Picture this: You have been planning to make your next move on your real estate investment in Singapore, and in the meantime, the banks are orchestrating a significant financial shift that can influence the way you approach real estate in Singapore.
Fact: The intervention by US Federal Reserve to tame the US inflation by increasing interest rates has been going on since March 2022. Its impact are being felt around the world, including Singapore.
In the exciting world of Singapore real estate, one has always considered various factors before deciding to own a home either as a roof over head for family or for investment purpose, or for both purposes. One important factor we need to talk about is the current interest rate hike that may or may not affect us in the long run. Yes, we might have to pay a little more each month for your mortgage installment, if you take one, but how long will such a high rate environment last. And, what is the correlation between US and Singapore hikes?
If you are reading this, you are likely someone who cares about managing money well so as to make smart decisions about your home ownership. How would you best digest situations that are evolving and navigate confidently through them? And good news, this article will help you understand it, from why interest rate changes to what choices you can have in your real estate journey. We aim to simplify the complexities and shed light on interest rates impact on the real estate market, and to present the dynamic of the market at this time, helping you make informed decisions for your property ventures.
The US central banks’ decisions on interest rate policies are significantly influenced by global economic trends and inflation concerns. When the economy is strong, rates are being increased to prevent excessive spending and inflation. Such increments directly affect borrowing costs of property investments. In its latest decision on 26 July 2023, the Federal Reserve announced another 0.25 percentage point hike to a target range of 5.25 % – 5.5%, and it means the US rates have now gone up by 5.25 percentage points over the past 18 months (see Figure 1a).
Figure 1b shows that inflation rate has been rather subdued in the recent months. The projection of FED Fund Rate to peak in 2023 and then declining afterwards in 2024 and 2025, is shown in Figure 1c.
“In our base case, their next move will likely be a cut but it will take until 2024 until we see it. That said, Powell will have no choice but to keep the threat of hikes alive, lest he encourage markets to prematurely price in cuts and re-ignite inflation expectations,” said Frances Donald, global chief economist for Manulife Investment Management, in her analysis. (Source: https://www.cnbc.com/2023/07/26/live-updates-fed-decision-july-2023.html)
Let’s look at the latest information from Monetary Authority of Singapore (MAS). The benchmark interest rate in Singapore was last recorded at 3.85%. See Figure 2a. (Source: https://tradingeconomics.com/singapore/interest-rate on 9 August 2023).
It is important to note that Singapore interest rate hikes do not follow extremely in tandem with US Fed Fund Rate, and that Singapore interest rate is lower. It is a welcoming news to us too that the inflation rate in Singapore has been tamed in the recent months, as shown in Figure 2b.
We can’t discuss interest rates without mentioning mortgage. The increase and decrease of interest rates will affect your mortgage. It is crucial to calculate how these changes could impact your budget before making a decision. Figure 3 illustrates the estimated monthly mortgage installment based on $1 million loan amount. For accurate loan amount and loan package illustration, you will need to approach your preferred banker.
Let us look closely to how the three (3) major residential property segments: HDB, Non-landed private property (condominium, etc) & Landed property, perform since the interest rate hikes in March 2022. It can be shown in Figure 4 that the confidence in the stability of real estate investment performance in Singapore has prevailed over the months, with no extreme fluctuation. It helps that Singapore government has intervened with various cooling measures. (The detail of cooling measures is not within the scope of this writing.)
It is good to note that the government has been proactive to maintain the market stability for years, notably since the introduction of TDSR, LTV and MSR in 2013. And it can be expected that the stability climate of Singapore property market to continue in the long term.
The interest rate moderation and declining inflation rate seen in Figure 1 and Figure 2 show that we are entering into a neutral to reducing interest rate market. Such interest rate environment tends to result in a higher property price index. Since 1988, the property market continued appreciating 4 out of 5 times (80% chance) after interest rates peaked. See Figure 5.
Figure 6 illustrates that the unsold supply level of private residential homes is trending at the lower range of the historical average, and it will still continue. While supply level is ramped up with more Government Land Sales (GLS) in the recent months, it is not so well supported with a cooled enbloc environment, and it is still catching up with the current demands and lurking demands (by the ready home buyers who are still very active in home searching yet currently adopt the wait and see approach).
In Figure 7, the estimated volume of completed private homes and volume of flats that will meet the MOP (Minimum Occupation Period) are shown. It can be seen that the volume of completed private homes is, consecutively in 2025-2027, expected to be still in the shortfall to counter the demand of eligible HDB upgraders, those who have fulfilled the 5 year MOP. This will pose another demand side pressure for private home prices.
After considering the above analysis of the ongoing trend in the market at the backdrop of increased interest rates, we hope that you are able to take the center stage in your real estate journey confidently. The insights and knowledge shared in this article, crafted carefully avoiding cumbersome complexity, yet deliver meaningful points, are meant to guide you towards making informed decisions.
You may put your knowledge gained above into action. There are indeed good-value properties in the market, both in new launches and resale markets. With the above information, you can engage in conversations with bankers and real estate agents from a position of good understanding. You can confidently evaluate different properties, dive in with a strategic mindset knowing the considerations of developers or resale owners, weigh the pros and cons, and negotiate price and terms that align with your property purchase goals.
For a highly satisfactory real estate journey experience, reach out to Darren Ong or Hendra Ng at CoffeeBrick.*
*Ask for more analysis regarding land cost, increased developers’ borrowing cost, rising construction cost, and the new standardized definition of floor area that lead to a reduction of profit margin for developers.
Bonus: For current homeowners whose mortgage package is within the window of refinancing, please approach your banker for advice. You may be able to save some dollars into your pocket rather than sending them to bank monthly.