More families could face difficulty with home loan payments though overall household debt fell: MAS

SINGAPORE – More families in Singapore could face difficulties making their home loan payments in the coming months, warned the Monetary Authority of Singapore (MAS) on Tuesday (Dec 1).

The unsecured credit card charge-off rate, a leading indicator for the credit quality of housing loans, crept up in the third quarter of the year, suggesting that more households could face difficulties in their housing payments, MAS said in its annual Financial Stability Review.

The credit card charge-off rate measures bad debt written off during the year against the average rollover balance. It rose from 5.9 per cent to 9.1 per cent between the third quarter of last year and the same period this year.

This suggests that borrowers may have problems servicing their home loans down the road, as people in initial periods of financial distress are likely to miss payments for credit card bills first, MAS noted.

As household resilience is ultimately tied to employment and income, credit risk for housing loans could increase further in the period ahead if the economic downturn persists, it added.

“Close monitoring of housing loans from more vulnerable households is necessary in the upcoming months given the expectation that the labour market recovery will be protracted,” MAS said.

Overall, aggregate household debt fell, as the growth in outstanding home loans also declined, in line with slower market activity following the cooling measures in July 2018.

Housing loans account for about three-quarters of total household debt, and are a key determinant of overall household financial vulnerability, MAS noted.

“At the same time, household debt as a percentage of income, which has remained stable… since 2015, is expected to increase slightly in the near term as accumulated labour market slack weighs on wages,” it said.

New home loans also remained stable, despite the suspension of showflat viewings during the circuit breaker period and safe management measures that limited subsequent footfall.

“These trends reflect the relatively stable transaction volumes and strong refinancing activity as borrowers took advantage of lower interest rates on their mortgages,” MAS noted.

Credit card debt, as a percentage of gross domestic product (GDP), also moderated in the second and third quarters, MAS said, as households pulled back on spending and consumption due to the circuit breaker period and safe management measures.

The lower figures could also reflect the relief measures offered by banks, such as allowing borrowers to convert such debt to term loans at lower interest rates.

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But MAS cautioned that prudence is vital, as some households will continue to face challenges into 2021.

Families with members employed in sectors that are severely impacted by the pandemic will also be more vulnerable.

“Labour market slack rose during the Covid-19 pandemic and domestic labour market conditions are likely to improve only gradually next year,” it said, adding that the increased resident unemployment rate is expected to weigh on wage growth, which will worsen household debt servicing ability into 2021.

“Given that an uncertain economic outlook could have dampening effects on income streams, households should remain prudent in taking up new debt and in committing to property purchases,” it said.

“Whenever possible, they should continue servicing or consolidating their existing obligations, which would be useful to enhance resilience against any unexpected shocks.”

They should also assess their financial positions and seek early assistance if they face repayment difficulties,” MAS added.

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