Singapore is currently Asia-Pacific number one financial hub, taking over the place of Hong Kong. Similar to Hong Kong, Singaporeans have a large amount of household debt. Household debt is a financial concept that is unnecessarily used throughout society. However, it’s one of the largest and most reliable sources for predicting one’s economy. Household debt is a concept to encapsulate the entire debt of all the people living in one household. The types of debt each dive into can be done through consumer loans, mortgage loans, vehicle loans, credit card loans, and so on.
The danger of overleveraged household debt in one nation is that it has been one of the major causes of a financial crisis. When there’s too much household debt, it would simply becomes a large burden on society. And when an individual fails to pay down their debt, it then transfers that problem towards the financial industry, which from here on out becomes a domino effect.
The Household debt of South East Asia
A huge household debt raises the concept of falling income whilst household debt increases. In recent years, however, we have seen this happen. The economic drawdown brought by the COVID-19 pandemic has made household debt skyrocket. It has gone up significantly in developed nations and even developing ones in Southeast Asia.
The riskiest nations that are plausible for this systemic risk are Thailand and Malaysia, two countries that have roughly around 89% of household debt to GDP, meaning their household debt is almost as large as their annual economic output.
Why Singapore is in a Better Financial Position
Singapore on the other hand is estimated to be close to 57%, which is still a considerable number. Indonesia and the Philippines have only 17 and 10% respectively, with such large household debt compared to their annual economic output.
This suggests that a potential crisis may happen within these three major borrowing countries, or is there something that this ratio is missing out on? Unlike Malaysian Thailand, Singapore is regarded as the world’s financial hub. Hence, the threat of a household crisis is not only going to cause major headaches for the country’s domestic economy, but it will affect the entire world.
To understand everything deeply and how household debt may or may not cause an economic risk. Let us first discuss what Singapore’s household debt is composed of.
According to the latest publicly available data from the Department of Statistics Singapore, the country has a total household sector liabilities of about $363 billion quite a massive amount. Do take note that while these liabilities do present themselves as considerably bigger. The risk truly lies in if Singaporeans can pay down the debt repayments properly, these $363 billion household liabilities are then divided into two major categories. They are mortgage and personal loans.
The mortgage loan is the largest destination for borrowings accounting for $260 billion worth. These are then sourced from financial institutions such as banks, and they can be from the government-led HDB(Housing and Development Board).
The country’s real estate price is one of the most expensive in the entire world. Living there and buying a place to live in should have made their mortgage loans twice or even thrice higher than the $260 billion that citizens have accumulated thus far. However, the reason why this society does not seem to have an enormous mortgage loan bigger, which even after being a destination for highly-priced real estate and a luxury market is because the government intervenes.
Why Singapore Real Estate Market is so Successful
The housing sector in Singapore is one of the most efficient in the entire world. As most Singaporeans know the country has enabled its citizens to have a cheaper form of housing, which is done through the HDB which subsidizes the entire housing sector.
According to data from value champion, the average price of subsidized HDB housing is around half a million dollars, whereas private and unsubsidized property costs an average of $1.7 million. In simpler terms, the government is helping the country by providing cheap real estate and had there been no government intervention and ensuring Singaporeans have a proper housing market. Their mortgage loans would be way higher than where it is right now.
Personal loan for the remaining $103 billion. And just like how the concept of HDB differs from most government policies around the world, so do Singapore’s loans.
The motor vehicle loans are quite frankly very small, estimated to be only $10 billion. This requires exactly no explanation. Since Singapore has a very tight vehicle law, and for an island nation with little land, it would not make any sense to buy a vehicle other than using it for luxury purposes. Much of personal loans come from a myriad of factors, but it also comes from investment purposes. Some Singaporeans have chosen to go into debt to fund their investment ideas.
Therefore, the idea of household debt both for a mortgage and personal loans differs widely from the rest of the world, especially when we compare the likes of Malaysia and Thailand, which are both regarded to be users of personal loans to fund their vehicles and mortgage loans to buy a house.
Finally, the most important question of this article is.
Is there is any possible economic risk in Singapore’s entire household debt sector?
Well, from what we’ve outlined so far, there seems to be a very small chance for that to happen. Here’s why!
Even after having a household debt to GDP of 57%. The truth of the matter is Singapore has a strong household wealth which is the counterpart of its debt.
Strong Household Wealth
The total household net worth of Singapore is estimated to be $2.4 trillion, a figure that is absurdly more than its household debt. If a country’s household wealth is this much compared to its debt, then it is easy to say that there is almost zero systemic risk involved.
This is a clear case showing just how rich Singapore is. And it might as well be a huge shock, since the country’s GDP is only estimated to be 533 billion Singaporean dollars, making its net worth to be almost five times more than its annual economic output. Now, after knowing that Singaporeans are worth trillions, everyone would probably want to understand how this figure adds up. Let us then take a look at what the country’s total net worth consists of.
⚠️FYI, Not everyone is Ultra-Rich⚠️
Before we do that, we should also take note that while the country’s total wealth is extraordinarily massive, there’s also a line of inequality between the ultra-rich and the average Singaporean. Therefore we cannot say that every Singaporean is of course going to be in the line of very wealthy people. Nevertheless, it still showcases how robust the country’s financial system is.
Why Singaporeans are Considered Wealthy
Most Singaporeans will definitely be able to retire based on how the government manages the country’s wealth. Household networth is composed of many factors. Here are where the money lies in Singapore.
The first is the household assets. An asset is a term that tells us how much the household earns, unlike liabilities. This shows how much a household owes these assets are divided further into banking deposits, shares and securities, life insurance, and the central Provident Fund.
For simplicity’s sake, we will just take a look at the largest ones. The first is the country’s currency and deposits in this category are approximately $566 billion. As the name suggests, it is the citizen’s money deposited in a financial institution.
The second largest is CPF(Central Provident Fund). This fund is Singapore’s compulsory comprehensive savings and pension plan. According to the laws of Singapore, this money cannot be withdrawn until certain conditions are met. This could be one of the reasons why the overall wealth of Singaporeans is high as their savings and pension plans are lost. And over the years, the accumulation would, of course, go up.
Now, these financial assets are what we can call them are composed of liquid assets. Which is another term that defines an asset that can be quickly converted into cash. These financial assets are roughly $1.6 trillion.
The other remaining factor comes from the residential property asset. Just like having a mortgage loan. One is also entitled to of course have assets in their residence. These are the remaining $1.2 trillion.
What will it be like in the Future?
Indeed, there should be no systemic risk that is foreseeable anytime shortly. We may not ever see a household debt-led crisis within Singapore. While we could not find any publicly available data on how much the average annual debt repayments. Singapore citizens have several assets compared to the total liabilities.
Singapore’s entire housing sector is robust
Well, many can argue that it is because of the country’s economy. Indeed, the country has gone from nothing to becoming a financial hub that influences its citizens to become high-income earners. However, one of the particular aspects that have downplayed this entire household sector is due to the country’s restrictions, and laws for that matter.
There are policies implemented in Singapore prescribed by the government to protect its citizen. According to the Monetary Authority of Singapore, the mortgage servicing ratio is capped at 30% of a borrower’s gross monthly income. Furthermore, the total debt servicing ratio, which includes all debt repayment obligations, should be no more than 55% of the individual’s gross monthly income. This in simpler terms suggests that the laws are of course limiting household borrowing. While many arguments support strong household spending, many people would disregard the use of too much-borrowed debt.