"When interest rates increase, mortgages get higher, and lesser people buy property". This was a comment made by one of my clients recently.
Today we shall continue on the myth-busting series, touching on the myth of an "Rising Interest Rates Driving Down Property Prices"in our current property market. <Clickhere to view our previous post>
To understand better, we need to first understand how housing loans are pegged to the Singapore Interbank Offer Rate (SIBOR). The SIBOR is basically the rate at which banks lend to each other in Singapore.
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.
CORRELATION BETWEEN SIBOR & US FED FUNDS RATE
We occasionally get this question – what is the correlation between the SIBOR and the US Fed Funds Rate?
We do know that when it comes to interest rates in Singapore, we are a price taker as our Singapore Central Bank does not use interest rate as a lever in its monetary policy; it uses foreign exchange against a basket of trading currencies. We also know as well historically our SIBOR follows the movements in the US Federal funds rate.
Source: US Fed & MAS website
We can see that there is a strong but not perfect correlation between the two interest rates over the past 30 years. SIBOR takes its cue from the movements in the Fed Fund Rate.
Now, that we understand the relationship between SIBOR and the US Fed Fund Rate, we need to know that the US Fed decided to hike its federal funds rate target range by a 0.25%. This is after nearly a decade of near zero (0.08%~0.37%) interest rate.
After such a long period of low interest rates, some have questioned the impact of raising them.
Will Raising Interest Rates Significantly Affect Property Prices?
A research done by Morgan Stanley on 12 April 2017, found that raising interest rates will not affect property prices as a whole:
1) No Significant Correlation between Changes in Property Prices and 3-Month SIBOR: -13% between 1996-2016
2) Singapore Household Balance Sheets are Strong: Singapore resident households are on aggregate in a net cash position at 5% net cash to equity - meaning cash holdings alone are enough to cover outstanding mortgages and other loans, with more left over
3) Mortgage rates are low: Absolute mortgage rate rates remain low relative to rental yields given the low starting point. Residential net rental yields at 2.5% still offer a positive spread over current mortgage rates of around 1.5- 2.0%.
4) Current Mortgage Payments vs Incomes low: Currently at 29%.
The Total Debt Serving Ratio (TDSR) introduced by Monetary Authority of Singapore (MAS) on 28 June 2013, limited the amount borrowers can spend on debt repayments to 60 percent of their gross monthly income.
All the data points to a healthy economy with a strong financial prudence framework. With the TDSR framework in place, it has curbed speculation making a more stable property market.
Are you still sitting on the sidelines watching? Do you want to lose the opportunity today to grow your wealth and assets?
Every housing decision needs to be carefully catered to each individual's needs and situations. If you are still lost or unsure, please contact us today for a free discussion. We have helped many clients to create a clear strategy plan and make the informed decision for their loved ones.
Many Thanks Teoduoproperty
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