The number of mortgage actions filed in Singapore courts fell to a five-year low last year despite rising interest rates.
A mortgage action, also known as a foreclosure action in some jurisdictions, is a legal process initiated by a mortgage lender or creditor when a borrower has failed to meet their mortgage payment obligations as outlined in the mortgage agreement. The purpose of a mortgage action is to seek a court order to take possession of and potentially sell the property secured by the mortgage in order to recover the outstanding debt owed by the borrower.
First and foremost, prior to the housing bubble bursting, there will usually be indication from the market one of such is a higher number of mortgage actions or foreclosure proceedings as was seen in the Sub-Prime Mortgage Crisis in 2007.
Here's how a higher mortgage action rate can be a sign of a property bubble:
Overleveraging: During a property bubble, homebuyers and investors often rush into the market, buying properties with high levels of debt (mortgages). They may believe that property values will continue to rise, allowing them to sell at a profit or refinance at favorable terms. When the bubble bursts, property values may decline, leaving these highly leveraged homeowners unable to make mortgage payments.
Declining Property Values: As property prices become inflated during a bubble, they eventually reach a point where they are no longer sustainable. When the bubble bursts, property values can decline significantly. Homeowners who purchased homes at the peak of the bubble may find themselves owing more on their mortgages than their homes are worth (negative equity), which can lead to mortgage defaults and foreclosures.
Economic Factors: A property bubble is often associated with speculation and excessive lending by financial institutions. When the bubble bursts, it can trigger broader economic challenges, such as job losses and a slowdown in consumer spending. These economic factors can contribute to higher mortgage delinquency rates and foreclosure actions.
Credit Availability: During a property bubble, lenders may relax their lending standards to accommodate the high demand for mortgages. This can result in loans being extended to borrowers who may not have the financial stability to sustain homeownership. When economic conditions worsen or property values decline, these borrowers are more likely to default on their mortgages.
Supply and Demand Dynamics: A property bubble can be characterized by an oversupply of housing due to excessive construction driven by speculation. When the bubble bursts, it can lead to an excess of available properties, putting downward pressure on prices and making it harder for homeowners to sell or refinance their homes.
What does this info tells us about the property market today and how does it translate to how we view it?
Based on the statistic provided that Singapore sees the lowest number of mortgage action filed in the past five year; strongly suggests that Singapore households are managing their debt well, even as mortgage rates have risen sharply in recent years.
One main factor would be due to the stringent cooling measures that the government have put in placed. One such cooling measures would be the Total Debt to Income Ratio (TDSR) as well as the Capped on the Loan-to-value (LTV).
Additionally, it is worthy to note noted that total household net worth have continued to rise despite a slowdown in residential asset value growth. The growth looked at 8.9% year on year to S$2.7 trillion at the end of Q2 2023. This outpaced the increase in Q2 2022, which came in at 7.5 per cent. In Q1 2023, the figure was 8.2 per cent according to the data provided by Singapore Department of Statistics.
However, It's important to note that a higher number of mortgage actions alone may not necessarily indicate a property bubble. Other economic and housing market indicators, such as rapid price appreciation, speculative behavior, excessive lending, and an unsustainable pace of construction, should be considered alongside mortgage actions to assess the overall health of a real estate market.
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