Impact of rising US interest rates to property investments in Singapore

By Istvan Loh

The US economy is doing well and the Federal Reserve has raised interest rates for the first time in almost a decade in a bid to tighten money supply.

While the rate increase was small at 0.25% per year and widely anticipated, it is highly likely that more increases will follow. As the liquidity in the US financial market is reduced, there could be far-reaching implications on the global economy.

Singapore property investments will also be impacted by the Fed’s new policy as interest rates here mirror the increase in the US.

Most housing loans in Singapore are pegged to SOR or SIBOR

The Singapore Interbank Offer Rate (SIBOR) is set daily by the Association of Banks in Singapore. As its name implies, it is the rate at which banks lend to each other in Singapore dollars.

The SIBOR is also used by banks to set housing loan rates. As it is impractical to vary housing loan rates on a daily basis it has become an established for banks to set the monthly rate using the SIBOR rate on the first business day of the month.

The Swap Offer Rate (SOR) is the US dollar version of SIBOR. As it is a currency-linked rate, it is more volatile than SIBOR. But both these rates trend in the same direction.

US dollar will strengthen

The Fed’s tight money policy will lead to an appreciation in the dollar as global financial markets find that there is a greater return to be made by moving their investments to the US.

A stronger American dollar will mean a depreciation in SGD with both factors contributing to the rise in interest rates.

Floating rate mortgages will become more expensive

A large number of investors opt to peg their mortgage rates to SIBOR or SOR. This gives them the advantage of reducing their repayment amount in the event that interest rates fall. Conversely, as rates rise, their liability correspondingly increases.

The stated intention of the Fed of continuing with interest rate hikes will result in a rise in SOR. As this happens and SIBOR also increases, investors who had linked their mortgage repayments to these benchmark rates will see an escalation in their monthly repayments.

Singapore property values, which are already flat, will be further impacted as mortgage rates increase resulting in lower demand.

Fed rate hike will affect Singapore’s economy

Property rates generally rise when the economy is doing well. Currently, investors are taking a wait-and-watch approach to acquiring property as several business sectors in Singapore are not doing well.

The oil industry and many companies that provide support to it are severely affected by falling oil prices. Practically all commodities are going through a rough patch.

The manufacturing sector in Singapore has also been in decline for over a year.

Singapore’s economy has suffered as China, with whom the country has strong linkages, has slowed down.

All these factors have served to depress market sentiment in the country.

On top of this, the Fed rate hike and the consequent appreciation of the US dollar will lead to an increase in interest rates in Singapore.

At a time when the local economy needs a stimulus, it will be negatively affected by an increase in interest rates.

Property prices will fall with rising interest rates

A commonly accepted method for calculating the fair market value of real estate is to discount the cash flows from rentals. If a higher discount rate is used, a lower capital value would result.

As interest rates rise, utilising the discounted cash flow method for arriving at the value of a property would require a higher rate to be used. This would lead to a fall in property prices.

Investors with floating rate mortgages will need to reassess their strategy

Many Singaporeans took loans to buy property in 2009 when SIBOR was at an all-time low. The most conservative ones pegged their loans to the three-month (3M) SIBOR while those with a greater risk appetite linked their loans to the 1M SIBOR or even the SOR.

The shorter tenure SIBOR mortgage packages gave investors the advantage of frequent interest rate reductions in a falling interest rate market. Now that the situation has changed, these investors will have to bear the brunt of repeated hikes.

SOR has much greater volatility than SIBOR as it is based on the expected forward exchange rate between US dollars and Singapore dollars.

Property buyers who linked their mortgages to SOR can now expect to face even greater repayment increases than those tied to SIBOR.

Property investors need to consider the interest rate scenario

A good rule of thumb to follow is to select longer tenures for mortgages when interest rates are rising and shorter tenures when rates are falling. 

This strategy will give investors the ability to take the greatest advantage of interest rate swings.

Those who are already locked into variable rate mortgages should consider moving to fixed-rate loans. This shift may come at a cost but could prove to be a sound decision if rates keep rising.

As the US Fed has made it clear that it will continue to tighten the money supply, it is safe to assume that both SIBOR and SOR will follow an upward trajectory in the near future.

Short-term outlook for the property market

Over the last two years, Singapore’s property prices have fallen by about 8%. Now the real estate market will face further headwinds as rising interest rates and a slowing economy combine to depress investor sentiment.

Unfortunately, the Fed has started implementing an interest rate hike at a juncture when Singapore’s property market needs to be revitalised.

In the near-term property prices are likely to stay depressed. The government may intervene and reduce Additional Buyers Stamp Duty (ABSD) or introduce other measures to provide a stimulus.

But until there are any concrete developments, either on the economic front or in interest rates, the real estate market will remain sluggish.

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