Growing Household Debts is Raising the Red Flags: Here’s Why

Households have amassed a larger pile of debt due to the buoyant property market in 2021 with household debt growing by 6.8% over the past year. The Monetary Authority of Singapore (MAS), as a matter of fact recently sounded the alarm – explicitly stated how most household leverage risk has effectively risen as compared with pre-Covid-19 levels. The clear stance given by MAS was to exercise caution and prudence in taking on large new commitments.
It is also worthwhile to note that whilst the economy is expected to grow through next year, the pandemic will continue to be a source of “considerable” uncertainty. This is very much exacerbated by the recent emergence of the Omicron variant. Thus, both borrowers and lenders must continue to be vigilant and prudent.

What could happen to interest rates in the future?

As the economic recovery at home and worldwide moves forward, new growth and employment risks are undoubtedly emerging. As policymakers make steadfast moves to confront these risks, market dynamics for all assets are likely to change as a result.
Property, being the best performing asset since the onset of the Covid-19 pandemic, may be impacted the most with changes such as the withdrawal of fiscal and monetary stimulus and higher interest rates.
Annually. the MAS will conduct the Financial Stability Review (FSR) which assesses the potential risks to Singapore’s financial system and its capacity to withstand potential shocks. It essentially measures the risks by using a Financial Vulnerability Index (FVI) for the Republic’s banking, corporate and household sectors.
As measured by the FVI, it clearly indicated that Singapore households are more vulnerable to financial risks today than before the onset of Covid-19. Ironically, over the past year though, the level of vulnerability has remained broadly unchanged due to Singaporeans taking up less short-term debt such as credit card debt and personal loans.
The steady household FVI over this year indicates that even as families lapped up housing loans offered at lower rates, Covid-19-related curbs held them back from racking up more charges on their credit cards as they did not spend on dining out and entertainment.

What should future homeowners take note of?

Private home prices have climbed 8.7% since the start of the pandemic in the first quarter of 2020, outpacing the 5.3% growth in Singapore’s GDP before adjusting for inflation.
New private home sales in the first 10 months of this year have surpassed full-year sales in 2018, 2019 and 2020, suggesting that more people are buying private homes.
As demonstrated by PropertyGuru’s biannual consumer sentiment study in August, despite rising home prices, 74% of Singaporeans still intend to purchase a home.
Nonetheless, MAS doesn’t think that the Singapore Property Market is “overheated” at the moment, although they are watching prices of homes like a hawk to prevent actual overheating.

Perhaps it’s time for an Annual Financial Planning Review for your New Year Resolution…?

DBS Bank has recently published a report in October, which has revelated that as property transactions and prices rise – this is outpacing Singaporean’s income causing alarm and concern.
After all, mortgage payments typically make up the largest component of a household’s monthly recurring expense.
Thus, for starters, it’s highly recommended to seek counsel from a financial adviser at your respective banks to reassess your mortgage-to-income ratios when higher interest rate scenarios become commonplace .
It’s also wise to retest your total debt servicing ratio (TDSR), mortgage servicing ratio (MSR) and loan-to-value ratio under the worst-case scenario.
That should give you an idea of what quantum of financial buffer you may need in order to service potential debt obligations should the market and economic conditions turn against your favour.
Interest rates aren’t expected to rise in the immediate future. With that said, most analysts believe major monetary authorities like the United States Federal Reserve and European Central Bank may start to raise their benchmark rates some time in the second half of 2022.
On a positive note, the results of a MAS stress test do show that household MSRs remain manageable under a conservative shocks to income and interest rates. But only on the condition that proper financial planning was done ahead of time.