Singapore household debt drops to lowest in over a decade

Less credit: The Helix bridge overlooking the city skyline in Singapore is a popular spot. High interest rates are discouraging the citizens of the city-state from taking new loans and healthy income growth is helping them pay off their obligations. — AFP

SINGAPORE: Singaporeans are reducing their debt levels as high interest rates discouraged them from taking new loans and healthy income growth helps them pay off their obligations, the central bank says in a report.

Aggregate household debt fell for the eighth consecutive quarter to 1.2 times personal disposable income in the third quarter of 2023, the lowest level in over a decade, the Monetary Authority of Singapore (MAS) said in its Financial Stability Review for this year.

MAS said that households have exercised caution in taking on additional loans due to the increase in interest rates since the second half of 2022, resulting in a decline in the amount of money they owe from a year ago.

Interest rates in Singapore, as measured by the three-month compounded Singapore Overnight Rate Average, which is used as a benchmark to price loans including mortgages, rose to more than 3.5% in the second half of 2023, from less than half a percent in the first half of 2022.

The biggest drop has been in personal loans, which represent about a quarter of the aggregate household debt.

Income growth and financial buffers – in the form of extra savings – also cushioned rising debt servicing costs for households and helped to keep non-performing loan (NPL) rates and leverage risks low.

Leverage risks are defined as the vulnerability of borrowers to an increase in debt relative to income, putting them at risk of not being able to meet their repayment obligations.

To ascertain the financial resilience of households, the central bank also carried out stress tests on how borrowers would fare in drastic economic scenarios.

Those tests showed that most borrowers refinancing into more expensive home loans would be able to handle higher monthly repayments should there be further hikes in interest rates or income losses.

Still, a small segment of highly leveraged borrowers could fail to repay their loans on time.

Hence, the central bank warned that borrowers should continue to exercise caution as interest rates are likely to remain high.

“Borrowers should remain prudent and continue to maintain sufficient liquidity buffers to withstand potential shocks,” MAS said.

Its advice comes as nominal wage gains are expected to moderate amid slower growth and global macroeconomic uncertainties in the quarters ahead.

“Borrowers should thus remain prudent and maintain their financial buffers where they can to protect against potential shocks,” it added.

Meanwhile, housing loans, which make up about three-quarters of aggregate household debt, grew at a subdued annual pace of about 1% in the third quarter as some existing borrowers paid down their mortgages.

At the same time, new housing loans have also moderated in tandem with reduced transaction activity in the property market, MAS said.

The central bank said mortgage servicing has remained manageable partly because of macroprudential measures, such as the recent adjustments in total debt servicing ratio limits that ensured continued financial prudence among borrowers in their property purchases.

Existing housing loan-to-value (LTV) measures have also helped in building up significant buffers for banks and borrowers against falling property valuations.

As at the third quarter of 2023, the average LTV ratio has remained low at 41%, MAS noted.

“This reflects the limits imposed on the loan amount for property purchases, even as households continued to pay down their existing mortgage loans,” it said.

Highlighting the resilience of housing loans’ credit quality, MAS said the housing NPL ratio has stayed low at 0.2%. Also, mortgage loans in arrears have been broadly stable, inching up slightly from 0.4% in the second quarter of 2022 to 0.5% in the third quarter of 2023.

The number of foreclosed residential units has also remained low at 27 units thus far in 2023.

Even as higher income and extra savings have eased leverage risk, the central bank said maturity risk, which refers to payments due on more expensive short-term borrowing such as on credit cards, has risen.

“Households’ short-term debt, as proxied by outstanding credit card balances, increased further in 2023... underpinned by the continued recovery of resident outbound travel and domestic retail sales, alongside the resumption of large-scale entertainment events in Singapore and the region,” MAS said.

Still, outstanding credit card balances as a share of personal disposable income remain below their long-term average, it added. — The Straits Times/ANN

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