Bursting of real estate bubbles to pose threats to Singapore

A sharp downturn in property prices remains to be a risk in the near future.

According to Moody’s, residential real estate values have appreciated strongly in several Asian economies, most notably Hong Kong, Singapore, Taiwan and China, since the depth of the global financial crisis in late 2008, and stayed at elevated levels in 2011. The risk of a sharp downturn in property prices in the near future remains relevant, especially in markets that experienced marked price appreciation between 2008 and 2010.

Here’s more from Moody’s:

We expect that even a substantial downturn in real estate prices in Asia would only have a limited impact on the region’s banking systems in general, despite the considerable run up in property values. This is due to the pre-emptive measures earlier introduced by various governments to limit speculative activities in their residential real estate markets, restrain consumer indebtedness, and limit banks' exposure to related lending, which effectively moderated the extent of potential price overshoots and curtailed banks’ exposures to residential real estate.

The macro-prudential measures introduced by governments in the region include: (1) caps on mortgage loan to value ratios, (2) restrictions on purchases of investment properties in Hong Kong and China, and (3) limits on banks’ maximum residential mortgage exposures in Taiwan.

Partly the result of these measures, broad leverage indicators for individuals in these economies remain relatively benign. Indeed, low LTV ratios of residential mortgages provide these banking systems with substantial cushions to absorb the impact of property value depreciations. Similarly, consumer leverage measures remain at reasonable levels.

These, and the generally low retail borrowing rates, suggest that borrowers’ overall debt burdens do not pose a threat in the short to medium term. As such, a rise in interest rates would increase monthly debt servicing costs, but is unlikely to lead to a large wave of defaults due to borrowers' large equity stakes in their properties.

Nevertheless, aside from directly affecting banks’ property-related loan portfolios, a sharp housing market downturn could also lead to a broader slowdown in the economy and a potential “second round” shock to banks.

However, we see most Asian governments as willing and capable of mitigating these knock-on impacts through initiatives supporting banks and accommodative of the economy, thanks to their strong fiscal fundamentals and the room they have to loosen macroeconomic restrictions.