[Analytics] Singapore’s worrying trend of homeowners defaulting on mortgages

Even as new home launches are seeing brisk demand, the number of homeowners in the Lion City defaulting on their mortgages is on the rise. Amid a rise in mortgagee sales and a slowing economy, private homes continue to be built, prompting analysts to warn of an oversupply. Kok Xinghui specially for the South China Morning Post.

Housing agent Shirley Lim took an excited couple to a recent condominium launch in Singapore. The married pair, an accountant and an engineer, snapped up a new 732 sq ft apartment in the city fringe for S$1.46 million (US$1.05 million).

The couple, both 36, whose monthly household income totals S$17,000, are what is known in Singapore as “HDB [Housing & Development Board] upgraders”. They are selling their public housing flat to move into a two-bedroom apartment in a private condominium.

They were among the thousands of people who had flocked to showrooms in the city state recently to view and buy new flats. Just last month, 276 of the 300 released units at the centrally located Avenue South Residence were bought on the opening day of sales. Prices ranged from S$982,000 for a 527 sq ft one-bedroom apartment to S$2.63 million for a 1,496 sq ft four-bedder.

Yet, not all is rosy in the housing market. The number of homeowners in the Lion City defaulting on their mortgages is on the rise.

Data from the Credit Bureau Singapore – which gets information from banks on real-estate loan defaults by individuals – shows 79 such cases this year as of July. Last year, there were 156 mortgage defaults in total, compared with 112 in 2017 – more than double the 65 cases seen in 2015.

The Credit Bureau’s data parallels the figures compiled by real-estate firm Colliers International Singapore of mortgagee sales seen by major auction houses in the city state.

In the first half of this year, there were 213 cases, compared with a total of 258 throughout last year. The numbers are more than double what they were in 2014, when there were 123 mortgagee sales. However, Colliers’ data includes relistings of homes – banks which have foreclosed on the houses but fail to sell them at one auction may take the listings off the auctioneer, then relist them with the same or another auction house.

Still, analysts say the rise in mortgagee sales is a worrying trend indicative of a stagnant economy.
“Bankruptcies are also rising, in line with the mortgagee sales, as the economy grinds to a standstill,” says Maybank economist Chua Hak Bin.

In August, Singapore downgraded its GDP growth forecast for this year to 0.0-1.0 per cent. Meanwhile, there were 1,847 bankruptcy applications from January to July this year, compared with a total of 3,079 last year, and 2,932 in 2017.

The houses on auction do not seem to be selling. In the second quarter of this year, real-estate consultancy Knight Frank saw 400 listings, including residential, commercial and industrial properties. Only three sold within that period – two flats and a shop.

The success rate based on total number of auction listings was 0.8 per cent in that quarter, and it has been declining progressively since last year – falling from 6.4 per cent in Q1 2018, to 1.4 per cent in Q1 2019, according to Knight Frank.

‘SLOW DEATH’

Defaulting on mortgages is a “slow death” process that indicates homeowners have lost grip of their finances, said Colin Tan, director of research and consultancy at Suntec Real Estate Consultants.
Foreclosure was usually a last resort for banks, which would prefer to restructure loans or allow clients to pay off just the interest for three to six months, Tan said.

“If you can pay the interest, you’re not in default. But these people can’t even service the interest,” he said. “It’s a reflection that the economy is not so good that you’re seeing more and more defaults.”
Analysts say the trend is fuelled by a confluence of factors: a slowing economy, rising unemployment, fewer buyers on the resale market, and a lack of tenants to fill properties purchased by property investors.

Professionals, managers, executives and technicians (PMETs) are a group that is increasingly bearing the brunt of retrenchments in Singapore, forming 76.7 per cent of those retrenched in Q2 2019, while for the first time since December 2017, there are more unemployed people than there are jobs available in Singapore.

Mortgagee listings are a lagging indicator of a cooling market, said Nicholas Mak, head of research and consultancy at ERA Realty. “It takes a few months for homeowners to be affected, so mortgagee sales tend to happen after the crisis has struck.”

Pointing to economic data, Suntec’s Tan said: “There was very high GDP growth in 2010 due to a very low base in 2009 when the GDP contracted by 0.6 per cent. Listings were very low in 2012 and 2013 due to moderate economic growth. Thereafter, economic growth slipped to stagnant mode from 2014 onwards.”

In a report about auction sales, Knight Frank noted that the growth in mortgagee listings from Q4 2017 to Q2 2019 was “highly correlated” to the rise in interest rates. “With residential rents largely staying the same, the higher interest rates further exerted pressure on distressed owners,” said report author Sharon Lee, head of auction and sales at Knight Frank.

Tricia Song, director and head of research at Colliers, said the 3M SIBOR interest rates, which affect mortgage amounts, “have risen steadily since 0.457 per cent in January 2015, to the latest 1.886 per cent in August 2019”.

Song said the increase in auction listings could also be due to the cooling measures imposed by the government last July, when stamp duty rates were raised and loan-to-value limits were tightened on residential property purchases – making it hard for distressed owners to find buyers quickly enough.

Mak, from ERA Realty, said these troubled homeowners could have over-leveraged themselves when the market was at its peak. “They may have bought a number of investment properties thinking they could collect rental income to sustain the mortgage once the place is completed, and later found they could not get a tenant,” he said.

That the cooling measures did work, reducing such investor speculation, is not a bad thing as it brings safety to the financial market, others say.

“[Singapore] tightened loans by using the Total Debt Servicing Ratio in 2013, and, for the third time, lowered loan limits quite a lot, so those have brought more safety to the market,” said Ku Swee Yong, CEO of real-estate brokerage firm International Property Advisor.

“The government doesn’t want exuberance in real estate because that can be one of the things that choke our banks,” Ku said. “So that’s why even though home sales continue to be brisk, loans are not necessarily growing at the same pace as the total number of homes in Singapore.”

A FULL PIPELINE

Despite a stagnant economy, private homes continue to be built in Singapore. The city state now has some 24,000 vacant units and another 44,000 in the pipeline, according to data released by the Urban Redevelopment Authority in June.

While home sales in August had slipped, down 4.8 per cent from a July peak which saw the highest home sales since November last year, some homes are still getting keen interest.

Developers launched some 4,500 uncompleted private residential units in the first half of this year, and sold about 4,200 homes in the same period.

Analysts say buyers for some of these properties may be among those who scored a windfall two years ago, when many ageing housing estates were sold to developers for redevelopment. Owners who sold their properties en bloc in 2017 netted some S$8 billion in total. “Every time there’s an en bloc exercise – let’s say 300 housing units went for collective sale – at least 150 of these households would need replacement housing,” said Tan from Suntec.

But who will buy the rest of the vacant homes?

At the moment, baby boomers form the bulk of property owners in Singapore, including for public housing. When they pass on, there will be a large supply of homes, both private and public, that cannot be absorbed by the younger population.

Ku of International Property Advisor said the situation was likely to worsen, given the country’s ageing population.

“It is going to be very risky from 2030 onwards. But oversupply has to be a concern now,” Ku said. “You cannot think that demand will always be there. Beyond a certain point, the more homes you build, the more empty they will become.”

The government has tried to address some of the issues. Cooling measures have reduced housing speculation, and the Singapore authorities in June said they would cut government land sales in the second half of this year to reduce the supply of private residential units. They also increased the income ceiling for public housing flats and widened the pool of homeowners who can qualify for public housing grants.

Still, there is a limit to what the government can do, given that Singapore’s current stagnant economy stems from trade and geopolitical issues.

“There are a lot of unpredictable leaders out there now, and events can change from month to month,” Tan said.

“You have the US-China trade war, what’s happening in the UK with Brexit, the potential of oil prices to be affected by the Iran conflict and there’s Kim Jong-un in North Korea,” he said. “Looking at the world situation, what’s the bright spark or cause for optimism?”

Chua from Maybank said: “Defaults may continue to climb if the US-China trade war escalates and companies start retrenching more aggressively.”

But Song, from Colliers, said while mortgagee listings had increased, the reserve prices of these listings were not at “fire sale” levels.

“That means the market and banks are generally not too pessimistic. Based on the developer take-up of 9,000 units per year, these 35,000 units can be absorbed in under four years,” she said.

Such listings, however, needed to be monitored since “a sharp rise in mortgagee sales listings should be a warning sign of some stress in the mortgage market”, Song said.

If the economy were to deteriorate and prices fell, Song said Colliers believed some cooling measures could be eased.

Chua suggested the authorities could cut stamp duties and give a better loan-to-value ratio for those buying at mortgagee sales.

Meanwhile, the Credit Bureau’s advice is simple: prudence.

“Singapore is a country that is constantly growing, and so is her population. Therefore, housing is constantly in demand and on the rise, which means that more and more people will take real-estate loans,” a Credit Bureau spokesperson said.

“We strongly advise all consumers to plan their finances in advance, in order to prevent defaulting on their repayments to lenders later on.”

Tags: Singapore