Exposures of Financial Institutions to Home and Real Estate Development Financing

Mr Gan Thiam Poh asked the Prime Minister (a) what are the respective exposures of financial institutions (FIs) to (i) owner-occupied home financing, (ii) non-owner occupied home financing and (iii) real estate development financing; (b) whether such exposures are excessive and healthy; (c) what is the impact on FIs for each percentage of increase in interest cost; and (d) what is the impact on FIs of a downward correction in property prices.

As of March 2013, property-related exposures accounted for 28% of banks' total outstanding non-bank loans. These exposures comprised housing loans at 17%, and loans to property developers and construction companies, at 11%. Of the housing loans granted, more than 70% were for owner-occupied residential properties.

The series of measures taken by the Government over the last three years have sought to have a cooling effect on the market. The measures, including especially the more stringent caps on loan-to-value (LTV) ratios, have also provided a buffer for banks should property prices decline. The average LTV ratio for outstanding housing loans stood at a reasonable 48% as of first quarter of 201310.

Mr Gan also asked about the impact of an increase in interest costs on financial institutions (FIs). An FI could be affected in two ways. First, its net interest margins may rise or fall, depending on whether interest income from its assets increases by more or less than the interest expense on its liabilities11.

While the impact on the FIs' net interest income may therefore be either positive or negative, there is a second important way in which banks may be adversely impacted. The overall loan quality of an FI could be impacted if borrowers facing higher interest costs encounter difficulty servicing their loans, or default on their loans. The default rate currently remains very low, at well below 1% for housing loans. However, a low default rate is to be expected during years when property prices are on the upswing.

I can assure Mr Gan that MAS conducts regular stress tests on banks and insurance companies in Singapore. The aim is to assess their ability to withstand adverse financial and economic shocks, including a sharp correction to property prices. We also assess the potential impact on Singapore's financial stability. The most recent stress test conducted last year showed that all major FIs would continue to maintain adequate capital buffers above MAS' regulatory requirements under the prescribed stress scenarios.

With a prolonged low interest rate environment globally and continued income growth in Singapore, there is persistent pressure for property prices to run ahead of economic fundamentals. If unchecked, this raises the risk of a sharp decline in the property market later on. While the quality of banks' housing loan portfolios remains strong, this could potentially deteriorate. We will continue to watch the property market closely, and take steps when necessary to avoid a bubble that could hurt borrowers and destabilise our financial system.