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The not-so-harsh reality about debt
Publication Date : 20-08-2013
Debt has become the four-letter word most likely to provoke a reaction among financial observers these days, so it was understandable that pulses started racing here in Singapore a few weeks ago.
The anxiety began when several organisations warned that local households were among the most indebted in the region, relative to their incomes.
Standard Chartered, Citi and Moody's were among them, noting that low interest rates had led to high levels of debt building up, mainly to finance property buys.
Moody's even downgraded its outlook for the local banking industry from "stable" to "negative". It said the inevitable rise in interest rates would cause some borrowers to struggle to pay off loans, which would in turn affect the banks' books.
The Monetary Authority of Singapore (MAS) responded quickly, giving its assurance that the local banking system was sound.
But it, too, chimed in with warnings that 5 to 10 per cent of Singaporean mortgage holders were overstretching themselves.
As MAS managing director Ravi Menon noted last month: "When interest rates rise, long before any bank gets into trouble, some households will."
But are Singaporean households really in trouble? Various indicators suggest that the debt situation might not be so dire.
Why is it a concern now?
First, the bad news. The era of low interest rates will soon be over, and Singapore's significant home-owning population will find itself saddled with ever-increasing interest payments.
The United States Federal Reserve has indicated that it could start unwinding its bond-buying programme as soon as next month if the US economy continues to recover, with US short-term interest rates expected to rise in 2015.
Singapore's interest rates closely follow those in the US. As the bulk of home loan borrowers here are on floating rate packages, any rate rise is likely to cause a pinch.
Mortgage rates in Singapore are about 1.4 per cent now, compared with about 3.5 per cent just before the 2008 financial crisis.
The MAS has said that if mortgage rates were to rise 4 percentage points, the mortgage-servicing ratio for the average household here would climb by an estimated 13 percentage points.
This means if mortgage rates rise from 1.4 per cent now to 5.4 per cent, a household spending 50 per cent of its monthly income on mortgage repayments would end up spending 63 per cent, assuming income stays the same.
The MAS has been quick to act. In June, it introduced the Total Debt Servicing Ratio framework, which restricts borrowers from taking on home loans if their existing monthly loan repayments on all borrowings exceed 60 per cent of gross monthly income.
This followed measures put in place last year that limited the tenure for property loans, required higher minimum cash down payments, and tightened loan-to-value ratios.
The moves may seem pre-emptive, but observers say a sudden downturn in the economy or job market could quickly make now-manageable debt unaffordable.
"It's always good to think ahead, especially when we know that we are nearing an upturn in the interest rate cycle," said Liang Eng Hwa, deputy chairman of the government Parliamentary Committee for Finance.
"The property market has grown, prices have gone up very fast and there's still continued hot money flowing into property still. I think its timely that the government look at this issue now."
Liang, also an member of Parliament for Holland-Bukit Timah GRC, added that Singapore's labour market is also undergoing some major restructuring, which may add risk to the economy and hence uncertainty to the job market.
"At this stage, the economy is still growing well, employment remains high and income growth is there. We may be drawn into complacency and assume that the current situation will continue for a long while," he noted.
"But we can never say this will be the case always, so it is good to get individuals to assess for themselves - are they extending themselves too much?"
Singapore's debt is too high
Even without the spectre of rising rates, Singapore households have come under scrutiny as they have among the highest debt levels in the region.
Standard Chartered Bank says households here had borrowings worth 151 per cent of their annual income last year, second in the region only to Malaysia. Much of this was property debt, amounting to 111 per cent of household income - the highest level in the region.
Credit Bureau Singapore data also shows consumers are taking on multiple debts and borrowing larger amounts as well.
The number of property loan holders who hold other loans has soared 81 per cent in the past five years to 362,340. Put another way, 76 per cent of property loan holders now also hold other loans, up from 69 per cent in 2008.
There has also been a 78 per cent jump in the number of consumers with more than one home loan on top of other loans such as vehicle or personal loans.
Borrowers are also taking bigger loans. The average monthly credit card balance has risen 20 per cent since 2008 to $5,488 today, while the average unsecured personal loan has gone up 43 per cent in the period to S$12,678 (US$9,911).
All this is raising red flags for debt watchers like Moody's, which believes Singapore's strong asset inflation and credit growth trends could be vulnerabilities.
...but it's not that bad
Despite these big numbers, however, Singapore's debt situation may not be as alarming as it first appears. In fact, as more details emerge about the group of Singaporean households at risk of overstretching themselves, the less gloomy the debt situation looks.
Lawrence Wong, an MAS director, told Parliament last week that most potentially overstretched borrowers are in fact above-average income earners.
Of the 5 to 10 per cent of property loan holders who are spending more than 60 per cent of their monthly incomes on loan and interest repayments, most earn more than the national monthly median of S$6,000 (US$4,690), he said.
Also, more than 90 per cent of them are servicing private property loans - indicating they are better off than the average HDB flat buyer - and over 80 per cent are servicing just one mortgage.
This means that most of these households probably live in the home that they are still paying off, and few among them are likely to be investors or speculators.
So, while this group of borrowers may have a relatively high debt service burden, they also have a larger buffer in terms of incomes and assets and would be at a lower risk of default, said Wong, also acting minister for the Ministry of Culture, Community and Youth.
"While over-leverage will cause these borrowers difficulty when interest rates rise, this does not mean they will automatically default on their loans."
Another good sign is that the average mortgage has not risen much despite the surge in property prices over the past five years. The average home loan was S$345,998 (US$270,501) in May this year, up just 4 per cent from 2008.
This could be due to borrowers making larger down payments or buying smaller homes, needing smaller loan amounts.
And even though Singapore's household debt looks high now, it is not near record levels.
In fact, Wong noted that the household debt-to-income ratio - an indication of the financial health of households - is significantly lower than in the middle of the last decade. It was 2.1 times last year, meaning households had debts worth 2.1 times their incomes. This is down from the peak of 2.6 times in the middle of the last decade.
Singaporean households also have massive savings, which would help to cushion the impact of a rise in interest rates or an economic downturn.
On top of mandatory Central Provident Fund savings, bank deposits have stayed strong, rising 19 per cent in the past three years. This is roughly in tandem with the growth in bank housing loans, which have increased 18 per cent over the same period.
"While debt is rising, household assets have also appreciated in value - not just property assets, but also liquid and financial assets," noted Barclays economist Joey Chew. "And net assets are significantly positive on the whole in Singapore. The household asset to liability ratio is easily six times, and the savings rate remains one of the highest in the world."
Debt, no doubt, is a serious issue. So it comes as no surprise that the government has already begun taking steps to ensure that Singaporeans keep an eye on their debts even if it may be two years before anyone needs to worry about rising interest payments.
It is good that the alarm bells have been rung early so that Singaporeans have enough time to adjust their own spending and borrowing patterns if needed.
Still, most can breathe easy. Household debt is not yet in the danger zone and recent measures will likely ensure it stays that way.