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HOME loans SINGAPORE: A Sensitivity analysis on Low Sibor SOR rates on Property demand
Quotes –>
“Analysts say the Sibor drop may complicate recent government efforts to rein in rising asset prices, in particular a surging real estate market.” (David Roman and Gaurav Raghuvanshi, Dow Jones Newswires, online.wsj.com/article/BT-CO-20100519-718371.html
,19th May 2010)
“Property is the most interest-rate sensitive sector of the economy,” said David Carbon, an economist with DBS. “The economy is growing very fast, rates are very low: You can draw your own conclusions.” (David Roman and Gaurav Raghuvanshi, Dow Jones Newswires, online.wsj.com/article/BT-CO-20100519-718371.html
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Newspapers online and offline always like to sensationalize things. They are also prone to not checking their work for correctness and tend to regurgitate half truths (though not deliberately).
Though the statement looks correct universally and is more or less so, but if you bother to drill down, a lot of so called Universal truth is not so Universal afterall.
WHAT WILL LOW PROPERTY INTEREST RATES CAUSE?
The general assumption is that when Interest rates are low, people can afford the properties, therefore bidding up the property prices . We are usually very careful about about generic motherhood statements such as these.
The statement seems to hold true when you stretch it to the extreme. But it probably failed to realise that at the current point in interest rates, the hypothesis may not be entirely true.
Because if you look at 2007 to 2008, during the property boom, the run up in prices as well as interest rates are almost in tandem. It took quite a lot of interest rates hike (from about 2% home loans singapore rates to almost 5%) to slow down the property market. So there is a substantial lag effect.
And eventually it was the break-out of the global financial crisis that made people lose jobs and lose confidence that did the job or slowing the property market.
So how will Singapore condominium prices be affected by varying property loan singapore rates.
We always like to do some investigation and research. As our tagline goes, WE RESEARCH, YOU SAVE. And when we say Research, we mean it.
POINTS FOR AND AGAINST ” Low Interest rates complicate recent government efforts to rein in rising asset prices”
Our customers are buying for reasons that are NOT how much Singapore bank interest rates they have to pay.
Only towards the last stage, then property buyers will start to be concerned about the interest rates.
The cases that we have seen are very different.
It is often not just about the Home loans Singapore, it’s more than that.
People buy properties in Singapore for different reasons such as : -
Need a place to stay
Don’t want to rent anymore
Property available in their locality
Price of Property
Property meeting their lifestyle
Investment reasons – Income (very few)
Investment reasons – Capital appreciation (Quite a lot)
Interest rates are very low Not many people told us this was their main reason for considering property purchase.
We have a sample size of 50 clients over the past many months , population of 5 million people, 90% of our clients did not state interest rates being low as buying criteria (only 10% stated low mortgage interest rates as property buying criteria).
Based on statistics (://www.surveysystem.com/sscalc.htm) we have arrived at a figure of 90% +/- 8.32% using a 95% confidence level.
Property investors ARE NOT BUYING DUE TO LOW lending LOANS RATES!!! (We are 95% certain) – Based on our rough estimation
People that bother to read our research material are typically skewed towards private properties, their range do vary a lot, from property purchase between $1m to $10m. And as these people are not related, we can therefore assume that they are fairly homogeneous and representative of Singapore’s Private property buyers.
Therefore we have a statistical 95% confidence level that between 81.68% to 98.32% amongst Singapore property buyers , , they are NOT buying due to low Singapore property loans rates . Of course there are between 1.68% to 18.32% @ 95% confidence level are buying due to low interest rate reasons.
So low interest rates is one of the many factors that cause property asset prices to rise, but only a small reason .
Second factor that proves that Property affordability cannot increase with lower effective interest rates
Singapore Banks practice a safety threshold for property mortgage loans interest rates. Therefore only those who have a healthy income (cash flow) minus off their liabilities meeting a certain debt servicing ratio (typically 50%) are granted a loan.
Singapore banks generally set a property loans interest threshold at between 3.5% to 5% at this point in time. Even if the prevailing interest rates are 1% or less on your home loans, you will be tested for your servicing ability at between 3.5% to 5% home loans rates. You must pass the bank’s credit department test to get a loan . Even if interest rates were to rise, the safety threshold bank interest rates for testing your loan servicing affordability do NOT immediately rise .
Therefore Sibor rates is INELASTIC to creating property demand when interest rates are low.
So if you cannot pass the home loan affordability test, you cannot buy a property using bank’s financing, so how will you add to the demand to force property prices to rise?
Therefore your affordability do NOT increase with lowering interest rates in Singapore. It’s whether the bank will lend to you, or NOT (if you fail the cash flow criteria).
The interest rates from about 3.5% to 1% is inelastic to actual demand in Singapore’s context aided by bank’s interest threshold setting.
POINT THREE – IF PROPERTY INTEREST RATES ARE HIGH AND YOU NEED A PLACE, THE DEMAND IS INELASTIC
Say you need a place to stay, you will still buy a place even if interest rates increases. So interest rates increases beyond a certain (will cause the bank to raise their safety threshold interest rates even higher) and eventually cause people to shun away from buying a property.
But Low interest rates alone do not do the opposite. It may not cause people to want to buy a property. When the rates are low, it could be more of a need based demand.
As there is a safety threshold, however low the interest rates go, the bank’s safety Sibor interest rate threshold typically do not fall further. (But it is the bank’s decision).
Smart property investors cannot simply believe in news reports and rumours
We are not Singapore economists, but neither do we want to use that as an excuse to regurgitate information without thinking about it. Because this is how most news work. They report something that is easy to read and digest.
Though the print media always try to get things right, because some of them are under a lot of time pressure to churn out sensational news on a daily basis, therefore it is also prone to dishing out generic motherhood statements that does nothing to help the investor.
So, Sibor must raise significantly ( at least 2 to 3% ) before it dampens property buying sentiment and ease the rising property prices. At this point, we would not go into why Singapore’s Ministry of National development get the supply and demand wrong again leading to massive hike in prices, what has happened has happened. Policy controls are more effective than raising or dropping interest rates.
So Low interest rate is not a key driver of demand of housing , but rather the shortage of housing due to poor timing and planning by the Singapore government is the cause of it.
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