In its annual Financial Stability Assessment report on Friday (25 November), the Monetary Authority of Singapore (MAS) reminded our businesses, households and financial institutions that they need to be well prepared for a more challenging macro-financial environment.

The report noted that while most of our households appear to be resilient to income and interest rate shocks, and the ratio of non-performing mortgages is likely to remain low, "some households appear more vulnerable to adverse shocks and need to be cautious about taking on additional debt in the current environment".

The HKMA's Financial Vulnerability Index, a measure of financial stability, showed that local households were more vulnerable overall in the third quarter than last year, with Maturity Risk increasing and Leverage Risk also rising slightly.

Our household debt continued to grow, although year-on-year growth has slowed to 3.1 per cent in the third quarter of this year after peaking at 7.4 per cent in the fourth quarter of 2021, mainly due to the cooling of real estate in December last year, which slowed the growth of housing demand and mortgage lending.

Mortgages were the main factor driving up household debt, accounting for 2.7 percentage points of the 3.1 per cent increase.

The HKMA said, "Outstanding mortgages have continued to grow since 2021, although they have remained broadly stable in recent months since the total debt service ratio (TDSR) threshold was raised late last year."

Despite the sharp rise in mortgage rates since the start of the year, private property prices have continued to move higher, with an average year-on-year increase of 2.7 per cent over the past three quarters, slightly higher than last year's average increase of 2.6 per cent. The HKMA said this reflected solid underlying demand, as well as strong purchasing power fuelled by rising wages.

In terms of transaction volumes, private property transactions fell in the first quarter of the year following the introduction of cooling measures in December last year, although they rebounded in subsequent quarters.

As of the third quarter, the average quarterly private property transaction volume for the year was down 28 per cent, but 10 per cent higher than before the epidemic (2017 to 2019).

The HKMA said rising interest rates and heightened downside risks to global economic growth in the next few quarters may have affected sentiment in the property market.

Local interest rates have risen sharply since the start of the year, with the Singapore dollar overnight rate (SORA) soaring from near zero to 2.6 per cent by mid-November, and fixed and floating mortgage packages rising to levels of 3.5 to 4.5 per cent over the same period.

The HKMA said SORA-linked mortgage rates are likely to rise further over the next few months and then stabilise, but will remain significantly higher than the low rates of the past decade. This means households face higher loan repayments, and the larger the loan, the greater the increase.

The Bureau's stress test results show that most households would be able to continue paying their debts even with an immediate 400 basis point increase in interest rates and a 10 per cent reduction in income.

However, households with larger outstanding mortgages (usually new borrowers) tend to have higher levels of leverage and are at greater risk of cash flow constraints, and the risk to these households is even higher if they have lower incomes and limited financial buffers.

The HKMA said, "Rising interest rates and increased costs in a context of uncertain economic growth prospects could put some households under increasing pressure and potentially struggle to service their mortgage debt. Households should therefore be prudent in handling their finances, including mortgages, to cushion against tighter financial conditions in the coming months."