Cooling property prices provide relief for Singapore banks

Residential buildings stand in the Grange Road area of Singapore, on Saturday, Sept. 21, 2013.
Bloomberg | Getty Images
Residential buildings stand in the Grange Road area of Singapore, on Saturday, Sept. 21, 2013.

Falling property prices in Singapore - one the world's most expensive housing markets - have provided some much needed relief for the nation's banking sector, analysts told CNBC.

"The gradual decline in property prices is credit positive for Singapore banks because it relieves pressure on bank asset quality," Moody's analysts said in a note published Monday.

"Further price increases would have increased the risk of a real estate price bubble bursting," they added.

Talk of a bubble forming in Singapore's red hot property market has been a hot topic in recent years, encouraged by low interest rates and an influx of speculative interest.

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Many analysts have warned that once the U.S. Federal Reserve hikes rates - a move expected in mid-2015 - many owners of Singaporean property could potentially default on their mortgage payments, which would be bad news for banks. U.S. interest rates are used as a benchmark for Singapore monetary policy.

But these fears have eased recently amid signs of cooling prices in recent months. Furthermore, a number of government measures introduced over the past two years have helped deter speculative buying and stopped home buyers from borrowing more than they can afford.

Last week, a flash estimate for the Urban Redevelopment Authority, showed prices had been cooling since December.

"The problems with trying to over leverage yourself today is that interest rates are bound to rise in the next few years and the global economy is in a fragile situation... so there is a likelihood for certain events to cause a shake-up in financial markets," Kenneth Ng, head of equity research at CIMB bank told CNBC on Tuesday.

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"The government measures and slowing prices will limit buyers to only buy what they can afford. So if an event does happen and prices fall in a bigger way the banks will be more protected - because most of the mortgage lending is to people who can afford it and who really need it," he added.

The Singapore government rolled out eight rounds of property cooling measures to address concerns of a bubble forming between 2009 and mid 2013. Residential prices have surged over 60 percent since 2009.

Steps have included measures to reduce the amount home owners are able to borrow to no more than 50 percent of a property's value, along with measures to ensure home owners are only able to use 60 percent of their household income to pay their total debts - known as the Total Debt Service Ratio cap introduced in June 2013.

"The effect of slightly falling property prices will take out the froth so only people who want to buy property to use will be in the market and it will take out those in to make a quick buck," added Ng.

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The Moody's analysts added that they expect the asset quality of housing loans to deteriorate mildly this year, but still remain robust owing to "stable economic growth, low unemployment and a small rise in interest rates."

Year over year growth in housing loans in 2014 has been the lowest in almost five years, Moody's pointed out.

"Macro prudential measures should improve the quality of new housing loans in Singapore, because such loans are originated under tighter underwriting standards, and are not granted to over-leveraged borrowers," the Moody's analysts added.

However, Moody's did highlight that one risky area for banks was the existence of mortgages with loan-to-value ratios exceeding 80 percent, but acknowledged that these loans only accounted for around 5 percent of outstanding housing loans at the end of 2013.