The not-so-harsh reality about debt

The not-so-harsh reality about debt

SINGAPORE - 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 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 Mr 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."

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