Deteriorating household net worth could push Singapore into a credit meltdown: UBS

The current environment is "unsustainably benign".

Singapore’s economy looks rosy on the outside, with household net worth estimated to be four times the GDP and assets far surpassing liabilities. But probe a little deeper and an inconvenient truth comes to the surface: the country could well be headed to a disastrous economic meltdown.

A report by UBS warns that Singapore’s healthy household balance sheets are a source of risk rather than resilience. The report notes that high household net worth did little to prevent the US economic crisis of 2008, and Singapore is already experiencing a decline in resident property prices and household residential property wealth.

“We do not believe household balance sheets are a source of resilience. Instead we see them as the source of weakness. Even before the higher interest rates have become a reality, the maturing credit cycle is depressing the elevated value of assets on household balance sheets,” noted UBS economist Edward Teather.

Rising rates will likely provoke a shakeout in the labour market –via corporate indebtedness – further weakening households’ demand for risky assets and depressing prices.This will cause household net worth to deteriorate, which in turn will crimp domestic demand, raise concerns of a vicious cycle and provoke a policy response.

Singapore is already experiencing a slowdown in domestic credit growth, and the economy could well be trapped in a ‘vicious’ feedback loop between credit, employment, property prices, household net worth and domestic demand.

The domestic economy is also exposed to pockets of risk--the Monetary Authority of singapore estimates that 5-10% of borrowers have a monthly debt servicing burden greater than 60% and that the percentage of overly-indebted households could increase to 10-15% should  mortgage rates rise by 300 basis points.  

“We think the current environment is unsustainably benign.We are not saying Singapore’s housing market looks like that of the US in 2007, just that pockets of risk matter. The point we are making is that this will hurt household balance sheets – which have been bloated by high house prices and leverage. Moreover, that deterioration will in turn lead to a depressing effect on the credit cycle, employment and domestic spending. Household balance sheets are a source of economic risk, not resilience.” added Teather.