atans1

The maths of salaries when mortgage rates rise 50%

In Financial competency, Property on 28/07/2013 at 10:22 am

Up to 9,000 Singapore private property owners could be forced to sell their homes if interest rates rise in the city-state, according to an analyst report published today.

On the back of news that up to 10 percent of Singapore households may have already over-leveraged their private property purchases beyond the new 60 percent limit that was recently imposed by the Monetary Authority of Singapore (MAS), wealth management firm Religare Enterprises has cautioned its clients to avoid investing in Singapore property developers.
http://www.propertyguru.com.sg/property-management-news/2013/7/36279/analyst-9-000-troubled-units-could-be-on-market.

If debt servicing absorbs a third of your income when the rate is x% and the rate rises 50% to 1.5x%, it will absorb a half of your income. You will need a 17% pay rise just to maintain your non-debt spending and a 50% pay rise to return your debt servicing ratio to its previous level.

Think you will get this type of rise?

Taz why MAS is afraid, very afraid*.

(BTW, the MAS concern is a tight slap to the nation-building, constructive ST because on 3 July 2013, ST spun a rose tinted tale on a worrying statistic)

SINGAPORE households are among the most indebted in Asia relative to what they earn, according to a Standard Chartered report this week

Households had borrowings worth 151 per cent of their annual income last year, second in the region only to Malaysia, with debt at 182 per cent of income.

This is mainly because consumers here take on large dollops of property debt, amounting to 111 per cent of household income – the highest level in the region, Stanchart said.

On the bright side, households have a robust buffer of financial assets from high savings, so their debt levels are relatively low compared to these assets, the bank added.

“We are not concerned about household solvency in Singapore,” it said.

Thanks to low interest rates, the repayments that Singapore households make on loans are also among the lowest in the region as a share of income.

However, Stanchart warned that as rates rise, debt servicing may become more difficult for home owners who are over-leveraged, although current debt burdens are still manageable.

http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={617222427-18073-5858065485} BT, gave a more sober reading of the same report http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={617243129-18067-663266181})

Coming back to reality from STLand, StanChart is not the only one arguing that financial assets buffer S’poreans against over-leverage. While, rising household debt is a concern, it should also be viewed in context with the asset side of the balance sheet. If needed, they [borrowers] could draw down on deposits,” said Michael Wan, economist at Credit Suisse. http://www.cnbc.com/id/100882025

I suspect they are wrong for two reasons.

S’poreans may have financial assets, but some may have very tiny discretionary income to rely on for emergencies such as increasing mortgage payments. ST reported MAS as saying, One couple with a total monthly income of $6,000 were granted a new home loan of $400,000 on top of their existing debt, as they had a savings deposit of $90,000. But their total monthly loan repayments came to more than 90 per cent of their income. http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={568402008-18352-5608736872}

That $90,000 will be smashed peanuts if the equity in their property turns negative or juz drops, and the bank asks them to top-up. And what happens if, in addition, they have to pay higher rates of interest on their debts? As I wrote above, if debt servicing absorbs a third of your income when the rate is x% and the rate rises 50% to 1.5x%, it will absorb a half of your income. You will need a 17% pay rise just to maintain your non-debt spending and a 50% pay rise to return your debt servicing ratio to its previous level.

Then too, financial assets unless they are bank deposits can depreciate too as interest rates rise (example bonds, or structured products predicated on low interest rates). And if the deposits are in foreign currencies, these currencies may lose value against the S$.

The only financial assets that matter then are S$ deposits, which brings us to Moody’s comments on the local banking scene. While Moody’s is concerned. I wouldn’t pay much attention to Moody’s concerns over the banking sector. Credit agencies are now overcompensating for being super bullish over US sub-prime and bank ratings. Netizens, especially TRE posters should think ST, when they “rate” credit agencies’ BS remarks.

S’pore’ banks are among the safest in the world. In fact too safe, for investors, I”ve argued https://atans1.wordpress.com/2011/06/30/ocbc-look-after-yr-shareholders-not-yr-creditors-or-regulators/. FTR, I have Haw Par shares which owns shares in UOB https://atans1.wordpress.com/2011/09/05/haw-par-rediscovered-yet-again/

To end, let me repeat, “If debt servicing absorbs a third of your income when the rate is x% and the rate rises 50% to 1.5x%, it will absorb a half of your income. You will need a 17% pay rise just to maintain your non-debt spending and a 50% pay rise to return your debt servicing ratio to its previous level.”

Can get this kind of rise, or not?

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  1. All along it is a trap setup by the elite rulers for their subjects to enslave them for the rest of their lives.

  2. These so called economists should go and study Economics 101.
    Evidence that housing prices in Singapore are unaffordable in 2009
    http://furrybrowndog.wordpress.com/2009/12/19/evidence-that-housing-prices-in-singapore-are-unaffordable/

  3. Hi just to point out a potential error on the 50% rise. For monthly amortizing payments, a large part of it comes from paying down the principal. If interest rates rise 50%, it does not mean the monthly payment will rise by 50%. You can check this out using the PMT function in Excel

    • Sorry! I should have qualified that “Depending on the terms and conditions of yr repayment …” LOL.

      Ever heard of simplification? )))))

  4. […] 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 […]

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