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.