27-11-2023 (SINGAPORE) Singaporeans have effectively curtailed their debt levels as soaring interest rates deterred new loans, coupled with robust income growth aiding in debt repayment, according to a report released on Nov 27 by the Monetary Authority of Singapore (MAS).
Aggregate household debt has seen a continual decline for the eighth consecutive quarter, reaching 1.2 times personal disposable income in the third quarter of 2023. This marks the lowest level in over a decade, as revealed in MAS’s Financial Stability Review for the year.
Caution among households in taking on additional loans has been attributed to the surge in interest rates since the second half of 2022. The three-month compounded Singapore Overnight Rate Average, a benchmark for loan pricing, rose to over 3.5% in the latter part of 2023, up from less than half a percent in the first half of 2022.
The most significant reduction has been observed in personal loans, constituting about a quarter of aggregate household debt. Income growth and financial buffers, including extra savings, have played a pivotal role in offsetting rising debt servicing costs, keeping non-performing loan (NPL) rates and leverage risks low.
Leverage risks, defined as borrowers’ vulnerability to increased debt relative to income, have remained in check, thanks to households’ ability to meet repayment obligations. Stress tests conducted by the central bank indicated that most borrowers refinancing into more expensive home loans could handle higher monthly repayments amid potential interest rate hikes or income losses. However, a small segment of highly leveraged borrowers may face challenges in timely loan repayment.
Despite the positive trends, MAS issued a cautionary note, advising borrowers to remain prudent given the likelihood of sustained high-interest rates. The central bank emphasized the importance of maintaining sufficient liquidity buffers to withstand potential economic shocks.
In the housing sector, which constitutes approximately three-quarters of aggregate household debt, housing loans grew at a subdued annual pace of about 1% in the third quarter. Existing borrowers paying down mortgages and a moderation in new housing loans aligned with reduced property market transaction activity contributed to this trend. Mortgage servicing has remained manageable, partly due to macroprudential measures, including recent adjustments in total debt servicing ratio limits.
The credit quality of housing loans has remained robust, with a low non-performing loan ratio of 0.2%. The number of foreclosed residential units has also remained low at 27 units in 2023.
However, the report highlighted a rise in maturity risk related to short-term borrowing, such as credit card balances. Outstanding credit card balances increased in 2023 due to the recovery of resident outbound travel and domestic retail sales. While this poses a challenge, outstanding credit card balances as a share of personal disposable income remain below their long-term average.
MAS advised credit card holders to prudently assess their financial situation before committing to large purchases financed by short-term debt. The central bank urged borrowers facing financial difficulties to approach lenders early for possible loan refinancing and repayment solutions.
Despite the economic uncertainties, MAS noted an improvement in the financial health of Singaporean households, with net wealth rising by an annual 7.6% to $2.7 trillion in the third quarter. This growth was supported by sustained growth in liquid assets and the value of residential property assets. While the personal savings rate has slightly decreased, cash and deposits continue to exceed total liabilities, showcasing overall financial resilience.
