This week we look at a question posed by Forbes contributor, Jesse Columbo, 2 years ago as he predicted the eventual bursting of a property bubble that was emerging in Singapore and a subsequent meltdown akin to the breakdown of Iceland’s banking crisis in 2008.(Check out the article above). While not all of his points are valid, the writer does make certain intriguing observations of the potential risk that Singapore suffers from as a financial center in Southeast Asia.

What happened in Iceland?

In 2008, after the sub-prime mortgage crisis and the shrinkage of short-term debt financing, the three Iceland banks – Glitner, Kaupthing Bank and Landaski – experienced severe shortages of liquidity. From the 1980s to 2000s, Iceland emerged from a small fishing state to an economy that averaged nearly 8% growth every year.


Its rise was largely a result of a property bubble boom that was fueled by massive credit expansion. From the 1980s to 2000s, as a result of the ‘Great Moderation’, the opening up of China, the world experienced long periods of stable low inflation and high GDP growth. However, there was also a dropping of long-term interest rate yield across the developed nations. In the case of America, it was largely a result of a global savings glut central in Asia while in the case of Iceland, much of the capital came from the Eurozone, especially Germany due to its close relations to the Euro. Low interest rates did not fuel productive investments but were instead concentrated in the property sector. It is quite blatantly obvious in the graph below that housing prices increased up to 300%,

Given the profitability of mortgage loans, the financial sector expanded indefinitely. Cheap credit from abroad was pumped into real-estates with banks acting as intermediates. It led to an delusional rise in wages, tax revenues and consumption that further fueled the credit boom and the housing market. The three big banks seemingly profited from this dangerous feedback loop.


They massively expanded their balance sheets and by the end of 2007, their total assets were nearly 12 times the country’s GDP. Thus, with the bursting of the bubble in US, it triggered a chain reaction of liquidity shortage and a banking crisis in Iceland. Leverages were so high among Icelandic banks to the extent that the Central Iceland Bank(CIB) could not intervene to bail them out and were forced to allow them to default on their loans. What followed was an extended period of high unemployment and low standards of living.

 Is a housing bubble emerging in Singapore?

The question to ask is thus whether a housing bubble is emerging and to what extent is the financial sector exposed to such a threat.


The residential property index(Good indicator of property prices) is showing quite a dangerous rise in property prices since 1975. The rise was especially significant after 2008 as a construction boom fueled property prices. As stated by the writer, this was largely a result of QE enacted all over the world which resulted in the fall of long-term interest rates.  


The Singapore’s interest rate(SIBOR) is close pegged to the US inter-bank funds rate. Thus with the introduction of quantitative easing, rates have hovered below 1% from 2010 to 2014.

With property prices rising nearly 3 times since the 1990s(identical to the Icelandic situation), we should thus be worried about a potential bubble formation. However, the government has made conscientious effort to deflate any further formation of a property bubble. SIBOR has crept back to 1.5% which is likely to depress private property prices.Every percentage point increase in interbank rates raises repayments on a S$1 million property by 12 per cent, assuming an 80 per cent loan-to-value ratio and a 25-year loan duration, according to Maybank Kim Eng Securities.

Moreover, unlike what the writer claims on the Fed’s decision to raise rates only in 2017, it is highly likely the Fed Reserve led by Janet Yellen will raise the Fed’s inter-bank rates by this Dec. Thus, expect the SIBOR to rise further which will depress prices significantly. Turbulent times lie ahead for the property sector but from a macro-economist perspective, the gradual fall in property rises is to be welcomed..

What are the measures taken up by the Singapore government? How effective are they? 

Though due to the different reasons, both Singapore and the eurozone countries do not have the freedom to set interest rates. Thus, macro-prudential policies play and important role in ensuring the controlled expansion of the economy. The term seems complex but just think of them as policies/laws such as capital ratios, loan requirements that aim to control credit expansion within the economy. The difference between Iceland and Singapore is simply that the Singapore government has played a more active role in controlling property prices.


Since 2009, the government has released almost 9 rounds of property curbs to control the rise of property prices, a contentious issue during the 2008 General Elections. For example:

  1. In August 2013, the government shortened the maximum loan tenure to 25 years from 30 years, and reducing the mortgage ratio limit against the borrower’s salary to 30 percent from 35 percent previously, effectively making it harder to service mortgage debts.
  2. The Total Debt Service Ratio (TDSR) framework was also introduced on 23 June 2013 by The Monetary Authority of Singapore to impact all property loans granted by financial institutions (FIs) to individuals. This will require FIs to take into consideration borrowers’ other outstanding debt obligations when granting property loans. Simply put, banks only can lend you an additional 60% of your gross monthly income but this lending must include all existing loans including – student loans, credit card debts, car loans, any other forms of loans.

This series of property curbs were placed after previous 7 curbs already enacted which shows the resolve of the Singapore government at controlling property prices. However, it is worth mentioning,and worrying that property prices only started decreasing towards the end of 2013. The evidence suggest that while macro-prudential policies can aid prices control. It will appear that interest rates tend to have a more adverse impact on property prices. The fall in prices seems to coincide with the tapering of QE in the USA beginning in 2013. While it may be possible that the curbs take time to surface, evidence suggest that local property prices may be severely affected by macroeconomic policies enacted by large countries. Domestic property prices are increasingly affected by foreign macro policies.

How exposed is our financial sector?

It is undeniable that Singapore faces risk given its big banking sector region. Singapore’s financial sector is nearly 6 times its economy and its financial services industry grew 163% from 2008 to 2012. Its growing role as a banking hub in Asia has resulted in a gradual increase in the management of assets in Southeast Asia. Many of the Southeast Asia countries are developing countries which have experienced a commodity boom and a liquidity surge as extended periods of low growth and quantitative easing has resulted in ‘hot money’ to flow excessively to the region. However, with potential interest rates rising in US, the liquidity can easily dry up the region, resulting in volatility and asset repricing due to large cross-border financing.

Moreover, according to the IMF, “70 percent of local housing loans at variable rates, most of which reset every six months, the transmission from higher interest rates to higher debt servicing costs would likely occur swiftly. According to a MAS survey, if interest rates rose to 3.5 percent (about 200 basis points above current levels), the debt servicing costs of some 5–10 percent of households would rise above 60 percent of income.” The risk is thus present that given an expected rise in inter-bank rates in the next few months, we may see an increase in mortgage defaults that will pose a risk to local banks.


However, in a 2013 report(Table 5) by IMF that looked at the sustainability of local banks, the Singapore’s banking sector is well poised to handle the turbulent times ahead. Capital to risk-weighted assets, effectively a measure of the liquidity present to handle bank runs are above 16%, well above the Basel III requirements of 8%. Right before the crisis in 2007, Iceland had a ratio of 7.4%. Moreover, non-performing loans are only at 1.1% thus there is still space for maneuver.

Yet, we must be wary of Jesse Colombo’s words where it can be seen that Construction + Housing industry constitute up to 35% of bank loans. These 2 sectors are close knitted and a spike in housing defaults will increase the systematic risk of defaults across the whole real estate industry.

Fundamentally, he financial sector was always fragile. Acting as financial intermediaries that capitalize on short-term deposits to lend out for long-term profits always suffered from a possibility of liquidity shortages. Singapore made a conscientious decision to expand its financial sector despite knowing the risk that it may pose. Given the healthy labour pool and our enhanced infrastructure, the potential benefits of acting as a financial hub in Southeast Asia is too much to be foregone. Hence, we can see the importance of the MAS and the government in extending financial oversight to ensure that banks are well-versed to tackle a crisis.

What can we expect in the near future?

Quantitative easing has proven to be effective as a monetary policy in combating liquidity pressures in a severe financial crisis and we will expect this policy tool to be possibly becoming common in the days ahead. While policymakers have emphasized on it being a ‘last resort’ policy, market expectations may force them to adjust. While a fall in interbank funds rate previously entailed a expansionary response, investors now may increasingly view QE as a norm and thus reduce the long-term effectiveness of interest rate changes. This consequence remains to be seen.

But, it is clear that the artificial creation of liquidity posed serious threats to global economies. Easy credit has created property bubbles in the US and the Eurozone before 2008. Following the crash of the financial industry in the developed world, it shifted to developing countries and fueled massive credit expansion and dangerous debts financing. With the rate hikes ahead, they are likely to now shift course once more. Such free capital especially in a world of large investment banking can easily fuel property and credit bubbles that are unsustainable and detrimental to any economy.

Singapore, given its market openness and large financial sector is prone to such liquidity risks and we must constantly ensure a group of world-class leaders who are at the forefront of preventing the creation of such credit bubbles. Do expect to see the real estate industry to experience falling housing prices over the coming of years. The government is likely to relax property curbs gradually perhaps after the fall of another 20-30% in prices to ensure the wealth of Singaporeans are maintained. There is a delicate balance that must be drawn.