Why Singapore's household debt woes could be overblown

Households have assets, says analyst.

According to CIMB, the market had some concerns on Singapore household debt but the analyst thinks it is overblown. 

"Our counter argument is that the Singapore households have assets," says CIMB.

Here's more from CIMB:

How deep the pockets of the Singapore households really are? Theoretically, if you have an increasing amount of wealth in cash savings, you are buffered against setbacks and you should be fine; but if an increasing proportion of household wealth is in property assets, you could have the makings of a US sub-prime crisis.

We focus on the asset side of the household balance sheet to find some answers. We compare Singapore’s total CPF (pension funds) saving balances vs. the entire amount of mortgage debt (both by banks and HDB).

This comparison is relevant because for most households, mortgages are mainly serviced by CPF savings.

Our data show that the ratio of total CPF cash vs. total mortgage debt has not fallen much from the 120% levels, even as property buying was rampant in the last few years, i.e. people have savings and are looking for something to invest.

If the pool of CPF balances rises faster than the pool of total mortgages in the system, this will also imply that there is potentially more savings chasing assets, as wealth rises. 

This comparison of pension savings vs. total mortgage debt is telling. From 1999 to 2006, when wage growth and population growth were relatively muted, total CPF balances were less than total mortgages – this meant that there were no excess savings chasing investment assets.

The situation changed starting from 2006, as population growth accelerated and inflation flared up later in the  decade.

It was no surprise that this coincided with the start of the property bull market. In fact, total CPF cash balances’ growth rate accelerated from +7.6%  CAGR pre-2007, to +15% CAGR from 2007-2013, even as we went through the Global Financial Crisis. Clearly, the asset side of the household balance sheet is strong.

We are also cognisant that comparing total CPF cash balances with total system mortgage might be a little flawed here since not all the CPF monies can be tapped to pay mortgages. Out of the total CPF savings, only the portion in the CPF-OA (Ordinary Account) can be used to pay mortgages.

Even as we adjust for this, the ratio of CPF-OA to total mortgage debt is around 48% and the figure has stayed relatively stable since 1995.

This means that the Singapore households have half of their mortgage quantum covered by CPF-OA assets that are not tapped.

Why is this so? The average mortgage rate is currently 1.5% while CPF pays a savings rate of 2.5% for monies parked in CPF-OA.

If mortgage rates were to spike for whatever reasons, there is money in the CPF-OA accounts that can be tapped to cover half of the mortgage debt.

If we add cumulative household savings (defined as CPF-OA + cash deposits) available to pay off mortgage debt, then household debts certainly look a lot less frightening vs. the headline debt-to-GDP number. 

We use another set of data points to test our hypothesis that the Singapore household balance sheet is sound, this time using the trend of households’ net cash (defined as total deposits minus total debt).

Comparing households’ liquiddeposits against debt, we note that despite all the concerns over the rising household debt-to-GDP, Singapore households actually have net savings at the moment!

Little wonder that the government had to implement one measure after another to curb rising property prices. We combined households' pension savings together with their deposit savings, and then compared the total savings against all debt – charts below paint the full picture.

Although property prices have hit record levels, the proportion of a household’s wealth in property has stayed below the 50%-mark.