Singapore Property Market Overview – 1H 2016 Update
Price trend, cooling measures and interest rates
URA Private non-landed residential property price index (Q4 1998 = 100)
Prices have softened since 2013
Property prices in Singapore first took a dip in the first quarter of 2009 from the fallout of the global financial crisis. Thereafter, a series of interest rate cuts and efforts from governments to reenergize the economy led to a rapid increase in property prices.
To avoid an overheated property market and to reduce the risk of a housing bubble, the Singapore government put in place a series of cooling measures (see next page) to curb price increases. Since then, prices have moderated in a slow, controlled fashion which is healthy for the broader economy.
The most interesting point though, is that anyone sitting on properties bought in 2009 or before 2007 are sitting on potentially huge capital gains.
The Singapore Property Market is softening under controlled cooling measures
Summary of Key Property Regulations
As property prices surged between 2009 to 2013, the Singapore government stepped in and introduced several cooling measures. Two of the main objectives commonly cited, are to:
- Prevent Singaporeans from over-leveraging – by introducing limits on total loans
- Prevent investors from overheating the market – by introducing various stamp duties
The cooling measures have been effective in softening Singapore’s property prices. Many Singaporeans had expected the cooling measures to be removed in 2016 after property prices have stopped rising. In response to this, Minister for National Development Lawrence Wang stated “we don’t want to risk a premature market rebound”, indicating that the government has plans to let the property prices fall further, and it is still too early to ease cooling measures1.
1.A complete timeline of cooling measures can be found in the appendices
It is not time yet to ease the property cooling measures. There is still some way to go, to entrench the gains in stabilising the property market and restoring household debt sustainability.
- Ravi Menon, MAS Managing Director
Singapore Mortgage Reference Rates (%)
Singapore’s home loan / mortgage packages are based on a reference rate which can be based on SIBOR or fixed deposit rates such as DBS’s Fixed Deposit Rate. Any change in these reference rates will impact monthly mortgage payments
Mortgage rates in Singapore are directly related to the state of the global economy. In the ‘recovery years’ following the early 2000s recession, SIBOR increased by as much as ~2.75% while fixed deposit rates (which are more stable) gained ~1%.
If history is to be an indicator, we should be mindful that the current low-interest rate environment is unusual and rates are already starting to climb back up.
1. “18-mth Fixed Deposit Rate” calculated as the average of the 12-mth and 24-mth SGD Fixed Deposit Rate, as per DBS’ original methodology for calculating the 18-Mth FHR
2.Forward rates are based on market expectations and is not a forecast. It is derived based on Association Banks of Singapore’s published 3-mths and 6-mths SIBOR rates. With the current 3-month and 6-month rate, it is possible to deduce market expectations of 3-mth SIBOR 3 months in the future
Local interest rates have remained low for a long time but are starting to creep up; Market expects rates to be higher in 3-mths time
Mortgage Rates
SIBOR and why it matters
SIBOR is the reference rate used by banks in Singapore when lending unsecured funds to each other. It reflects how much it would cost banks to borrow from each other.
Why does it matter? It matters to home owners and home buyers as majority of Singapore’s home loan packages are based on SIBOR.
In Singapore, there are no fixed-rate mortgages. While banks typically advertise both 'fixed-rate' and 'floating-rate' mortgages, the so-called 'fixed-rate' is only fixed for a period of 2 to 5 years and eventually reverts to a floating rate.
'Floating-rate' mortgages are set in relation to a reference rate. Simply put:
Mortgage rate = Spread + Reference rate
- Spread is a variable amount set by the bank
- Reference rate depends on the loan you choose and is either based on SIBOR or deposit rates such as DBS’ FHR
While the reference rate has traditionally been the 3-Mth SIBOR, banks increasingly prefer using their own fixed deposit rates as reference.
Forward Rates – where SIBOR will be in the near term
The Association of Banks in Singapore publishes the 3-mth and 6-mth SIBOR rates. With the current 3-month and 6-month rate, it is possible to deduce market expectations of 3-mth SIBOR 3 months in the future. Note: The Forward Rate for the 3-mth SIBOR is a market expectation and not a forecast.
When the forward rate is higher than today’s spot rate, it implies that the reference rate (and hence the overall mortgage rate) will be higher 3 months in the future.
For those looking to refinance or to enter into a new mortgage, we have started to see a slowdown in the rise of interest rates amid slower economic growth. The US Central Bank signalled that it would raise rates more gradually given concerns around employment and the US economic outlook, on the back of Brexit.
Current forward rates imply that 3-mth SIBOR is expected to be 1.425% in 3 months time
Find out more about market expectations for the SIBOR here
Property buyers should take note of interest rates as they directly affect monthly mortgage payments
Mortgage Rates
Demand for housing loans (1H16 vs 1H15)
Largely driven by demand from home upgraders; appetite for investment properties has tapered out
Total outstanding housing loans attributed to owner-occupied properties has grown by 3.7% in comparison to housing loans taken out on investment properties of 0.7%
Mortgage advisory company, Redbrick saw a 26% increase in new home loan enquiries in 1H 2016 and majority of these enquiries came from upgraders wanting to move to a bigger space or nearer to town
Many believe that the market is close to bottoming out and current pricing is attractive enough for them to make that switch