Unease as property fuels rise in Singapore household debt

Unease as property fuels rise in household debt

Tuesday, Jul 16, 2013

Goh Eng Yeow

The Straits Times

SINGAPORE – During the global financial crisis five years ago, one local bank boss quipped that his management went through so many stress tests on the loans book that they were stressed out themselves. Well, stressful times are back. You can’t blame analysts for going into overdrive trying to suss out the various economic scenarios that could emerge here after the United States central bank flagged a possible tightening of its monetary policy.Recent history has shown that monetary tightening by the mighty Federal Reserve can be messy affairs. A recent report by Nomura shows that when the Fed reversed gears in 1994 the stock market in China – the region’s economic giant – fell an eye-popping 20 per cent while a similar move in 1999 sent it plunging 31 per cent, as the region faced a big credit squeeze.

This time, the picture is not looking pretty either.

Any Fed tightening could clash head-on with a slowdown in the mainland’s huge manufacturing sector and precipitate a region- wide economic reverse, given China’s important role as a big commodity buyer.

And with Singapore interest rates tracking the US very closely, the impact could be a double whammy for borrowers who took out huge mortgages to buy property.

While Nomura regards Singapore as medium-risk where financial crises are concerned, it flags the 50 percentage point rise in private debt over the past four years as a potential flashpoint.

Its studies have shown that in large economies such as the US, Japan, Europe and China, financial crises were often preceded by the proportion of domestic debt to gross domestic product surging by 30 percentage points or more in the previous five years.

Nomura identifies the big jump in home loans as a culprit: “To the extent that the low-interest environment in Singapore has sucked in significant investments into property, there is a concern that the high leverage is due to over-investment in property.”

So, it is just as well that the Government took steps last month to restrict a home loan applicant’s total monthly debt repayments to 60 per cent of his income. That will stop more home buyers from becoming financially overextended but what about those households that are already knee-deep in debt?

This question was posed by Citi Investment Research when it warned in a recent report that rising debt levels may put a lid on any further gains in the Singapore stock market.

Its analysis found that household debt has risen to about 77 per cent of GDP. “This is similar to levels recorded before the Asian financial crisis nearly two decades ago,” it added.

This is not exactly the most propitious comparison to make, considering we have just recently suffered our worst bout of haze in 15 years since the 1997-1998 Asian financial crisis.

Like Nomura, Citi noted that the rise in household debt levels is largely due to the big jump in the number of mortgages – accounting for 60 per cent of total household liability against 51 per cent in the first quarter of 2010.

But the good news, according to Citi, is that interest rates would need to double to depress affordability to the lows posted between 2001 and 2006, when the residential property market last experienced a wobble.

It also helps when price hikes on a per-square-foot basis are partly offset by declining unit sizes. This makes flats more affordable in absolute terms.

Citi estimates that at a mortgage rate of 1.4 per cent, a household with a monthly income of $13,500 would need to use only 20 per cent of that to meet the monthly mortgage instalment on a $1 million condo, even if it maxes out on the loan it can take.

That would go up to 25 per cent of monthly household income if mortgage rates hit 3.5 per cent – the medium-term interest rate that the Government has mandated banks to use in computing a home loan taken by the borrower.

Of course, Citi assumes that household income will stay intact. That may not hold true if the economy hits a rough patch and causes unemployment to shoot up. Affordability will drop sharply if a household with two wage earners loses one, for whatever reason.

Citi posed another question: Which segment of the population is most likely to feel threatened by an interest rate hike? “Is it the group (aged 30 to 49) with a high percentage of credit card balances being rolled over, or the peak income group (between 45 and 54 for those with diplomas, professional qualifications or degrees) which will be most vulnerable when interest rates eventually normalise?”

Hopefully, such concerns can be kept at bay as the economy hums along. Some economists are predicting that Singapore’s economy will grow at a faster pace but that assumes the rest of the region, including China, will be enjoying blue skies too.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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