What will be the impact of a Sibor rate hike on homeowners and businesses?By Paul Ho
There is much talk about the Federal reserve rate hike. However what is the likely impact on Home loans as well as on Businesses?
The Federal reserve has raised rates 3 times in 2017 to 1.25%. The federal reserve has hinted at 3 rate hikes in 2018 and 2 more rate hike in 2019. Is that to be taken seriously?
If the rates were to be raised 5 times and each time is expected to be 0.25% to 0,5%, that means that the rate will likely end up at 1.25% + 1.25% to 2.5%.I think we have to treat the rate hikes seriously or at least prepare for it.
The key reasons are: -
- Lowest unemployment rate of 4.1% for several months. This is in-line with the previous lowest unemployment rates during the previous booms.
- Rising disposable income for 6 months in a roll to US$14,566.5 billion in Nov 2017, around 70 plus percent of the US GDP. The consumer sentiment is also rising.
- Housing starts has been on a 8 years rising trend since 2010.
- To roll back Quantitative easing (also known as money printing). The Federal reserve has US$4.5 trillion of balance sheet that needs to be trimmed down. This is like the creation of digits on the computer screen and money is created by a private bank called the Federal Reserve Bank and they have the right to create money and then to buy the government’s treasury bonds. The only reason they do not call it money printing is, they will at some point need to pare down the “Balance sheet”, which is essentially to cancel the digits on the computer screen.
Under the fiat monetary system, this US$4.5 trillion of Balance Sheet through treasury bond purchases in the open market. When more of the bonds are purchased, it means that more money reaches the banks available for lending out. There is also the potential multiplier effect based on the reserve ratio of around 10 times. This causes the interest rates to be low. When these balance sheets are pared down, the amount of money that can be lent out will be reduced. Interest rate hike will then materialise. Those banks have have lent aggressively will also need to pare down their loan portfolio.
At this point, the odds of several rate hikes look increasingly likely unless there is a major crisis of sorts that could throw all the projections into disarray.
Sibor is highly correlated with the Federal Reserve Overnight Rate, hence any such increase in the Fed funds rates will lead to Sibor going higher. Sibor in turn is the “Market rate” for interbank borrowing cost, i.e. the benchmark. So it is safe to say that Sibor will likely follow the US interest rate up wards.
Property Prices in Singapore
Singapore House Price Index is beginning to rise due to the hype in the market place and the stimulus pumped in by the property developers. An estimated S$8 to 10 billion has been pumped in through asset purchases such as En Bloc redevelopment of entire condominiums and Strata titled developments. The units being removed from the stock or about to be removed from the private property stock is estimated in the 3000 plus units. To put it in it’s perspective, the entire private property housing stock is around 360,000 as at Q3, 2017, that is really a drop in the ocean. But this cannot stop the excitement from brewing as everyone is excited about en bloc.
Asking prices and valuation
We are already seeing the seller’s asking prices being raised. Many times the property buyers that come to us for home loan, the valuation of the property often cannot yet be matched by the valuers. In short, the valuers have yet to come to terms with the asking prices of the sellers.
Interest rate impact on Property owners
Even if interest rates were to rise by 1%, the monthly repayment of S$1m over 30 years is only a few hundred dollars more a month, this could usually be managed. However for those who are buying to rent out, their biggest worry is in fact vacancy rate. It is either they can rent it out or they cannot. If they cannot, it’s usually either you have a $4,000 rental or you have zero rental, so that difference is the bigger problem, not interest rate hike.
Interest Rate impact on businesses
If Sibor hikes, businesses will definitely face some headwinds. Especially those working capital loans or term loans that are based on Sibor + spread.
However many business term loans are structured along the lines of 4.5% flat, 6% flat and so on, peg to bank’s internal board rate. There is often also admin fee charges for loan initiation. These are often equivalent to 10+% on an effective annual rate. Hence a rise of sibor from 1.2 to 1.3% to 2.5% will hurt the bank’s cost of funds, but most banks will be able to absorb these costs. If the banks do want to raise the rates, we do not expect them to go the full magnitude as they are already sitting on ample margins.
So I rate the risk of banks raising interest rates due to Sibor rate hike is manageable. The bigger risk I see in the horizon is the reduction in risk appetite of the bank if the economic cycle turns south. This will more likely lead to the pull back of loans as well as banks asking for top-ups, margin calls or cancelling unused overdraft lines. A few of our customers have even encountered the bank cancelling their term loan facility and giving them 3 months to pay up or switch to another bank.
Banks recalling loans or canceling loan facility is the bigger risk. Small and medium enterprises should not maximised their loan exposures if they can help it, else when the pull back comes, they will be in trouble. If one bank starts to pull back, it is generally an indication of the market sentiment, many banks will also have become cautious and you will have little avenues for refinancing this business loan.