IF YOU already have a mortgage on a home, you will need more cash on hand to buy a second property – under new rules announced yesterday.

Buyers with one or more outstanding housing loans will now have to stump up a downpayment of 30 per cent of the property’s price, up from 20 per cent previously. At least 10 per cent must be in cash – up from 5 per cent before – but the remainder can come from their Central Provident Fund (CPF) accounts.

This means that buyers will now be able to borrow up to only 70 per cent of the property’s purchase price, instead of 80 per cent previously.

These new financing rules are more significant measures to cool the housing market, experts said. They added that these moves would weed out speculative activity from the market and prevent buyers from overextending themselves – while leaving first-time buyers unaffected.

The Ministry of National Development said in a statement yesterday that while non-performing loans made up less than 1 per cent of all loans as at the second quarter, there are signs that more borrowers are taking loans of more than 70 per cent of a property’s price.

Local banks yesterday told The Straits Times that they have seen an increasing number of home owners investing in multiple properties in recent years.

United Overseas Bank said most of these home buyers took up financing of up to 80 per cent of the purchase price.

OCBC Bank said that while the majority of its loan applications are for home-owner occupation, it has seen an increase in the number of applications for investment purposes – compared with a year ago. An increasing number of home-loan applicants have applied for loans of more than 70 per cent of the property price, it added.

Kim Eng analyst Wilson Liew said the new measures would ensure that banks remain prudent in their lending practices.

DMG & Partners property analyst Brandon Lee said the rules would also effectively force out speculators.

‘They would have to think twice before buying as the cash outlay now is reasonably higher… Sales volume will probably be hurt across all segments,’ he said.

ERA Asia-Pacific associate director Eugene Lim said the measures would affect demand in the mass-market private property segment.

HSR chief executive Patrick Liew said speculators made up about 20 per cent of the mass-market segment, and that the new measures might flatten the sector for the next two quarters.

Demand could drop by up to 20 per cent in the next few months, as buyers react in a knee-jerk fashion and speculators stay on the sidelines, he said.

However, since economic fundamentals are strong and the market had already been slowing, he does not expect prices to head south.

Instead, Mr Liew thinks prices will hold at current levels before gradually increasing again from the second quarter of next year, because there is still genuine demand in the housing market.

ERA’s Mr Lim said that a significant number of mass-market condo buyers live in HDB flats with outstanding mortgages, so demand for such private homes might take a beating now that the required downpayment has been increased.

Mr Colin Tan, research and consultancy director of Chesterton Suntec International, said the steps ‘had more bite’ than previous ones. It would most affect demand from high-risk buyers who are highly leveraged, he said.

‘These measures will help to soak up the liquidity in the market as those who could previously afford three similarly priced homes, fully leveraged… would now be able to afford only two, lessening demand by a third,’ he added.

However, owners who are just selling their home to buy another need to get their timing right and ensure the first mortgage is fully paid before taking out a new loan.

If not, they will be allowed to take out only a 70 per cent loan for the new home and would have to pay the remaining 30 per cent upfront.

Source: Straits Times, 31 Aug 2010

(SINGAPORE) New government measures to cool the property market and curb speculation in the resale market for HDB flats could cause headaches for banks here due to the extra checks needed for home-loan applicants, but the impact on loans growth will likely be small, a check by BT shows.

‘Banks will certainly run into problems for any pre-existing loans which may have been approved but not drawn down yet, and housing loans not registered at the credit bureau,’ said Helen Neo, head of consumer banking at Maybank Singapore. ‘Banks may have to request a declaration from customers to confirm that there are no such pre-existing loans.’

Effective yesterday, home buyers with outstanding home loans must pay more cash upfront for a new house, and they may borrow no more than 70 per cent of its value, down from 80 per cent.

Housing loans have been the biggest driver of loan growth for banks here throughout the economic downturn, and the recovery since.

Total housing loans grew 22 per cent over the year to end-June, to $101.1 billion – a third of all Singapore-dollar loans by banks here, Monetary Authority of Singapore data show. Including business loans to the building and construction sector, property-related loans made up $149.7 billion, or 50.5 per cent of all Sing-dollar bank loans outstanding at the end of June.

‘I don’t think you’ll see a collapse in loan growth’ due to the new measures, said a banking analyst, who declined to be named. ‘Housing loan growth is more correlated to the completions of properties – that’s when the loans are drawn down. We’ve seen record home sales in 2007, 2009 and so far this year; those would underpin completions in the medium term.’

But if home sales slow and banks compete more aggressively to lend on fewer home purchases, that could squeeze their loan margins and hurt profits, the analyst said. ‘That’s the uncertainty.’

The new rules could also be a problem for people who want to buy a new house to live in, before selling their existing home, if they are still paying off an earlier mortgage, Ms Neo said. Such buyers can no longer borrow more than 70 per cent of the value of the new home from banks, even if they intend to stay in it.

Maybank Singapore had $4.1 billion in housing loans at the end of June. Of those, ‘less than three- quarters’ were loans for more than 70 per cent of the property’s value, a proportion that hasn’t changed much over time, Ms Neo said. ‘We focus mainly on owner-occupied properties, so there is minimal impact on our home loan portfolio.’

While lending standards by banks here are ‘still prudent’, there are signs that more housing loans are being made for over 70 per cent of the property’s value, the government said yesterday.

At OCBC Bank, ‘we have seen an increase in the number of loan applications’ asking to borrow more than 70 per cent of the value of the property, said Phang Lah Hwa, head of consumer secured lending. Most of its home loan applications are for owner occupation, but ‘we have seen an increase in the number of loan applicants for investment purposes compared to a year ago’, she added. The bank is assessing the new measures and their overall impact on its home loan business, she said.

‘The new measures are likely to affect HDB upgraders and investors who would have to commit higher cash amounts for their down payments’ if they have outstanding home loans, a DBS Group spokesman said, adding that the bank has ‘robust underwriting criteria’ for its loans.

‘There may be some near term impact on property sentiment. But in the long run, this is good for the market,’ said Chia Siew Cheng, loans division head at United Overseas Bank.

The new rules could also mean it takes longer to process home loan applications. Banks must check with the Housing & Development Board – in addition to their usual checks on a borrower’s credit record with Credit Bureau (Singapore) – to see if a home-loan applicant has a home loan outstanding.

‘If HDB is willing to enrol with the Credit Bureau as a member, the checks can be made more efficient in the processing of applications,’ Ms Neo said.

Source: Business Times, 31 Aug 2010

New housing loan products expected to intensify competition

MAYBANK Singapore has launched a new range of home loan products with interest rates that start off at below one per cent, a move that could put even more pressure on its rivals already struggling to boost lending income amid low interest rates and loan margins.

The bank is offering five-year fixed-rate home loans that start at just 0.88 per cent for the first year, rising to 2 per cent in the second year, 2.25 per cent in the third year, and 2.5 per cent in the fourth and fifth years. Thereafter, the rate is variable, pegged at 0.5 percentage point below Maybank’s adjustable board rate, which is now 3.75 per cent.

A three-year, fixed-rate home loan also starts at 0.88 per cent, climbing to 1.9 per cent in the second year and 2.3 per cent in the third year, after which the variable rate is similarly pegged at a 0.5 percentage point discount to Maybank’s board rate.

The rates are cheaper than those currently offered by the three Singapore banks for fixed-rate home loans, a check by BT shows. As an indication of how keen the competition is, DBS Group and OCBC Bank no longer publish their home-loan rates on their websites; only United Overseas Bank still does so.

‘Fixed-rate packages are very popular with customers as it gives certainty in financing their mortgage,’ said Helen Neo, head of consumer banking at Maybank Singapore. The new home-loan packages are being offered as a ‘gesture of appreciation for our customers’, she added.

The bank is also offering variable-rate home loans that start at just 0.8 per cent in the first year, based on the current level of the board rate, though that could climb if the bank raises the board rate. Similar variable-rate home loans offered by the Singapore banks charge interest starting at 1.18 per cent or more.

Another home loan product offered by Maybank is pegged to the floating three-month Sibor, or interbank lending rate, now at 0.56 per cent. Interest on that home loan is charged at 0.5 percentage point above Sibor in the first year, one point plus Sibor in the second year, and 1.25 points plus Sibor subsequently.

By comparison, the Singapore banks offer floating-rate mortgages that start at 0.75 percentage point above Sibor, and others that start at 0.75 point above the three-month swap offer rate – now at about 0.3 per cent.

Home loans are by far the biggest component of banks’ loan portfolios here. Housing and bridging loans – short-term loans provided by banks to buyers of new homes waiting for cash from the sale of existing property – made up $101.1 billion, or a third, of all Singapore-dollar bank loans outstanding at the end of June, according to central bank data.

The size and long tenure of home loans makes them attractive to banks. But persistently low interest rates have restricted how much banks could charge on new loans, while renewed competition for market share has also squeezed loan margins in recent months, making their lending less profitable. Net interest margins at all three Singapore banks shrank in the second quarter, compared to both the prior quarter and the same period last year.

Maybank Singapore’s housing loans grew 10 per cent in the year to end-June to $4.1 billion – just under a quarter of its $17.5 billion loan portfolio, chief executive Pollie Sim said on Wednesday.

Source: Business Times, 28 Aug 2010

(SINGAPORE) Mortgage default rates in Singapore have fallen dramatically in the last two years, as a buoyant property market and a stable employment situation helped individuals repay more easily.

According to figures released yesterday by DP Credit Bureau (DPCB), a national consumer credit bureau, the percentage of mortgagors in Singapore that have fallen behind in their repayments has halved over the last two years.

The average rate of default across all age groups fell to 0.43 per cent in March this year – down from the 0.59 per cent in March 2009, and the 0.89 per cent in March 2008.This means that one in every 233 mortgagors are in default of their payments – down from one in every 112, two years ago.

‘The numbers represent an improvement in the property market leading to more positive sentiment,’ said Lincoln Teo, general manager of DPCB. ‘This indirectly drives better payment behaviour from mortgagors. A home mortgage is the most important loan many people take out during their lives. Typically, one would choose to default on other borrowings and not a mortgage.’

‘We have also seen greater consumer awareness on the maintenance of one’s credit worthiness and how important it is for securing credit. Over the last two years, the credit bureau has seen a growing number of borrowers being diligent in their loan repayments in order to maintain or improve their credit standing,’ he said.

The banks here say their experiences tie in with the data just released by DPCB.

OCBC Bank’s chief credit officer of its consumer, group risk division, Joseph Wong, told BT: ‘We have seen a general improvement in consumer credit repayments including mortgage repayments.’

DPCB’s findings are also in line with recent data on the broader economy. Song Seng Wun, an economist with CIMB Research, notes that petitions for bankruptcy have fallen and should touch a new low this year.

‘A lot of it (mortgage servicing) depends on property prices, which have been resilient and on jobs creation growth, which has been fairly buoyant. There should be enough momentum for both of these this year, even if growth in the US and Europe should slow down, which will mean that people’s ability to pay off credit spending should be quite strong,’ Mr Song said.

It’s an observation which DBS Bank’s managing director and head, consumer banking group (Singapore), Jeremy Soo, concurred with: ‘The combination of (lowered unemployment rates and improved property prices) and a relatively low interest rate environment has resulted in a natural decline of mortgage defaults. DBS also engages our customers actively where needed, to work on their debt repayment, and that helps to lower the delinquency rate and ultimately default of loans.’

And a spokesperson at United Overseas Bank said: ‘Mortgage payment defaults have decreased when compared to the same period the previous year, on the back of an improving economy and a lower unemployment rate.’

DPCB’s data showed that people aged between 40 and 49 make up the largest proportion of mortgagors, of all the age groups – accounting for 37 per cent of all loans.

It also found that there has been a shift towards younger borrowers, over time – with the percentage of loans given to 21-29 year olds increasing, while those extended to people over 50 is declining.

It also found that the 21-29 year olds – which traditionally have had the highest percentage of defaults on their mortgages – are getting better in meeting their debt obligations. The percentage of defaults for this age group has fallen from 2.2 per cent in March 2008, to 0.42 per cent this year.

Instead, the 50-59 year olds have overtaken 21-29 year olds as the age bracket with the highest percentage of loans in arrears, with 0.62 per cent behind in their payments. DPCB’s Mr Teo said: ‘One explanation is that when people in this age bracket lose their employment, many find it hard to get another job, placing great pressure on their ability to continue servicing their mortgages.’

The bureau also found that almost half of all mortgage defaults take place between the third and the fifth year of the loan. It said that defaults within the first year of the loan are rare (4.1 per cent), while those between two and three years represent 15 per cent of all defaults. More established loans – those older than five years – account for 31 per cent of the total number of loans in default.

Source: Business Times, 24 Aug 2010

THE level of mortgage default has dropped dramatically over the past two years, thanks to the improving property market and low interest rates.

Only 0.43 per cent of borrowers – or one in 233 – were in default in their mortgage payments in March. That is down from the 0.59 per cent – or one in 169 – at the same point last year. It is also less than half the rate in 2008, when the economy began to sour. Then, 0.89 per cent – or one in 112 – of mortgage holders lagged in their payments.

‘The numbers represent an improvement in the property market leading to more positive sentiment,’ said Mr Lincoln Teo, general manager of information firm DP Credit Bureau, which conducted the study. ‘This indirectly drives better payment behaviour from mortgagors.’

He added the better payment situation comes amid greater efforts from consumers to maintain or improve their credit worthiness as they realise its importance for securing future borrowings. A loan is regarded to be in default, for example when it is 90 days past due.

Mr Teo also pointed out that for many, a home mortgage is the most important loan they will ever take out: ‘Typically, one would choose to default on other borrowings and not a mortgage.’

The study also showed middle-aged Singaporeans are overtaking younger borrowers as the group with the highest mortgage default rate. People aged between 50 and 59 had the highest percentage of loans in arrears, with 0.62 per cent in default.

Mr Teo said many people in this group find it harder to get another job if they are laid off, affecting their ability to pay their mortgage.

The most striking change came in the level of arrears – 0.42 per cent – for people aged between 21 and 29 years. This group traditionally has the highest proportion of defaults, but they have shown a marked improvement. However, Mr Teo said other data from DP Credit Bureau shows younger borrowers are still the most likely to default on car loans, credit card debts and overdrafts.

DP Credit Bureau’s study was based on loan records from its members, which include OCBC Bank and United Overseas Bank. DBS Bank is not a DP Credit Bureau member, but it told The Straits Times it is also seeing a fall in mortgage defaults.

Source: Straits Times, 24 Aug 2010

Sibor and SOR, rates that mortgages are pegged to, have fallen

KEY interest rates that determine mortgage levels have fallen steeply, promising cheaper home loans but even leaner times for those with bank deposits.

The rates have been driven down by the economic recovery, which has led to an increased willingness by banks to lend and a flood of cash coming in from foreign investors.

The falling rates have followed the trend of the rates set by the United States Federal Reserve, which continue to be at historic lows. They have also come as the Singdollar has been allowed to strengthen since April.

Both key banking industry rates display the same trend.

The Singapore Swap Offer Rate (SOR), the average cost of funds used by banks for commercial lending, was at 0.304 per cent yesterday. This was up slightly from the 0.298 per cent on Thursday – the lowest in at least 10 years. This rate is used by United Overseas Bank and OCBC to peg their loan packages.

It is a similar story with the Singapore Interbank Offered Rate (Sibor), the rate at which banks lend to one another.

The Sibor, which serves as a handy benchmark for all kinds of rates, was at 0.547 per cent yesterday. It has ranged from 0.524 per cent to 0.563 per cent since May after hovering at about 0.65 per cent for the previous 14 months. DBS, HSBC and Standard Chartered peg their loans to Sibor.

Mr Vinod Nair, chief executive of website Smartloans.sg which offers home loan comparison, said a 0.1 percentage point difference in interest rate for a $500,000 mortgage on a 30-year loan could work out to about $8,000 in total savings.

Stanchart economists, however, project the three-month Sibor to rise to 1.5 per cent by the end of next year and up to 3.2 per cent by the end of 2012.

Mr Dennis Khoo, Stanchart general manager of retail banking products in Singapore and Malaysia, said customers looking for peace of mind and certainty in monthly cash flow should opt for fixed-rate packages instead of floating-rate or Sibor-linked ones.

But customers who feel interest rates will change or fall more can pick Sibor-linked packages, he added.

Economists say the low interest rate climate has created a disincentive to save, encouraging people to take advantage of available ‘cheap money’ to invest in assets like property.

DBS Bank economist Irvin Seah added: ‘There are substantial millions in the region and with Singapore being a financial hub, a lot of money is making its way here.’

CIMB Research economist Song Seng Wun said that given the general global uncertainty, including the risk of a jobless recovery in the US, central banks are in no hurry to raise rates just yet.

‘Rates in the US are similarly low, and low interest rates here might be a reflection of the likelihood that US rates might stay lower for longer than expected,’ he added.

Source: Straits Times, 7 Aug 2010

Downsizing, refinancing and loan deferments help households in need

FOR seven years, receptionist L. Boey, 63, had been struggling to make the monthly $1,450 loan repayment to the Housing Board (HDB) for her four-room Choa Chu Kang flat.

Earlier this year, she had a lifeline thrown to her. The HDB found her a studio apartment in Bishan which was big enough for her and her 90-year-old mother, and affordable enough for her to buy using her Central Provident Fund (CPF) savings. She sold her flat in May this year, cleared her debt and moved in.

Financially relieved flat buyers like her have helped to halve the number of those with loan arrears (owing three months’ instalments or more) from the peak of 55,700 cases in December 2003.

‘I guess I didn’t have a choice, but I also felt I was getting old and didn’t need such a big apartment,’ said Miss Boey.

She was among 2,000 home owners whom HDB helped to ‘right-size’ their flats between August 2008 and June this year, as a long-term solution to their debt problems.

Another measure the HDB instituted to help households falling behind on payment: allowing them to take an extra loan from the HDB to help them downgrade, even though they had already enjoyed two concessionary loans.

Between January 2008 and June this year, the HDB approved about 2,700 such loans.

These measures, along with others introduced in recent years, and the recovering economy have cut down the number of households who are in hock over HDB loan payments.

There are now about 26,000 HDB households who owe the HDB payments, making up 6.6 per cent of 393,000 accounts with an HDB loan as at June this year. This is down from 33,670 cases forming 7.9 per cent in September 2008.

The HDB team which helped to tackle HDB arrears cases will receive an award for its efforts at the Ministry of National Development’s National Day Observance Ceremony on Friday.

An HDB spokesman told The Straits Times it has helped close to 20,000 cases since January 2008.

Short-term measures include reducing loan payments for up to six months, deferring loan instalments for up to six months, and instalment plans to clear arrears.

If the home owner still has difficulty paying the instalments, long-term solutions, such as flat downsizing, would be suggested.

In Miss Boey’s case, she had sold off her first Choa Chu Kang flat for a profit and bought another four-room Choa Chu Kang flat for $335,000 on the open market in 1996.

She had a job then as a purchaser, and was granted an HDB loan of $224,000 at a concessionary rate. But in 2003, she lost her job. The money from her earlier sale was also depleted. Even after she found another job in 2008, and rented out a room, she was unable to make the payments.

Her HDB counsellor, who had been working on her case since 2006, suggested that she sell her flat and downgrade. In May this year, she sold her flat for $310,000 and bought the Bishan studio apartment for $83,000 using her CPF savings.

Miss Boey is all praise for the HDB and her MP Zaqy Mohamad. ‘If the HDB didn’t help me, I guess I would still have to sell my flat, but I may not have been able to find another place within my budget.’

The HDB spokesman said compulsory acquisitions are ‘very rare’ – slightly more than 1,480 since January 2008 – and usually happen only after a household does not take proactive steps to pay up.

Some households, the HDB said, would include working family members as joint owners to help pay for the flat, or try to enhance household income by sub-letting a room.

Mr Dennis Ng, founder of mortgage consultancy web portal housingloansg.com, said loan repayment problems arise when people do not budget for crises.

Some people, he said, use up to 50 per cent of their monthly income to service their housing loan, when the maximum should be 35 per cent.

‘If you use half your income to pay for your house, you might be in trouble in bad times, when you face job loss or a pay cut…people must budget first if they don’t want problems paying in the future,’ he said.

Source: Straits Times, 4 Aug 2010

THE unusual urgency with which a housing bill was expedited through Parliament this week was well warranted and welcome – even (or perhaps especially) if it sounds the death knell for a small but insidious industry.

In going for the roof over the borrower’s head, Singapore’s moneylenders have been no less pernicious than latter-day Shylocks – indeed, every bit as artful and exploitative as the notorious Shakespearean character who coolly sought, as loan collateral, a pound of flesh. With the law amended to close an unfortunate loophole, Singapore’s moneylenders – or legalised loan sharks, as it were – can no longer avail themselves of the sales proceeds when desperate HDB flat owners resort to cashing out their homes for quick funds.

For the lenders, this is a sudden turn of events leaving them lamenting their fate, with nary a trace of guilt nor any sense of wrongdoing. And this is an industry officially represented by an association – the Moneylender’s (sic) Association of Singapore – that states, among its five objectives, a desire not only ‘to project moneylending as an important and integral part of the business of financing individuals and businesses’ but also ‘to advocate ethical practice in the moneylending industry’.

No doubt, moneylending (legal and illegal) plays a key role in consumer financing, and indeed in small business financing as well. The average person sometimes finds it hard to get a bank loan to pay off urgent bills or debts, especially if he or she is unemployed or a low-income earner. But, while the moneylending association has a self-declared aim of advocating ethical practices, its president felt free to explain, in a newspaper report in January, why his members were targeting HDB sellers in need of quick cash. Indeed, ads by moneylenders were essentially saying: ‘Only HDB sellers need apply’.

David Poh, the association’s president, was reported to have said: ‘If they take a personal loan which is based on their income, they may lose their job at any time, so it’s not so secure for us.’ Liquidating a HDB flat, on the other hand, virtually guarantees repayment, as the moneylenders – who would have lodged a caveat on the flat – get the first bite of the sales proceeds. The number of HDB resale applications with caveats lodged by moneylenders in just the first six months of 2010 has already exceeded the 2009 total of 546. The lenders might have insisted there was nothing unethical about this – indeed, it was entirely legal, until this week – but there was also collusion with housing agents who, for a fee, would refer flat sellers to lenders.

New rules in May ended the lucrative careers of lenders moonlighting as housing agents and vice versa, and a welcome new bill to regulate housing agents is on the cards. It remains to be seen how many of the several hundred moneylenders in town will actually close shop. If those weeded out are the firms that cannot thrive ethically, it would be no loss at all. And if the culling makes room for ethical, institutional microfinance to take root here and displace loan sharks, all the better.

Source: Business Times, 22 Jul 2010

LICENSED moneylenders, hard hit by a new Bill that was passed in Parliament on Monday, say they are now left with no choice but to close down.

The new law disallows Housing Board home owners from using the proceeds of selling their homes as collateral for loans, or for the payment of debts, except under approved circumstances.

Simply put, this means moneylenders are now no longer able to lodge caveats against flats to ensure they get first bite of the proceeds from the property’s sale if the borrower cannot pay up.

The Straits Times understands that at least 10 moneylenders who focus on loans for home sellers will be putting up the shutters in the coming weeks.

Moneylenders’ Association of Singapore president David Poh said at least 30 members in his association are extremely discouraged by the changes.

In May, new rules prohibiting licensed moneylenders from working as property agents, and vice-versa, were announced.

One affected moneylender, who declined to be named, said she used to lodge caveats for the four cases she handles on average monthly.

‘Now the law has closed all our options, we have no choice but to wind up,’ said the 37-year-old.

Another moneylender, who wanted to be known only as Mr Tan, 44, said he will now focus on his property business. He started a moneylending arm late last year to complement his realty work.

‘Now I just want to collect the loans I have given out, and close down the moneylending firm,’ he said, adding that he used to lodge about two caveats monthly. ‘Without caveats as security, who wants to risk lending out large amounts?’

The growing practice by some moneylenders of exploiting cash-strapped home owners desperate for loans was first flagged in Parliament in April.

Industry players estimate that of the 260 licensed moneylenders in the market, at least 30 per cent regularly lodged caveats on their borrowers’ homes. There were 556 registered resale applications with caveats lodged by moneylenders in just the first half of this year, a spike from 546 for the whole of last year and just 12 in 2008.

Mr Poh’s committee held a meeting yesterday to discuss the impact of the new rules. ‘Those affected are rethinking how to continue their business,’ he said, adding that most moneylenders will raise their interest rates by at least 10 percentage points per annum, now that they do not have the security of caveats.

The new rules could also put loansharks back in business. ‘The demand for loans is still there. But if the people can’t get loans, they will turn to the illegal lenders,’ said Mr Poh.

Source: Straits Times, 21 Jul 2010

THE credit loss risks of Singapore banks would be limited even if an asset bubble were to form, Standard & Poor’s Ratings Services said yesterday.

Singapore banks’ heavy exposure to home loans and the strong climb in property prices in the past year have raised many questions, including the credit loss risks that banks face, it noted in a report. However, ‘a high savings rate and low household debt support borrower repayment ability when collateral values fall’, said Standard & Poor’s credit analyst Ivan Tan.

Negative equity (when the loan amount exceeds valuation of the home) by itself, is not a sufficient condition for default, he added.

Standard & Poor’s said that its view was based on the reasonable level of housing affordability, sound borrower repayment ability, low loan-to-value ratios, the government’s measures to cool the market, and mortgage rates turning upward. Mortgages represent the single largest industry exposure for Singapore banks, at about 25 per cent of loan portfolios.

The risk of financial losses to banks would increase if affordability declines, which could occur if property prices continue climbing or if household incomes slip, the rating agency said.

‘We believe an unabated increase in property prices is unlikely, given the government’s past willingness to implement cooling measures,’ Mr Tan said.

On the other hand, household incomes can fall sharply for a few reasons: job loss in a recession is the most common factor. Nevertheless, the rapid economic recovery has led to an improvement in the unemployment rate to 2.2 per cent as of March 2010, almost back to pre-crisis levels.

In February 2010, the government lowered the ceiling for home loans to 80 per cent of valuation – one of the steps that it took in trying to rein in the market.

‘We believe Singapore banks seldom extended loans of more than 80 per cent of valuation even before the loan ceiling was lowered,’ said the report.

‘Banks are beginning to price in higher risk premiums by raising home loan rates . . . The higher home loan rates will counterbalance the returns from property investments. This, in turn, helps reduce the likelihood of a speculative bubble and limit the risk of credit loss for banks.’

Last week, Standard & Poor’s affirmed its rating on the three Singapore banks, citing the lenders’ strong financial profiles and prudent management strategies.

S&P kept its long-term rating for DBS at AA-/Stable, United Overseas Bank (UOB) at A+/Stable, and OCBC Bank as A+/Stable.

The banks’ short-term ratings stand at DBS with A-1+, UOB with A-1, and OCBC with A-1.

Source: Business Times, 20 Jul 2010