Singapore homebuyers should exercise prudence in taking out new mortgages as interest rates are expected to increase, the Monetary Authority of Singapore (MAS) said in its Financial Stability Review.

It also advised against undertaking new loan commitments for highly leveraged households.

Household debt in Singapore has surpassed pre-pandemic levels. As a share of gross domestic product (GDP), household debt stood at 70 percent in the third quarter of 2021, 3 percentage points higher than in the fourth quarter of 2019.

Over the past year, the total value of household debt in Singapore rose by 6.8 percent, driven by surging housing loans as both housing price and transaction volume increased.

Despite an economic slump amid the pandemic, soaring real estate prices are now seen in many parts of the world. In Singapore, private property prices climbed 7 percent in the third quarter of 2021 compared to a year ago, according to data from the Urban Redevelopment Authority.

Quarterly average number of transactions since the beginning of 2020 is 20 percent higher than the average between 2017 and 2019, fuelled by demand for both new homes and resales, according to the MAS.

Low interest rates, large-scale fiscal and monetary stimulus, and a tight supply amid pandemic-related construction disruptions underlie rising property prices relative to income across both the advanced and emerging market economies.

The central bank also underscored the risk of a “sharper-than-expected” monetary tightening if inflation remains persistently higher than the target, which could trigger a “sharp and disorderly repricing of assets.”

“An increase in housing prices that is not supported by fundamentals risks a sharp correction that could impair household wealth and bank loan portfolios,” cautioned the MAS.

Around 40 percent of household assets and 75 percent of liabilities are made up of residential properties and loans in Singapore.

A downturn in the real estate market could suppress domestic demand as properties loom large on households’ balance sheets.

Currently, aggregate household net worth is about 4.6 times GDP, representing a slight increase from 4.4 a year ago, as rising financial and property asset values more than offset the growth in liabilities.

A stress test showed that the median household would be able to meet loan obligations if income drops by 10 percent and interest rate is lifted by 250 basis points.

However, the central bank warned that households’ financial positions could still come under pressure, especially for the more vulnerable, due to potential growth setbacks or policy missteps “in the timing, pace, and sequence of withdrawal of support measures.”


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