Last Monday, on 15 July 2013, it was reported by the Moody’s Investors Service that they have “changed the outlook for Singapore’s banking system to negative from stable, owing to the recent period of rapid loan growth and rising real estate prices in Singapore and in regional markets where Singapore banks are active. These have increased the probability of deterioration in credit quality under potential adverse conditions for the banks in the future.”
Channel NewsAsia further reported that, “Domestically, household debt increased to 77.2 percent of gross domestic product as of March 2013 from 64.4 percent at the end of 2007, with private property prices growing 120 percent during the same period.”
The following day, on 16 July, the Monetary Authority of Singapore (MAS) release a comment to say that, “MAS has been concerned that some borrowers are at risk of being overstretched, especially when interest rates rise. However, the local banks are not at risk. They undertake regular stress tests on their own as well as coordinated by the MAS, and have adequate buffers in place to cope with the inevitable upturn in the interest rate cycle.”
Interestingly, just only half a year ago, Moody’s Investors Service had said that, “the outlook for Singapore’s banking system remains stable for the next 12-18 months” and that “we expect a good overall performance by the banking sector even though the banks’ financial metrics are anticipated to mildly deteriorate from the current cyclical peak against the backdrop of declining economic growth in Singapore and the region.” However, within half a year, the outlook for the Singapore’s banking system was downgraded.
Finally, yesterday, more than a week after Moody’s lowering of the banks’ rating, MAS spoke up about Singapore’s household debt – the real problem that Moody’s had brought out which the MAS had initially not addressed. It was reported in Channel NewsAsia that, “Singapore’s central bank said rising household debt in the city-state is worrying, and that it is “important to act now to limit build-up of leverage.” The Channel NewsAsia also reported that, “housing loans (now) account for 45 per cent of GDP, up from 35 per cent three years ago.”
Ravi Menon, managing director of the MAS, had also said that “5 to 10 per cent “have probably over-leveraged their property purchases”. He also warned that, “if mortgage rates were to rise by 3 percentage points, the proportion of borrowers at risk could reach 10 to 15 per cent.” Mr Menon added that, “Many households could have over-extended themselves, fuelled by low interest rates and stretched loan tenures.” Channel NewsAsia reported that, many households “have total debt service payments at more than 60 per cent of their income.”
Will A Housing Bubble Happen In Singapore Soon?
Essentially, what is happening is that Singapore is on the brink of a housing bubble. According the Investopedia, a housing bubble is defined as “A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.”
Investopedia further explained that, “a combination of very low interest rates and a loosening of credit underwriting standards can bring borrowers into the market, fueling demand. A rise in interest rates and a tightening of credit standards can lessen demand, causing a housing bubble to burst. Other general economic and demographic trends can also fuel and burst a housing bubble.”
In this light, does the MAS’s “pre-emptive measures” seem counter-intuitive? The MAS had introduced measures which, “include tightening loan-to-value ratios for housing loans, introducing stamp duties on property transactions, and shortening loan tenures.”
It is perhaps discomforting and disappointing that the MAS had, in its comment to Moody’s chosen to emphasise that “the Singapore banks have the highest average credit ratings amongst banking systems globally” and that “the local banks have enough capital to withstand even the severe stress test scenarios that it considered.” As much as high credit ratings will protect Singapore’s banking system in the event of a housing boom, as even the book, “Preventing House Price Bubbles (Policy Focus Report): Lessons from the 2006-2012 Bust“, had affirmed, that, “countercyclical capital buffers—which would raise capital requirements for financial institutions during the initial stages of the price bubble and reduce them during the period of decline—are a much more promising policy direction because they could be designed to put the brakes on only in those markets where bubbles appear to be developing,” but even then these measures would only protect the banks but will throw many Singaporeans into a heavy debt situation, and in such a scenario, there will be dire consequences.
A proportion at least 10% to 15% of Singaporeans driven into bankruptcy and poverty will only result in an immobile group of the population, where trapped in class poverty, would take some time to emerge from the state of poverty. This will slow down Singapore’s economic growth and exacerbate the already widening income inequality. This is not already noting that Singapore already has an existing estimated 10% to 20% of Singaporeans living in poverty. Another 10% to 15% would result in at least a third of Singaporeans living in poverty in Singapore.
But what the MAS had not discussed are the multivariate factors that had resulted in the looming potential housing bubble. It was precisely because of the the poor planning of Singapore’s infrastructural capacity which had led to a shortage of housing in Singapore, which did not grow in tandem with the population growth. Also, unrestrained speculation drove housing prices up, causing home loans to spiral upwards as well.
What Needs To Be Done To Prevent A Housing Bubble?
Writing in The Financial Times, Merryn Somerset Webb suggested in the article, “How the UK’s house price bubble might deflate”, that to deflate the housing bubble, “House prices should still be lower than they are, relative to incomes, and one day they will be. They can get to the “right” price in three ways. Real incomes can shoot up – unlikely. Prices could fall fast when interest rates normalise.” Emma Rowley also wrote in The Telegraph, in the article, “Is there a house price bubble on the horizon?”, that house prices need to be brought down in relation to average salaries but “simply to return to the affordability conditions facing first-time buyers in the 1990s, house prices would have to drop to around 60pc of their current levels, calculates Stephen Lewis, chief economist at Monument Securities.”
It might seem counter-productive for current home owners to impose a downward pressure on housing prices, but this is precisely what needs to be done. Indeed, the Channel NewsAsia had reported that “private property prices growing 120 percent” from 2007 to 2013. However, over the same period, the real incomes of Singaporeans have remained stagnant. Clearly, if a housing bubble were to come to pass, it would be the fault of the government to have imposed policies which had depressed the wages of Singaporeans, pegged to the stagnant wage level of the ‘S’ Pass and Employment Pass.
Last year, Yahoo! Singapore had reported that former National Wages Council (NWC) chairperson and Nanyang Technological University economics professor Lim Chong Yah had “urged the raising of salaries of workers earning less than $1,500 by 50 per cent over three years while imposing a moratorium on the country’s highest wages during the same time.” However, this has fallen on deaf ears.
It is also worrying that in the face of a potential housing bubble that The Straits Times had reported that, “National Development Minister Khaw Boon Wan (had) said … that he wants to lower the prices of flats by just “a few per cent” over the next few years … (and that) he acknowledged that any price drop should not be too drastic.”
The current potential housing and, to a lesser extent, banking crisis would require firm and decisive action by the government to put a curb on the growth of housing prices and put a downward pressure on the prices. The government should also act dynamically to uplift the wages of the workers, especially for the lower-income group, so that the gap between housing prices, in relation to wages, will be drawn smaller. Clearly, housing prices had spiralled out of control over the past few years and wages have been artificially depressed and had remained stagnant due to policies which had lacked foresight, and there needs to be immediate steps to rebalance the situation.
Even though the government might have instituted plans to protect the infrastructure of Singapore’s financial situation, a housing bubble will compromise Singapore’s workforce severely. The government needs to act to invest in the human capital, by uplifting their lot to ensure the sustainability of our human resources.
In the article, “Australian housing is too expensive. So why can’t we talk about it?”, in The Guardian, Luke Mansillo had surmised that in Australia, “It is a helpful reminder that the two major (Australian political) parties’ pay masters have a say in the matter of keeping Australians hocked up to their eyes with debt. In 2011-12, banks donated $1,702,536 and property developers $513,113. This is compared to unions at $200,000.”
“Who do you think has the ear of power?”, Mansillo asked. Could the same be said of Singapore’s predicament as well?