Rising interest rates and benchmark prices loom over the housing market this year

·6-min read

Multiple rounds of property cooling measures introduced by the government over the past few years have raised minimum capital requirements for aspiring property investors in Singapore. (Picture: Samuel Isaac Chua/The Edge Singapore)

SINGAPORE (EDGEPROP) - Two issues that may concern home buyers this year will be the increase in interest rates over the next few months, as well as higher benchmark prices for upcoming new launch private residential projects in Singapore. (Browse newly launched condos in Singapore right now)

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Multiple rounds of property cooling measures introduced by the government over the past few years have raised minimum capital requirements for aspiring property investors in Singapore. The government says that the cooling measures were rolled out to match property price growth with economic fundamentals.

Given these prevailing market conditions, HDB and private residential homeowners who plan to upgrade this year may find it more challenging to move up the property ladder or invest in residential real estate.

Sell one, buy two

A common investment strategy that was pitched to many homeowners a few years ago was the “sell one, buy two” approach. This called on owners to sell their existing property and take advantage of a spike in residential property prices at that time and realise capital gains from the sale.

These gains would then be reallocated to a replacement home, with a portion sunk into an investment property for rental income. Ray Teo, advisory branch district director at PropNex Realty, considers it a risky investment strategy.

“This type of investment approach works best for people who are generally under-invested, such as those who are sitting on a fully paid property and have no other investments. This type of investment approach is also best framed as a portfolio restructuring,” he says.

PropNex’s Teo: Property investors should avoid a short-term cash out approach, and instead opt for a gradual accumulation of their property portfolios. (Picture: EdgeProp Singapore)

Portfolio restructuring is not as straightforward as it sounds, especially under the prevailing market conditions, notes Teo. It is also dependent on an individual’s credit history.

“Property investing is traditionally viewed as a gradual snowball effect, where a few choice properties appreciate over a relatively long period of time,” says Teo. “It’s important to let the investment grow over time, rather than cashing out after holding the property for a short period of time.”

Investment barriers to entry raised

A lasting effect of prevailing property cooling measures has been to increase the barriers to entry for individuals who aspire to invest in residential property in Singapore. (Check all latest Singapore property Market Trends)

For example, the latest round of property cooling measures that were rolled out in December 2020 saw the additional buyer’s stamp duty (ABSD) for Singaporeans purchasing their second property go up to 17% from 12%. For the third and subsequent properties, it is now 25%, up from 15%. The ABSD for foreigners has also been hiked to 30% from 20%.

“If you consider investing in the residential real estate market and acquiring an investment property, it is getting more difficult due to the increase in the ABSD as well as reduction in the total debt servicing ratio [TDSR] to 55% from 60% before. These definitely impact the ability to invest in residential properties in Singapore,” says Teo.

However, there are alternative property types that locals may choose to invest in, such as some commercial and industrial properties, he points out. (Find Singapore commercial properties with our commercial directory)

“There are attractive investment opportunities keen investors could explore. But these alternative assets also come with their own set of risks,” he adds. For instance, the pool of buyers of strata commercial and industrial space is smaller compared to residential. Hence, trying to offload the property in the future may pose some challenges.

The pinch of higher interest rates

Besides investors, HDB upgraders who are eyeing a property purchase this year could feel the pinch of higher interest rates, but this will still not stop the majority of homeowners who intend to upgrade their properties this year, says Jo’An Tan, associate director at Redbrick Mortgage Advisory. (Find HDB flats for rent or sale with our Singapore HDB directory)

“Generally, we expect people to continue to buy properties this year, especially first-time homeowners. Homeowners who are still eligible to decouple will continue to do so this year,” says Tan. “The group of home buyers for whom this option is not available may turn to non-residential properties such as commercial or industrial properties as an investment.”

Redbrick’s Tan: Some clients who are not due to refinance their mortgages have approached us to lock in the relatively low rates still offered by the market. (Picture: EdgeProp Singapore)

Anticipating higher interest rates in the coming quarters, some clients who are not due for refinancing are reaching out to Redbrick associates to lock in the relatively low rates still offered by the market, says Tan.

“If a homeowner had refinanced about six months ago, around October 2021, they could secure fixed rates as low as 1%, so we inform our clients that they should refinance now to secure the all-time low fixed-rates before banks start increasing their fixed rates packages,” she says.

However, if they chose to refinance their mortgage this month, they would already see fixed rates increase by over 40% compared to six months ago, with the lowest two-year fixed rates at about 1.45%, Tan says.

She adds: “While they still save from refinancing their existing mortgage [because they could be paying about 2%], their savings would have potentially dipped by 40%.”

The Singapore Interbank Offered Rate (Sibor) is a Singapore dollar-denominated benchmark interest rate, which the banking industry in Asia uses to transfer funds and manage liquidity. Sibor will be phased out and replaced by the Singapore Overnight Rate Average (Sora), a volume-weighted average rate of borrowing transactions in the overnight interbank Singapore dollar cash market.

Homeowners with an existing mortgage are also concerned over the coming Sibor-Sora transition, which will see all banks in Singapore stop issuing Sibor-linked mortgages from 2024.

In 2019, close to 60% of Redbrick’s clients opted for Sibor packages for their mortgages. “We have observed that more clients are willing to move out of their Sibor rates now to secure the relatively low fixed rates rather than waiting for 2024,” says Tan.

What can upgraders do to prepare?

Redbrick advises home buyers to secure in-principle approval for home loans at the start of their property purchase to ensure they can borrow what they want.

“Buyers should also check on the fair market value of the property they intend to purchase to ensure that they are not overpaying for a property, as this results in a large cash-over-valuation scenario,” says Tan.

Homeowners should be prudent to plan and strategise which mortgage package is best suited for them. For example, some five-year fixed rates may be attractive, but it comes at the risk of locking in those rates for a long period of time.

Buyers also need to consider their cash flow management and make a choice between a smaller loan and paying down the mortgage sooner, or maximum financing now to leverage the low interest rate environment, says Tan.

“Generally, most Singaporeans fear debt and don’t wish to pay too much interest, so they opt for shorter loan tenure,” she says.

Tune in to our next episode of Real As State on March 25 to listen to the full interviews.

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