Stable household wealth behind property surge

Source : Business Times – 25 Aug 2009

Consumer spending could also recover more quickly than in previous recessions

THE net worth of Singapore households has fallen only slightly from its peak last year and is still much higher than it was at the start of this decade, according to an analysis by a senior Citigroup economist.

This resilience in household wealth is one likely reason for property sales volumes and prices having rebounded strongly in recent weeks, and could mean that consumer spending here recovers more quickly than in previous recessions.

‘The strength of the household balance sheet probably explains to some extent the rally in asset prices, in particular housing, and may set the stage for a swifter recovery in domestic spending,’ Citi economist Kit Wei Zheng said in a report yesterday.

Mr Kit estimates that Singapore households had a combined net worth of just over $900 billion as at the second quarter of this year – down only 5-6 per cent from the peak in 2008 and 70 per cent higher than in 2000, despite the slump in asset prices due to the financial crisis.

That net worth measures the value of cash, shares, property and other assets owned by households, less any liabilities such as mortgages and personal loans.

Mr Kit used data from the Monetary Authority of Singapore’s latest Financial Stability Review and past studies by the Singapore Department of Statistics that show changes in households’ balance sheets until the third quarter of 2008. He then estimated more recent values for households’ assets and debts.

While household debt had risen by 30 per cent from 2000 to the second quarter of this year, the value of household assets rose at double that pace, or some 60 per cent, over the same period, Mr Kit’s estimates show.

‘Even accounting for private home price declines in 2008 and the first quarter of this year, with HDB prices holding up and cash positions building, total household assets are up 60 per cent from 2000, and only 4.3 per cent down from the peak in Q2 2008,’ he said.

Financial asset holdings grew especially quickly – holdings of cash and deposits rose almost 70 per cent from 2000 to the peak in the third quarter of 2007, while holdings of shares and securities rose almost 150 per cent.

Given the recent rally in equity prices and the continued accumulation of cash, Mr Kit estimates that total financial assets held by Singapore households have fallen only 3.2 per cent from the Q3 2007 peak.

While the dollar value of household debt has risen in recent years, the even more rapid increase in assets means that debt is now only 16-17 per cent of total assets, compared with 20-21 per cent in 2000-01. Households’ cash holdings alone exceed total household liabilities in aggregate, although most of that cash is likely to be concentrated in higher-income households.

The lower proportion of household indebtedness compared to 2000-01 ‘can probably be explained by wage growth – and hence, financial assets – outpacing housing price growth in nine out of the past 11 years, which has probably improved home affordability as well’, Mr Kit said.

And while household debt is likely to increase further in the coming months due to recent new home purchases and the completion of homes bought under the deferred payment scheme, ‘households seem unlikely to reach previous levels of leverage any time soon’, he added.