Overleveraging happens when an individual has borrowed too much debt, be it on a home, car or credit card. We dig deeper to find out if Singaporeans are indeed living beyond their means. To do so, we need to first explain 3 key indicators: Non-Performing Loans (NPL), Credit-Card Charge-Off Rates and Pawnshop Loans.
What a mouthful.
So, let’s make it easier by taking a look at Elliot, a Singaporean man (just a story).
Elliot is 31 years old, has a loving wife, and a 1-year old daughter. He is a hardworking man, clocking in long hours in a corporate job doing research (in one of those banks at Marina Bay Financial Centre).
Non-Performing Loans (NPL)
Elliot recently received keys to his new 3-room condo in Hougang. He now has two homes, one a studio apartment in River Valley and a second home in Hougang. On top of the exorbitant fees of raising a child, his recent wedding, and the monthly allowance he gives his parents, Elliot also has (guess what) two mortgages.
However, just 2 weeks prior to both his mortgage payments, Elliot’s mother fell ill. To pay for her medical and hospitalization fees, he has to exhaust both his income and savings. On top of it, he is having difficulties renting out his studio unit. Elliot is certain, he will not be able to pay both his mortgages for the next few months.
Non-performing loans (NPL) refer to loans such as Elliot’s, whereby the borrower has not made his scheduled payment for at least 90 days. In Singapore, however, Housing NPL has fallen to less than 1% since 2000 and is at an all-time low. We take the view that most Singaporeans are able to service their home loans today.
Credit Card Charge-Off rate
In the past few years, Elliot has also taken an appreciation for the finer things in life. Perhaps due to the influence of Tim, Elliot’s best friend, he has not only begun collecting vintage wines from Bordeaux, he has also been indulging in the new trending spirit, Hibiki.
His expensive hobby, nonetheless, has become a colossal extravagance to maintain. In order to upkeep his lifestyle, on occasion, he sees his credit card as the solution. He has been known to spend beyond his monthly salary and has a growing outstanding balance on his credit card.
Credit card charge-off rate refers to the amount written off by a bank from the amount outstanding. In this case, Elliot’s bank has decided to write off his credit card debt as it has been long overdue. Whilst more Singaporeans are better able to service their housing loans, there are also increasingly more cases like Elliot’s where people are spending beyond their means. In fact, current credit card charge-off rates are higher than the peak of the Global Financial Crisis.
Feeling the heat of her husband’s surmounting financial difficulties, Elliot’s wife, Elena, has resorted to pawning her branded bags at the local pawnshop. By handing over her 7 different Chanel bags, Elena received $12K. Elena believes that their financial difficulties will be over in 2 years and she will redeem her bags then.
Since 2012, more and more Singaporeans have been redeeming items pawned and we have seen a decline in the loans issued by pawnshops. This unlike Elliot’s case paints a more positive picture of Singapore, with less people resorting to options like pawnshops and more people redeeming their items.
All in all, we see the decline in housing non-performing loans and pawnshop loans positively but we are cautious about the rising credit card charge-off rates and should not ignore signs that more people are dragging out payments. In our view, Singaporeans are not overleveraged but should rein in credit card spending.
The End….for now
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