Can we repay our debts?

2023 is another year of high interest rates. Borrowers with outstanding debts from the banks are constantly under pressure. With four more months to go, the Federal Reserve shows no sign of decelerating the engine of rate hike.

The big question is: How much longer can individuals, SMEs, corporations and governments hold onto their high-interest debts?

The trap of “borrow cheap, buy high”

Between 2020 and 2022, expensive homes with value inflated by cheap money looked affordable under low interest rates. Many rushed to buy like bees to honey. They were tempted to take up big loans for these overpriced properties and stepped into the trap of “borrow cheap, buy high”. After years of money printing, inflation got out of control. Interest rates started to climb.

As of August 31, US 30-year fixed rate mortgage has climbed to 7.18 percent. Under the influence of the Fed, Singapore’s 3-month compounded SORA is now hovering around 3.7 percent.

The Monetary Authority of Singapore recently released Singapore’s housing loan data for the last quarter. As of June 2023, total outstanding loans for owner-occupied properties came up to $175 billion. This is a 12.9 percent jump from $155 billion since end of 2019. (In contrast, total outstanding housing loans for investment properties fell from $48 billion to $45 billion over the same period from 4th quarter of 2019 to 2nd quarter of 2023.)

Before September 29, 2022, the medium-term interest rate floor of TDSR (total debt servicing ratio) was only 3.5 percent. However, the current DBS fixed rate for private housing loans is 3.75 percent (after revising from a height of 4.25 percent early this year).

Can borrowers afford to pay their housing debts when their low-rate loan packages expire? How many borrowers have enough financial strength to switch from old low interest rate mortgages to new high interest rate loans?

In Australia, about one million homeowners have made the transition from cheap fixed rate mortgages to much more expensive variable rate loans so far. Another one million will follow suit in the next 12 months. It will be interesting if the three local banks can release similar figures for comparison.

Can borrowers pay their housing debts?

Last November, the OCBC Financial Wellness Index 2022 revealed that 2 in 5 Singaporeans are facing mortgage stress. About 40 percent of Singaporeans are struggling to pay their mortgages. Furthermore, 17 percent are able to pay monthly instalments on time but with some problems. About 14 percent sometimes miss paying on time due to financial constraints. Besides, 8 percent may be forced to sell off or downgrade due to incapability to sustain the loan.

Higher interest rates imply higher monthly instalments and a higher portion of the household budget spending on paying mortgage. This is especially stressful for lower income and low saving households when they are already struggling with higher cost of living under rising inflation.

– “Can pay or can’t pay?”, PropertySoul.com

Mortgage repayment is often the biggest monthly expense in an ordinary household, especially an lower-income household. An August DBS Bank study and the latest trends report from the CPF confirmed this fact. The report said, with housing loan rates remaining high, vulnerabilities are emerging in those earning less than $5,000 a month and those aged 59 to 77.

“Those earning less than $5,000 a month spend 50 to 60 percent of their income on mortgages. 60 percent of them have floating rate packages. In contrast, loan customers in other income tiers are allocating about 40 per cent to 45 per cent of their income growth to mortgage payments.”

– “Vulnerabilities emerging as home loan rates stay high in Singapore”, The Straits Times, 1 August 2023

As I said in my speech at the recent 2023 Mid-Year Singapore Property Review and Outlook Seminar, I was wrong to believe that Singaporeans pay their mortgage using their CPF money. On the contrary, many are using cash from their pockets to settle their housing debts every month.

Singapore has the 3rd highest debt-to-GDP ratio in the world

The Institute of International Finance (IIF) Global Debt Monitor tracks and compares indebtedness across countries.

According to the latest IIF report published end of May, among 34 major economies, Korea has the world’s highest household debt-to-GDP ratio at 102.2 percent. It is followed by Hong Kong (95.1 percent), Thailand (85.7 percent), the UK (81.6 percent), the US (73 percent) and Malaysia (66.1 percent). Singapore occupies the 10th position with household-debt-to-GDP ratio at 48.2 percent.

What about government debts?

US has the world’s highest national debt ($30.1 trillion), followed by China ($14 trillion) and Japan ($10.2 trillion). Singapore is now in the 13th position with $0.81 trillion national debt (and it was $0.32 trillion ten years ago).

Which countries can repay their national debts?

One way to measure a country’s financial health is debt-to-GDP ratio. The government is able to pay back if the total value of the goods and services a country produces exceeds the national debt. On the other hand, if the value of debt-to-GDP ratio is greater than 100 percent, it implies that the country is spending more than it is making.

IIF’s first quarter 2023 data shows that Japan has the highest debt-to-GDP ratio at 239 percent. Greece occupies the 2nd place with debt-to-GDP ratio at 197 percent. Surprisingly, Singapore has the world’s third highest debt-to-GDP ratio at 165 percent (and It was 106.7 percent ten years ago). This makes me feel bad subscribing to MAS 6-month treasury bills, with S$5.5 billion offered each round every other week. I was unintentionally adding up to Singapore’s debt.

Are housing loans good debts or bad debts?

As Rich Dad Poor Dad told us, bad debts take money out of our pocket, and good debts put money into our pocket. Bad debts are what we borrow to buy depreciating assets for consumption. Good debts are investment in assets that can generate passive income and increase net worth.

However, bad debts are often good debts gone awry.

When we tell others that we bought a home or invested in a property, we feel good because we are putting our money to good use. We think that the mortgage we borrowed from the bank is a good debt.

However, this is based on the condition that the value of the property appreciates, or can generate positive cashflow every month.

Unfortunately, owners who bought some new launches in 2012-3 are still waiting for the price to breakeven. The home they purchased for their consumption is an asset that will depreciate over time. The mortgage they are paying is now a bad debt.

Similarly, for investors who bought at some CCR new launches in 2007 or 2010, these luxury homes are still under water. If the rent cannot cover the high interest rates of the mortgages and other expenses pushed up by inflation, the housing loans of these investment properties now become bad debts.

Imagine you were a multiple property owner. All your investment properties would be affected by rising interest rates at the same time. Unfortunately, interest rates might be revised up a few times a year. But your tenants were still paying the same rent because it was fixed in the tenancy agreement.

– “What will happen to private homes with rising interest rates”, PropertySoul.com

Food for thought

Before you borrow money from the bank, you are a “customer”. After you borrow money from the bank, you become a “debtor”.

Banks will make sure that you pay high interest for your outstanding loans as long as possible. The margin between saving rate and borrowing rate ensures a profit for the banks. That’s why the banks don’t welcome early housing loan redemption and impose penalties on borrowers who do so.

Nonetheless, you should pay back all your loans as soon as possible. Because it is difficult to find any safe investment with a yield good enough to cover the high interest paid to your creditor.

The returns of fixed income investments are very high now compared with 1.5 years ago. We haven’t seen this for the last 15 years and it will likely last for some time. Grab the opportunity. Pay back all your loans and let your money benefit fully from the high interest environment.

“Mortgages are tax and financial losers. Pay them off ASAP. Think about it: If you have $100,000 that you can invest right now in a bond earning 1.5%, you’d have $1,500 in interest income over the course of a year. But if you had a $100,000 debt at a 3.2% interest that you could pay off right now, you’d save $3,200 over the course of the year in interest payments.

On balance, you’d make $1,700 with no risk by investing in debt repayment rather than investing in the bond.”

I completely agree with Kotlikoff. This is especially true when governments all over the world are raising rates to beat high inflation. In our case, we paid off the mortgage of our home four years after purchase. From then on, we would never have to worry or be upset about one day the bank would take us hostage while raising mortgage rates.

– “Buying homes under inflation? What will happen next”, PropertySoul.com

Let me end this post with a wisdom I learned over the years: We should first target to lower our personal debt level to zero. Only then we can start building our wealth. When we have wealth, we have freedom. And that freedom comes from the choices in life. With choices we can live with more dignity.

– “Can pay or can’t pay?”, PropertySoul.com

You can watch the recording of the presentations at the 2023 Mid-Year Singapore Property Review and Outlook seminar. Watch the presentations of Ku Swee Yong and Vina Ip here.

I will share with you the good deals in the current market and how to do your research in the new online course Buy The Right Condos. You can also check out other online courses.

The video 2023 Singapore Private Home Market is available for viewing here.

If you need advice on property matters or residential properties in Singapore, you can check out my one-to-one consultation service.

My book Behind The Scenes of The Property Market is available for preview and order online.