In the last few days, an article published in Forbes magazine on the housing bubble in Singapore and its comparison to the bubble in Iceland has circulated widely. In the new millennium, Iceland banks had grown far bigger than the economy of Iceland itself. When the global crisis struck, property values plunged and Icelandic banks collapsed. So did the country’s economy. Hence, by putting Iceland in the title, the author succeeded in attracting attention.

On some counts, the author is on a strong wicket. Singapore has seen explosive growth both in the prices of homes (individual houses and apartments) and in housing finance. Of course, they go together. Singapore’s gross domestic product (GDP) deflator for dwellings (simply put, the price index for residential properties used in GDP calculations) had doubled in the six years up to 2012, implying an annual compounded growth rate of around 12%. In contrast, housing loans have not gone up at the same rate.

Singapore’s property bubble and credit bubble could be traced to the rising importance of banking, finance and insurance to the Singapore economy. This sector’s contribution to GDP has stagnated at around 10% but its growing importance is evident in other dimensions. The stock of foreign direct investment (FDI) into Singapore held by firms in the finance and insurance sector rose from around 121.7 billion Singapore dollars (SGD) in 2005 to SGD 289.7 billion in 2011. The sector’s share in overall FDI in Singapore rose to 43% in 2011 from 37.6% in 2005. The financial sector also saw the fastest gains in employment and compensation compared with all other sectors. In nominal terms, the growth in compensation in the Singapore financial sector averaged 12% a year between 2003 and 2012.

There is a symbiotic relationship between growth in compensation in the financial sector and the sector’s pace and practice of asset gathering. They reinforce each other. Overall loans and advances by Singapore banks as a percentage of GDP rose to around 120 in 2012. The figure stood at 74% in 2006. That is an increase of 46 percentage points. According to research by Fitch Ratings, credit crises have befallen countries that saw such a substantial rise in the credit to GDP ratio in a short span of time. More worryingly, Singapore’s maximum two-year rise in the ratio occurred in 2011 and in 2012 with the ratio jumping from just over 91% of GDP in 2010 to a little over 120% in just two years. That record is bettered only by Korea and China. As for loans to the real estate sector (to developers and to consumers), the ratio went up from 41% in 2007 to over 66% in 2012. Clearly, this means that both banks’ assets and the private sector loan liabilities have become more sensitive to rise in interest rates.

Singapore’s inflation used to be much lower than the US. It is no longer the case since 2008. Singapore’s consumer price inflation rate has moved ahead of the US inflation rate and has remained there. This has adverse implications for interest rates in the island if the market moves to price in a higher inflation risk premium.

Now that we have presented the developments leading up to 2013, we have to mention the actions taken by the Monetary Authority of Singapore (MAS) since then. In the last one year or slightly more, MAS has steadily expanded the range of administrative measures to cool the speculative fervour in the Singapore property market. Buyers’ stamp duty has been instituted and the duty rates go up for second and third properties. Sellers’ stamp duty too has gone up. Banks have strict instructions and ceilings on the maximum amount of loans that they can disburse against property values. Monthly equated loan instalments also cannot exceed a fixed percentage of borrowers’ monthly income. Cumulatively, these could be deemed the equivalent of several hundred basis points of interest rate increase, as a good friend pointed out.

These measures have begun to deliver. Housing transactions fell 80% in December over a year ago. Annualized monthly growth in credit to developers and consumers has dropped to around 2%. Soon they may enter contraction zone. The residential property price index posted its first decline in the fourth quarter of 2013 since the global crisis of 2008. Largely, the risk of rising interest rates in the US in 2014 must be in the price in Singapore assets since it has been widely flagged. In fact, it is likely that the risk of higher rates in the US will turn out to be the proverbial dog that did not bark. The real risk will always be unanticipated. It could be a large and accelerated decline in US stocks leading to a precipitous decline in global risk appetite and interbank flows. It could be a banking and financial crisis in China that has regional and global ripple effects.

In the final analysis, MAS and the Singapore government have done their part and, more importantly, they are still at it. Of course, in hindsight, they might wish that they had acted sometime sooner, say, in 2011. But, real time decisions are harder.

V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at To read V. Anantha Nageswaran’s previous columns, go to

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