Property Vacancy Rate a Risk Worry says Singapore Central Bank

In the annual financial stability review of Singapore’s central bank, the city-state’s property investors got a yellow card.

“Before investing in property, investors should be aware that rising vacancy rates, declining rentals and impending interest rate increases mean that they may not always be able to rely on rental income to service their investment property loans,” said the review, published by the Monetary Authority of Singapore (MAS).

With the number of new homes sold rising to 1,252 in October, from 509 in September, the highest number of sales since July 2015, there has been some signs of a sales pickup in Singapore’s property market.

But according to government data, marking 12 straight quarters of declines and the largest on-quarter drop since 2009 during the global financial crisis, prices haven’t followed suit, with private residential property prices dropping 1.5 percent on-quarter in the third quarter.

While still hovering around levels last seen in 2000, amid the aftermath of the Asian Financial Crisis, vacancy rates have also remained high amid increases in housing supply, running at 8.7 percent in the third quarter, down slightly from 8.9 percent in the second quarter.

“MAS remains vigilant to the risk that demand-supply dynamics could weigh on the property market outlook amid rising vacancy rates and softer economic and labour market conditions,” it said.

But it also pointed to upside risks for the market.

“Transaction activity has held firm, perhaps buoyed by the low interest rate environment and better matching of price expectations between buyers and sellers. Resale activity has increased and take-up at some newly-launched projects has been strong,” the MAS said.

“The upside risk that current low global interest rates could spur further demand in the market cannot be discounted.”

The risk profile of housing loans has improved and financial prudence has been encouraged by the series of cooling measures implemented by the government since 2011, it noted.

With loan-to-value ratios of housing loans coming down from 77 percent in the second quarter of 2010 to 60 percent in the third quarter of this year, it expected that the banking system would be resilient to a sharp fall in property prices.

But it cautioned, “repayment risks remain for a small group of borrowers amid the weaker economic outlook. The share of mortgage loans that were more than 30 days in arrears increased to close to 1.0 percent in September 2016, up from 0.9 percent a year ago.”

With the value falling to 200 million Singapore dollars ($140.4 million) from 1.1 billion Singapore dollars in the first half of 2014, overseas property transactions by Singapore households continued to moderate in the first half of 2016, the MAS noted.

While the Philippines, Cambodia and Vietnam comprised 11 percent, properties in the U.K., Australia and Malaysia made up 80 percent of the value in 2016’s first half.

“Currency fluctuations and shifting monetary policies in foreign economies could also affect the cost of debt obligations and rental returns for overseas properties. It is important for households to make investment decisions prudently and with a longer-term perspective,” the MAS cautioned.

Since house purchases would affect retirement savings amid a swiftly aging population, the MAS was cautious about Singaporeans’ home purchases. It noted that by 2030, one in four Singaporeans will be 65 years old or older.

“There is a trade-off between housing consumption and retirement savings. The more savings are used for housing consumption, the less households will have for their retirement,” it said.

(Adapted from CNBC)

Categories: Economy & Finance

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