted, however, that on the whole, households here have an "ample financial buffer" to weather the stress of soft economic and labour market conditions.

Still, it warned that as slower growth weighs on earnings, some households might find it harder to service their debts, especially if they have taken on a high amount.

Households should start planning for retirement early and take a long-term view when deciding on property purchases, MAS said.

After all, the more households pay towards property, the less they have left over for retirement.

An HSBC survey last year found that households tend to underestimate their retirement expenditure, the MAS noted.

To supplement their retirement income, households could consider various options of monetising their housing assets, it added.

These include moving to smaller homes with the option of taking up the Silver Housing Bonus, renting out their properties or spare bedrooms, or applying for the Lease Buyback Scheme offered by the Housing Board.

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Central bank backs keeping property cooling measures in place

MAS says still low interest rates, weak global growth and rising political risks pose threats to financial stability; repayment risks remain for some

By Soon Weilun

[email protected]

@SoonWeilunBT

Nov 30, 2016


THE property cooling measures are here to stay for a while, at least going by the tone that Singapore's central bank has set in its latest annual review of financial stability.

In its report released on Tuesday, the Monetary Authority of Singapore (MAS) hinted that it still wants more time for these measures to work through the economy, as global conditions in the form of still low interest rates, weak growth and intensifying political risks weigh on Singapore's household and corporate balance sheets.

Singapore has introduced several rounds of property cooling measures since the 2009 financial crisis.

On the back of these measures, "growth in housing loans has eased considerably and the overall risk profile of housing loans is strong", said MAS. "But repayment risks remain for a small group of borrowers amid the weaker economic backdrop."

Such an assessment comes as MAS deems that the protracted low-interest-rate environment holds implications for financial stability.

Low rates can encourage risk-seeking; households and firms will be tempted to take on more leverage.

Low rates also expose them to the dangers of a rate hike - which the market expects will happen soon, MAS noted.

"It will take time for household balance sheets to strengthen and become more resilient to interest rate and income shocks," said the central bank.

For now, Singapore households, corporates and banks seem resilient enough to withstand shocks, going by the results of stress tests by MAS.

Initial signs for households' risk profiles seem promising: Household debt growth fell from an average of 6.9 per cent year-on-year over the last five years, to 2.8 per cent in the three months ended September 2016.

Building slowly

The fall was largely driven by trends in housing loans, which make up three quarters of household debt. For example, growth of housing loans from financial institutions slowed from 4.8 per cent year-on-year in Q3 2015 to 3.3 per cent in Q3 2016.

In addition, households' risk profile has improved, MAS noted.

For example, since the introduction of the total debt servicing ratio (TDSR) restrictions in 2013, the debt servicing ratio for the 20th income percentile household fell from 22 per cent in 2013 to 17 per cent last year.

Private residential property prices have also moderated, falling a cumulative 10.8 per cent since Q3 2013.

But beyond these improvements, MAS noted that some borrowers still have problems with repayment.

In September this year, the share of mortgage loans that were more than 30 days in arrears increased to close to one per cent, up from 0.9 per cent a year ago.

Non-performing housing loans also inched up slightly over the past year and stood at 0.4 per cent in Q3 2016, though still much lower than the peak of one per cent recorded during the recent financial crisis.

"MAS remains vigilant in monitoring property market developments and, if necessary, will take appropriate measures to maintain a stable and sustainable market," it wrote.

Beyond worries about household balance sheets, MAS wrote that weak global growth may eat into household incomes and corporate profitability.

Low commodity prices and slowing global trade would cause corporate borrowers in certain sectors to struggle. Bank asset quality could thus worsen.

MAS said that the overall ratio of non-performing loans (NPLs) rose to 2.1 per cent in Q3 2016 from 1.5 per cent a year ago.

Overall corporate profitability declined too. The median return on assets (ROA) of listed firms fell from 3.5 per cent in Q2 2015 to 2.8 per cent in Q2 2016.

Beyond the oil-and-gas sector, the manufacturing, as well as transport, storage and communications (TSC) sectors were flagged in MAS's report. NPL ratios of the latter two sectors rose to 5.9 per cent and 7.1 per cent in Q3 2016 respectively.

Manufacturing and transport sectors

Corporate profitability of firms in the manufacturing, commerce and TSC sectors also weakened. Their ROAs declined by 0.6, 0.7 and 0.8 percentage points respectively in Q2 2016 on a year-on-year basis.

Political risks are also fast becoming a threat to global financial stability, MAS noted.

For example, following Brexit, or the United Kingdom's vote to leave the European Union, political uncertainty in Europe has increased.

"Even then, markets do not appear to have priced in risks to EU integration, as sovereign yields of more vulnerable eurozone economies remain much lower than during the height of the eurozone debt crisis," wrote MAS.

How policymakers tackle political risks may have "long-lasting effects on global growth and downstream effects on the financial sector", said MAS.

"Financial surveillance increasingly needs to take into account possible shocks from and repercussions of political events," it urged.

"Policymakers should also stand prepared for disruptions and tail risks."