Earlier this month, MAS reported that Singapore home loan growth rates were slowing, but that households were still vulnerable to high debt burden. The fact that households’ debt, currently standing at 151% of our annual income, is growing is not surprising, given that home prices are persistently increasing and home loans make up the largest proportion of our debt.
As we look at the economic climate over the past five years, property prices have clearly skyrocketed, by about 80%, whereas wages have increased by less than 15%. It shouldn’t come as a shock to anyone that Singaporeans would be increasingly less likely to be able to afford homes, and more likely to take on larger loans to buy flats that they otherwise can’t afford.
Does this mean that Singaporeans are living beyond their means? If having a shelter over our heads and demanding to be given greater security and attention by our government is considered reprehensible behavior, then yes, we’re living beyond our means.
The myriad of constraints imposed by the government on buying and selling properties have helped soften the market. But how does this actually help the average Singaporean family seeking to buy their 1st HDB flat.
The astronomical prices already in place, coupled with stagnating income levels, means the average citizen is already overleveraged for a large part of his or her life after buying their 1st flat.
In fact, Singaporeans are among the most highly leveraged population in Asia with household borrowing relative to GDP (Gross Domestic Product) hovering at about 75%.
How Interest Rate Is Going To Affect Us
We use the word “is” and not “if” because the truth is, the current low interest rate climate will not last. And yes, our population is going to be among the most vulnerable when interest rates start rising in the future.
When interest rates rises (right now home loan rates are hovering at about 1.65%), most of us will find ourselves having to fork out more for our monthly repayment. Assuming it increases to about 4% (Malaysia’s home loan rates right now are standing at 4%-6%), A household with a $400,000 loan would be paying close to $2,000 a month over a 30-year period, an increased of about $500 from existing interest rates.
What Else To Be Concerned About?
Having limited savings in our bank accounts is another dangerous side effect arising from our stagnating incomes. Most Singaporeans spend the bulk of their money repaying housing loans, leaving them with very little savings. When the economy goes through a downward cycle and property prices drop, some may find difficulty in forking out on any top-ups demanded by the banks. And we are not even talking about planning for retirement yet!
Singapore has a highly leveraged population not because her people are necessarily living “luxurious” lifestyles, but because its property prices are closely linked to the debt level of its citizens.
The government has tried to subdue property prices, yet the haphazard way in which cooling measures have been parachuted in is not even that conducive to begin with, at least for Singaporean household planning to purchase a home to stay in for the long-term.
When another financial crisis hits us or when interest rates increase, Singaporean households may find it difficult to maintain its current lifestyles, which for majority of us, may not even be that luxurious to begin with.
Original photo by Benjamin Lim. Used with permission.
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