Aerial view of crowded Singapore high rise apartment skyscraper buildings.

Larger group of homeowners defaulting on mortgages, indicating a worrying trend in Singapore’s property market

In September this year, 276 out of 300 newly released apartment units at the centrally located Avenue South Residence were grabbed on the opening day of sales itself. The prices for the development ranges from S$982,000 for a 527 sq ft one-bedroom apartment to S$2.63 million for a 1,496 sq ft four-bedroom apartment.

Despite witnessing a positive demand for new housing projects in Singapore, the number of homeowners who default on their mortgages in the country is increasing over the years.

According to a data released by the Credit Bureau Singapore, 79 individuals have defaulted their mortgages as of July this year compared to a total of 156 mortgage defaults for the whole of 2018. Additionally, there were 112 mortgage defaults registered in 2019, which is more than double the 65 cases recorded in 2015.

The increase in mortgage defaulters indicate a worrying trend in the city-state’s property market.

The data released by Credit Bureau matches the figure released by real-estate firm Colliers International Singapore on mortgage sales seen by major auction houses in the country.

As recorded in the first half of this year, there were 213 cases, compared to a total of 258 throughout 2018. The numbers are more than double of what they were in 2013, with only 123 mortgage sales registered.

On top of that, houses that are on auction were not selling as well. Based on a data released by real-estate consultancy Knight, it is showed that in the second quarter of 2019, only three properties – two flats and a shop – were sold out of 400 listings, which include residential, industrial and commercial properties. This translates to a success rate of only 0.8%, a decrease from 1.4% in Q1 2019 and 6.4% in Q1 2018.

As such, analysts opine that the rise in mortgagee sales is troubling as it shows a stagnant economy.

“Bankruptcies are also rising, in line with the mortgagee sales, as the economy grinds to a standstill,” said Maybank economist Chua Hak Bin to South China Morning Post (SCMP).

Two months ago, Singapore slashed its gross domestic product (GDP) growth forecast to “0.0 to 1.0%” due to the global and domestic economic environment. This is not the first time the Government cut its growth expectation for this year. It did it in May when it lowered the upper bound from 3.5%, and forecast growth of 1.5% to 2.5%. This figure already showcased a steep slowdown, against the full-year GDP growth of 3.1% marked in 2018.

Apart from that, 1,847 bankruptcy applications were recorded for only the first half of this year, compared with a total of 3.079 last year and 2,932 in 2017, SCMP reported.

Defaulting mortgages lead to slow death

As more and more homeowners default on mortgages, it could result to a “slow death” as it shows that they cannot handle their finances, said Colin Tan, director of research and consultancy at Suntect Real Estate Consultants.

Speaking to SCMP, he explained that foreclosure is a bank’s last resort as they would rather restructure loans or allow clients to just pay off the interest for three to six months.

“If you can pay the interest, you’re not in default. But these people can’t even service the interest. It’s a reflection that the economy is not so good that you’re seeing more and more defaults,” he noted.

Other analysts are pointing out that the rising trend of defaults are attributed to combination of a few factors like slowing economy, lack of tenants, rising unemployment and lesser buyers for resale property.

Based on a report about auction sales, Knight Frank asserted that the growth in mortgagee listing from Q4 2017 to Q2 2019 was “highly correlated” to the rise of interest rate.

“With residential rents largely staying the same, the higher interest rates further exerted pressure on distressed owners,” the author of the report Sharon Lee was quoted in SCMP.

On the other hand, the director and head of research at Colliers Tricia Song, noted that the increase in auction listings was due to the cooling measures introduced by the Government in July last year. The Government increased the stamp duty rates and loan-to-value limits were tightened for residential property purchases, causing difficulties for distressed owners to secure buyers fast enough.

Nicholas Mak, from ERA Realty, said that these worried homeowners might have over-leveraged themselves when the property market was doing well. “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 explained.

However, other analysts noted that the cooling measures did work as it reduced such investor speculation. This is seen as good news as it brings safety to the financial market.

“[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 to SCMP.

He added, “The government doesn’t want exuberance in real estate because that can be one of the things that choke our banks. 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.”

Although there’s an increase in sales for new property, more people are defaulting on their mortgages. Therefore, Credit Bureau warned Singaporeans to be prudent.

“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.”