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Gradual home price slide a plus for banks: Moody's

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Positive outlook: Moody's expects 'the asset quality of housing loans to only deteriorate mildly but still remain robust this year and next'.

[SINGAPORE] Ratings agency Moody's said on Monday that the gradual decline in Singapore's private home price index for the third quarter is credit positive for Singapore banks as it relieves pressure on bank asset quality.

"Further price increases would have increased the risk of a real estate price bubble bursting," Moody's said in its credit outlook note on Monday, commenting on the Urban Redevelopment Authority's flash estimate released last week.

URA's Private Residential Property Price Index fell 0.6 per cent quarter on quarter in Q3 2014 - after slipping one per cent in the preceding quarter. The Q3 flash estimate index value reflected a year-on-year drop of 3.8 per cent.

In its note on Monday, Moody's said: "Despite a few isolated cases driving a small increase in problem home loans in second-quarter 2014, we expect the asset quality of housing loans to only deteriorate mildly but still remain robust this year and next owing to stable economic growth, low unemployment and a small increase in interest rates."

Moody's also noted that Singapore's property prices are easing due to regulatory moves aimed at cooling the market. Between 2009 and mid-2013, the Monetary Authority of Singapore (MAS) has implemented eight rounds of property cooling measures to address concerns that low interest rates would lead to a property price bubble.

Macroprudential measures, especially the introduction of the total debt-service ratio (TDSR) cap of 60 per cent rolled out in late-June last year, contributed to a significantly smaller increase in housing loans, which rose in June 2014 by 8 per cent from a year earlier. Year-over- year growth in housing loans in 2014 has been the lowest in almost five years.

Despite the property market cooling off, the quality of housing loans at DBS Group Holdings and Oversea-Chinese Banking Corp is stable, while that of United Overseas Bank has weakened mildly because of a few isolated problem loans, Moody's noted.

Macroprudential measures should improve the quality of new housing loans in Singapore, given that such loans are originated under tighter underwriting standards, and are not granted to overleveraged borrowers, that is, those with TDSRs exceeding 60 per cent.

"The quality of housing loans originated before June 2013 should also remain good, despite the decrease in property valuations, because the average portfolio loan-to-value ratio (LTV) was about 48 per cent in June 2014, according to MAS. Such LTVs provide the banks with large buffers, even if property prices fall significantly," Moody's commented.

Still, one risk area for banks lies in mortgages with LTVs exceeding 80 per cent. However, these loans only accounted for about 5 per cent of outstanding housing loans at the end of last year, down sharply from around 20 per cent at the end of 2009, the ratings agency added.