Banks with large property loan portfolios will face higher risks when interest rates start to rise — this as highly-leveraged households begin to have difficulty paying their mortgages.
Economists said this could lead to credit tightening by banks, and a hard landing for the property sector.
If that happens, DBS Bank said Singapore and Hong Kong will be hardest hit within Asia.
To spur growth, central banks in the developed world have kept global interest rates low for the last five years. However, that produced unintended consequences for Asia, where growth is chugging along just fine.
The access to cheap money has helped fuel a property up-cycle for the past four years. At the same time, it has also caused household debt to hit record levels.
In Singapore and Hong Kong, household debt has outpaced average household income growth.
According to a recent Goldman Sachs report, for the period from 2005 to 2012, household debt in Singapore grew by 63 per cent, outpacing the average household income growth of 57 per cent.
Irvin Seah, a senior economist with DBS Bank, said: “Among Asian economies, Singapore and Hong Kong will be the most vulnerable to an interest rates hike because of the rapid increase in leverage ratios over the last few years (in) a low interest rate environment.
“However, the property prices in these countries have run up quite significantly compared to the rest.”
In Singapore for example, the number of property loan holders has risen to almost 480,000 this year. That is up 66 per cent from five years ago, according to Credit Bureau Singapore.
The number of property loan holders with more than one property loan has jumped 78 per cent over the same period to 48,782.
Singapore’s central bank warned in July that about one in ten of borrowers could have over-leveraged on their property purchases, and the proportion of borrowers at risk could reach 10-15 per cent if mortgage rates were to rise by 3 percentage points.
Mortgage rates in Singapore currently hover at 1.5 per cent.
According to Goldman Sachs, if mortgage rates in Singapore were to rise to around 3.5 per cent from 1.5 per cent, a household looking to upgrade from a HDB flat to a private home will see mortgage payments increase by 25 per cent, and the household’s savings rate could drop to just 8 per cent of household monthly income, from 15 per cent previously.
Other economies in Asia where rising household debt is also a concern are Malaysia and Thailand.
Rajiv Biswas, Asia-Pacific chief economist at IHS, said: “We have seen rising levels of leverage in Malaysia and Thailand, and I think both the central banks in those two countries are concerned about rising household debt levels.
“Once we enter the period where the Fed begins tapering, what we expect to see is gradual increases in global interest rates.”
The US Federal Reserve is expected to hike interest rates only in 2014, but the market has been pricing in the announcement — banks for example, have raised fixed-rate loans.