Where is the excessive borrowing?

This is a 2-part article that looks at the macro picture of home mortgages in Singapore and questions whether the fear over-borrowing and rising interest rates are overplayed. Part 1 reviews the Singapore household debt that has come under some bad press recently. Part 2 looks at the overall LTV (loan-to-value ratio) of Singapore’s private residential market.

“Tormenting tapers”, “tapering jitters”, “QE3 tapering” and many other terms have been used to describe the potential reduction of the massive money printing and bond purchase by the US government in recent years. Chairman of US Federal Reserve Mr Ben Bernanke stated in May 2013 that if there is sustained confidence and improvement in the US economy, the pace of purchasing bonds can be stepped down.

There followed immediately a slew of almost-doomsday predictions about rising interest rates and a big selling of bonds which, lo-and-behold, increased bond yields and interest rates! New bond issues in the past 4 months had to offer higher coupons at IPO in order to ensure full subscription.

The panic bond dumping seemed to indicate that the word “tapering” meant a reversal or a complete halt to the bond buying program.

It is neither. The current consensus is for the US Fed to step down its bond purchase activities from a colossal US$85 billion per month (US$1 trillion dollars a year!) to a mammoth US$70 billion a month (still close to US$1 trillion dollars a year!). Medication is still required, but the gigantic dosage is trimmed by 20 per cent because the patient is somewhat less sick.

No one ever promised that quantitative easing will last till eternity. It is well known that the bond buying program has to stop entirely some time in future. How soon and how fast depends on the pace of the economic recovery in the USA and the implementation has to be a measured process such as not to create economic shocks and market disruptions. Based on recent weak employment data, it seems that the answers to “how soon” and “how fast” are “later rather than sooner” and “over a period of more than a year to slow down bond purchases to a complete stop”. And that is just for QE3 – bond purchases. After that there is still QE2 and then QE1, to be unwound, by stopping the excessive money printing.

Just last week, with 9 votes for and 1 vote against, the US Fed ruled that the economy is too weak for them to slow down the bond purchases. Immediately a new term popped up: “taper hoax”. I hope we have woken up to reality: near-zero interest rates may last well into 2016 as the US struggles along.

The Singapore Household Debt

Amidst the fear around tapering, the Singapore brand suffered some collateral damage as several international banks’ economists put out papers pointing to our worrisome “household debt to GDP” ratio. One major ratings agency also issued a warning about the expanding mortgage-loan books of Singapore’s banks.

A common worry pointed out by the economists: Singapore’s household debt to GDP ratio is at 75% in 2Q2013, up from 63% in 1Q2010. I am puzzled and I wonder about the relevance of this “household debt to GDP” ratio: why compare household liabilities (which are accumulated over time by family units in Singapore) to the total market value of Singapore’s goods and services produced (which measures Singapore’s annual economic output, in large contributed by MNCs, TLCs and Government)?

The household debt to GDP ratio is irrelevant. The criticisms against Singapore’s household finances are misleading.

During the period of 2Q2013 versus 1Q2010, household debt increased by 41%: mortgages increased 40% while personal loans (which include car loans, credit/charge cards, etc) increased by 45%. Mortgages accounted for 74% of household debt in 2Q2013 so mortgages take the blame. Extrapolate that to the doomsday predictions about housing supply and we have criticisms that Singapore’s economic foundations might be shaken.

What They Did Not Say

Allow me to paint the other half of the household balance sheet picture (see Table 1). For the period under consideration, while total household debt grew by 41%, or $78 billion, total household assets grew by $420 billion (+33%) of which “Currency and Deposits” grew by $77 billion (+33%) and CPF funds grew by $70 billion (+41%).

As for the residential segment, mortgages increased $57 billion (+40%) while the value of residential assets increased $229 billion (+38%). Asset value grew 4 times that of liabilities. Ask the accountants if this is healthy for household balance sheets.

[Note: there is a gap in the data because residential asset values refer to households in Singapore but the residential loans include loans on condominiums owned by foreigners and Singaporeans overseas who are not considered a household unit.]

There is a base effect that we should not forget about when we analyse statistics. Percentages can distort the truth unless we show the absolute figures that lead to the percentage changes.

The nationwide household balance sheet is solid. Net worth increased $342 billion (+32%) during the 3 years of 2Q2013 and 1Q2010.

However, fingers are still stuck pointing at the risks of a housing market collapse. Residential asset values may drop faster than mortgage liabilities due to rising interest rates, reduced rental demand and the oversupply of housing units. However, we should not forget that in a downturn, when property values fall due to lower transacted prices, each property sold wipes out the mortgage on that property. So it is not merely a drop in assets without a corresponding drop in liabilities.

Alarm Bells Are Ringing: ABSD! TDSR!

The Monetary Authority of Singapore (MAS) sounded alarm bells about certain households over-stretching their finances and taking on high mortgages. To curb the herd mentality in property investments and to instill further prudence in taking on mortgages, the MAS imposed further restrictions on property loans with the Total Debt Servicing Ratio (TDSR) framework.

Commentators and analysts also chimed in about household debt and the impending interest rate hikes. Families might not be able to service their loans if interest rates increased.

I tried hard to find out what this “impending increase” might lead interest rates to. But I failed to find forecasts for interest rates beyond end-2014, the highest of which has 3-month SIBOR at below 1.00% p.a.. MAS, in sharing its concerns about the possibility of increased interest rates, does not share what its forecast for the 3-month SIBOR might be in 2014, in 2015 nor in 2016.

I often ask people who are worried about rising interest rates “what is your forecast for the 3-month SIBOR?” Some say that interest rates may triple or quadruple in the next 2 years. That still brings 3-month SIBOR to a mere 1.6% p.a. With unemployment hovering at 2%, the risks of families defaulting on their mortgages, which may by then be priced at around 2.5-3.0% p.a., remain low.

Let Mortgage Rates Speak

In looking at the forward risks of rising interest rates (how soon and how high) we can tell the banks’ views by the fixed rate mortgages they offer. Even before last week’s admittance of the taper hoax, when there was consensus around interest rates rising in early 2015, one bank offered a 5-year fixed rate home mortgage at 2.18% p.a. on up to half of the loan. That means one will be paying 2.18% right up till Sept 2018. A few banks offer 3-year fixed rate home loans of between 1.55% to 1.70% p.a. in the third year. If we signed up on these loan packages today, we would be paying 1.70% interest in the third year i.e. Sept 2015 till Sept 2016. Most mortgage banks offer 2-year fixed rate packages priced around 1.7% p.a. in the second year, i.e. till end of 2015.

Source: Surveys of various banks done in end August 2013, Century 21 Singapore

Banks are in the business of making money. These fixed rate loans are clear indications that the lending banks are confident that their future costs of funds will be lower that these loan rates in the years till 2018. Or could these banks’ treasuries be ignorant about the worrisome rise in interest rates next year?

On one hand some banks’ economists express their concerns about the impact of rising interest rates on high household debt. On the other hand several lending banks offer fixed rate packages that indicate their outlook on interest rates remain low at least up till late 2016.

Is there excessive borrowing?

I hope to put to rest the irrelevant concerns about rising household debt versus GDP growth. Singapore’s household net worth remains on solid growth and a steep increase in interest rates is not likely to happen in the next 3 years.

While the absolute household debt has increased, contributed in large by mortgages, the numbers merely capture household sector numbers. The Dept of Statistics defines the household as “all household institutional units, including Singapore citizens, PRs, foreigners and unincorporated enterprises (e.g. sole proprietorships), which engage in economic activities in Singapore for at least a year”.

Residential properties owned by investors that are not in Singapore do not get included in the residential asset value (although loans are included in the total liabilities – Table 1). Residential asset values and their associated liabilities presented in the household sector survey do not represent the total net worth (asset value minus outstanding mortgages) of our residential segment.

The next part of this article explores the total private residential market value versus the outstanding mortgages. Hold your thoughts. You might be surprised by the excessive borrowings.

Source: Ku Swee Yong C21

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

Where is the excessive borrowing?

Comments

Leave your comment