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.

SIBOR-3M-vs-Federal-Funds-Rate

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.

(Credit: SBR.com.sg)

Stephen Chong
Stephen Chong
Lim Ming Hwee
Lim Ming Hwee
2022-02-26
Stephen is a very good agent who goes beyond his way to ensure that his clients are happy. He is very patient and helpful, and will always give good advice.
Joseph Sze
Joseph Sze
2021-12-24
Stephen is a professional & responsible person who has provided good quality customer services to our recent Condo housing purchase & related matters. I found he has put in great efforts and gone for extre miles to assist us in the whole process and related purchase issues. Excellent work, Stephen!👍🏼👍🏼👍🏼
SZ Lim
SZ Lim
2021-07-20
Was going thru Stephen's video when I noticed he had a google review panel up. Going to copy paste my review on his FB page from 2019. I still stand by my review. Stephen was very professional throughout our engagement process. I first engaged Stephen as his effort could be seen thru the videos he made. The videos were informative, detailed, yet easy to understand from a beginners point of view. Could also see the improvement of his videos as time passes, and that speaks volumes about one's character on his eagerness to improve and share. During my engagement with him, Stephen was very professional. Since I was very new in the scene, I required alot of guidance and honesty. Stephen was very upfront with me on many items and did not try to hide any facts from me. As a first time buyer, both good and bad prospects were laid out after his detailed analysis on my current financial condition and also on the projects we went to see. Comparing to other agents who will just blab anything that benefits their sales point, Stephen was straightforward and truthful on the issue. I have met quite a few agents but would highly recommend Stephen to people who are looking for properties, be it looking for a place to stay, or looking for a property to invest.
YingYu Tan
YingYu Tan
2021-07-11
Stephen handled both my HDB sale and new condo purchase. The whole process was fuss-free and smooth. What impressed me was his willingness to go the extra mile for his client, from analyzing every detail and being there for me and my wife every step of the selling/buying process.
陳若芸
陳若芸
2021-07-04
Cannot believers Mr Stephen posting my rental unit less than 10 mins ? Yes, can't believed it ? but please believed it. 1st day open ..more then 8 enquiry. Mr Stephen was very professional, patient and knowledgeable, he shares all the information i needed, excellent service 💪💪 Rent out my unit within 2 days highly recommended ..BINGO
Jade Bai
Jade Bai
2021-06-30
We came across Stephen YouTube video and appreciated the tips he is providing. We decided to engage Stephen when we were house hunting. Most people may feel that you can DIY resale hdb buying process. Personally we feel its money well spent engaging Stephen. The whole buying process is swift. Stephen is very prompt in his reply. He did alot of detailed analysis and recommend us the units we can explore. He is very detailed anf meticulous. This process saved alot of time. He also gave us helpful advice on the units we viewed. No hard selling or rush you into hasty decisions 😊
Adrian Tay
Adrian Tay
2021-06-30
Knowledgeable and professional, Stephen is not the typical agent you will meet. Ever so patient, he will help provide his genuine feedback and never pushy unlike most sales agents. Fortunate to have Stephen walk with me in my property investment journey. Will recommend Stephen to anyone who is looking for a trustworthy agent to walk the mile with.
michael tan
michael tan
2021-06-29
Very patient and give good advise. I bought ec under him and he sold my hdb.
CY Goh
CY Goh
2021-06-05
I believe every property investors or home buyers have encounters with numerous property agents. However, how many of you ever met someone with passion and enthusiasm to sit down and analyze each property based on your criteria (budget, requirements like location, size, etc)? Having watched Stephen's videos in YouTube, decided to ping him and the rest is unspoken of. Not only did he helped to narrow down our search, he also analyzed which project has higher prospect and which unit (level, facing, etc) fits our living habits. No complaints, except for not knowing Stephen earlier. Good job Stephen, thank you.
Esther Cheh
Esther Cheh
2021-04-30
Stephen was the agent assisting us in the purchase of our condo and now to market them for rental. He is extremely helpful, open, transparent and reliable throughout the entire time. He went above and beyond to help us set things up while we are not in Singapore.He is also very professional and knowledgeable about the property market in general. I am confident to leave our condo in his care to find us a good tenant and to manage them in future.