Economists mixed over impact of household debt on private consumption

[SINGAPORE] Private consumption is losing steam amid rising household debts and waning home equity - something that economists can agree on. But how severe private consumption will be affected and its impact on the broader economy remains the big question.

In a report issued yesterday, Citi economist Kit Wei Zheng said that the rise in household net worth in the second quarter has masked the continued rise in debt.

"Even without tighter regulations, the likely rise in debt servicing burdens may already put the brakes on the consumer," he said. Possibly as many as 25-30 per cent of borrowers are currently having debt service ratios in excess of 40 per cent, Mr Kit estimated.

Private consumption growth, which has slowed since 2012, eased further to 1.3 per cent in the second quarter from 2 per cent in the first quarter, according to the Department of Statistics. This marked the weakest growth in five years since 2009.

Data on household balance sheets released last week also showed household net worth growing 2.7 per cent from a year ago to S$1.46 trillion in the second quarter, led mainly by the rise in financial assets such as shares and securities and life insurance.

But the recent correction in home prices wiped off 1.4 per cent of the total value in housing assets to S$820.6 billion - the first time since 2009 that residential property assets on household balance sheets turned south. Mortgages, however, went up 5.6 per cent year-on-year to S$210.8 billion in the second quarter.

Mr Kit noted that the fall in home equity - which represents the current market value of homes less any remaining mortgage payments - may have further tightened credit for consumption.

Falling home equity may continue to pose a drag on consumer spending in the coming years, he warned, adding that there has been anecdotal evidence of a proliferation of home equity loans in recent years.

But other economists posit that there is no cause for alarm at this point given the backdrop of full employment and wage inflation.

Coining the moderating private consumption as a "healthy correction", CIMB Research regional economist Song Seng Wun noted that the decline in private consumption is, to a large extent, caused by credit tightening through the total debt servicing ratio (TDSR).

"Any reining back of lending is going to affect private consumption," Mr Song said, referring to the TDSR framework that caps the total borrowings of an individual at 60 per cent of gross monthly income.

Stabilising property prices and the muted stock market have also resulted in a more subdued sentiment for private spending, he added.

While property owners may be sitting on paper losses when property prices fall, "it is a question of whether property owners can service the loan or not", Mr Song said. "It all boils down to the speed and quantum of the property price adjustments."

Selena Ling, OCBC Bank head of treasury research and strategy, concurred that a sharp fall in prices coupled with a surge in cost of financing will be painful to property owners.

"If overall unemployment rate remains low and real wage growth is positive and there is no need to liquidate the property due to financing difficulties, then the situation may be more manageable compared to the Asian financial crisis," she said.

UBS argued in a recent report, however, that while the percentage of over-stretched borrowers may appear modest even in a worst-case scenario, this should not lull us into a state of complacency.

According to the UBS analysts, the often cited estimate of 5-10 per cent of borrowers being over-stretched could rise to 10-15 per cent if mortgage rates rise by 3 percentage points.