Measures to cool Singapore’s housing market are likely to be eased gradually over the coming years to support demand, says Fitch Ratings. However, house prices are likely to continue falling amid oversupply and rising interest rates.

Singapore’s efforts to curb property speculation in an environment of low global interest rates have been effective. Speculative purchases have declined as, from 2009, restrictions on mortgage lending were made progressively tighter and stamp duties were raised. House prices have now fallen in each of the last three years and housing loan growth has slowed steadily since 2011. The impact contrasts with Hong Kong, where macro-prudential tightening began around the same as in Singapore, but prices have continued to rise and mortgage growth has shown no clear downward trend. House price growth has also remained rapid in New Zealand, where tightening began 2013, and Australia, where it started in 2014.

Singapore’s regulators should have room to lean against price declines by reversing macro-prudential tightening, if needed. The first, modest move in that direction was made on 10 March – sellers’ stamp duty was lowered and the holding period during which it applies was cut from four to three years, while the 60% cap on the total debt servicing ratio was removed for some mortgage equity withdrawal loans. We expect further gradual loosening over the coming years, as the authorities balance supporting the market with guarding against risks. Regulators in Hong Kong, Australia and New Zealand are still some way off loosening property market restrictions.

The latest changes are unlikely to have a significant impact on Singapore’s housing market. Macro-prudential settings are still tight, while high vacancy ratios, a slower pace of immigration, subdued economic conditions and a weakening labour market are all likely to continue weighing on prices. Local interest rates are also set to rise from their current low levels, as the US Federal Reserve tightens policy. House prices are still likely to fall by another 2%-5% over the next two years.

Singapore’s banks are well-positioned to withstand a sharper drop in property prices, partly as a result of macro-prudential tightening. Average loan-to-value ratios are low, loan-loss coverage is adequate, and capital and liquidity buffers are strong. Households also have healthy balance sheets and well-diversified assets.

The tight regulatory stance has also protected banks in Hong Kong and New Zealand against potential property-price shocks. Loan-to-value ratios in Hong Kong are among the lowest across Asia-Pacific and, like in Singapore, the authorities have the flexibility to soften a potential dip in the property market by unwinding restrictions. Banks in Australia would be more susceptible to deterioration in asset quality in the event of a sharp decline in house prices.

Source: FitchRatings