Macro‐economic factors and foreclosure risk: evidence from mortgages in Singapore

Abstract

Foreclosure risk is a key concern to lenders of real estate mortgages. Using auction data, this study provides the first analysis of mortgage foreclosure in Singapore by examining how macro‐economic variables affect the probability of foreclosure. The foreclosure rate for properties is found to be increasing in the first five years of purchase and decreases as the holding period lengthens. The likelihood of foreclosure increases with unemployment rate, mortgage rate and expenditure and decreases with equity, dividend yield and lending volume at fourth and twentieth quarters lag. Further analysis shows considerable differences between residential and non‐residential properties. However, when the analysis on non‐residential properties is further separated into office, retail and industrial sub‐sectors, the results are relatively similar among the three sub‐sectors. This implies that banks and financial institutions should apply different underwriting standards for residential properties, mainly for owner‐occupation and non‐residential properties for the purpose of businesses and rental income.