The best start to a year since 2014 in Singaporeâ€™s property market seems to have finally lifted the spirits of investors in its banks.
A 37% jump in new home sales in January ought to be making lenders optimistic about what the Year of the Dog holds for their all-important mortgage businesses. Yet when the property data were released Wednesday, shareholders were still stuck in the past. Both Oversea-Chinese Banking Corp. and United Overseas Bank Ltd fell by more than 2% after the lenders made aggressive provisions on bad loans to the oil services industry.
Thursday saw a predictable recovery, as investors switched their gaze from the rearview mirror, as aÂ Bloomberg NewsÂ report described the banksâ€™ stepped-up allowances, to the road ahead. Housing credit accounted for 27% of OCBCâ€™s customer loans last year; building and construction made up another 15%. For the banking system as a whole, what used to be high-double-digit growth until 2013 has wallowed at below 5% year-on-year for 29 straight months. Any change in this equation would help lenders greatly.
Still, a little caution is warranted. Singaporeâ€™s housing rebound appears more robust than it is. The number of private apartments sold by developers in January was only 522, or half of the past decadeâ€™s monthly average. If the city-state maintains this pace, and Hong Kong sustains last yearâ€™s crop of 18,500, Singapore will end 2018 with a third of its arch rivalâ€™s sales.
Perhaps the much-anticipated cooling of the red-hot Hong Kong residential market will occur this year, pushing more investor demand (read, mainland Chinese money) to Singapore. Iâ€™m not holding my breath, though. Banks in Hong Kong are still serving up attractively priced fixed-rate mortgage offers to permanent residents, according to Bloomberg Intelligence analysts Patrick Wong and Francis Chan. Interest-rate shocks may lie ahead. For now, the only fear Hong Kongers have is of missing out.
Meanwhile, Singapore is far from firing on all cylinders. As I noted earlier, rents arenâ€™t improving in line with rising prices. So the buy-to-rent motivation canâ€™t be very strong. As for demand from working folks taking out mortgages to purchase family homes, thereâ€™s a natural limit to buoyancy. The big constraint is incomes. Condominium-dwelling families, the most affluent of Singaporeâ€™s resident population, earned an average S$20,491 ($15,590) last year from wages. Thatâ€™s only S$278 more than the previous year, and barely enough to absorb a third of a percentage point increase in the interest on a 2%, S$1 million mortgage.
Tax increases may also weigh on sentiment. Thereâ€™s a good chance the 7% goods and service levy will rise, with Prime Minister Lee Hsien Loong saying in his Chinese New Year message that issues relating to an aging population â€śguide the thinking behind the budgetâ€ť due on 19 February. This, too, could weigh on home-purchase sentiment. Over the past five years, the real, or inflation-adjusted, income of condo dwellers has increased only 0.9% a year, compared with 1.6% in the previous five-year period.
Should the government scale back the high stamp duties on buyers, optimismâ€”and sidelined buyersâ€”may return more strongly to the housing market. However, given Singaporeâ€™s money glut, as evident from the cityâ€™s interbank rates tracking below Libor, authorities may be hesitant to allow a tsunami of new overseas cash.
If the benchmark local-dollar interest rate continues to languish at 1.13%, mortgage loans linked to it wonâ€™t be very profitable for banks. Somewhat higher interest margins with reasonably strong volumes may be their best hope for 2018. Unless the budget has some unexpected goodies, a bumper harvest for banks from Singaporeâ€™s property market is unlikely.Â livemint