Highly leveraged homeowners may face double whammy from inflation, housing supply
Highly leveraged homeowners may face double whammy from inflation, housing supply. A PERFECT storm, according to the National University of Singapore’s Institute of Real Estate and Urban Studies (IREUS), could be on the horizon for Singapore’s private residential property owners, particularly those who are highly leveraged.
Rising interest rates amid rising inflationary pressures, as well as an impending increase in housing supply, are expected to be a drag on homeowners who rely on rental income, according to the research institute’s analysis of historical data.
In late April 2022, the Business Times (BT) reported that several Singapore banks had suspended fixed-rate home loan packages, which offer a fixed interest rate, due to rising funding costs. Mortgage rates in the city-state could be raised three times this year, according to mortgage advisers polled by BT.
As Singapore’s central bank adjusts monetary policy to support long-term growth, the 3-month Singapore Interbank Offered Rate (Sibor) usually moves in lockstep with core inflation, albeit with a lead-lag effect between the two time series.
Despite higher inflation from the end of 2011 to the first half of 2012, the 3-month Sibor remained relatively stable between 2010 and 2015. One of the reasons was the intention of the US Federal Reserve to keep short-term interest rates near zero in order to stimulate growth.
Sibor is calculated by averaging the interest rates charged by Singapore banks to one another. It is a popular floating-rate home loan benchmark, but it will be phased out by the end of 2024, with the Singapore Overnight Rate Average taking its place (Sora).
Global market movements, particularly those in the United States, have a significant impact on domestic interest rates in Singapore. Today, as inflationary pressures appear to be on the rise, central banks around the world are under pressure to raise interest rates in order to keep prices in check.
“As a result, the Sibor and, by extension, mortgage rates are expected to rise further,” IREUS said.
These higher rates, according to Lee Nai Jia, deputy director of the research institute, will likely put financial strain on low-income homeowners.
The current strong rental market for private homes, on the other hand, offers a silver lining for investors leasing out their properties, as the rent collected can help provide a buffer to cover their higher mortgage payments.
“Buyers must also comply with the total debt servicing ratio (introduced in 2013), which is 3.5 percent or the current market interest rate, whichever is higher.” According to Dr. Lee, this means that borrowers who took out loans after 2013 and were subject to more stringent underwriting criteria will be in a better financial position to deal with the upcoming rate hikes.
However, as more units are scheduled to be completed between 2022 and 2024, the strength of Singapore’s private residential rental market will be put to the test.
As the supply of private housing increases, rents tend to fall. During periods of significant increase, the market also took longer to absorb the stock.
According to the Urban Redevelopment Authority, 10,401 units will be completed between the second and fourth quarters of 2022. 16,978 private residential units are expected to be completed in 2023, with another 10,850 following in 2024.
According to Dr. Lee, this new supply will have a significant impact on private home rents unless there is a large influx of expatriate workers to fuel rental demand.
“When combined with the possibility of a recession, rent-paying homeowners may find themselves in a precarious position in the worst-case scenario, especially if unemployment begins to rise.”
He went on to say that the private housing market would have been especially vulnerable to external shocks if the government had not taken preventive measures to encourage financial prudence last December.
Furthermore, while there appears to be strong demand for private housing such as upcoming AMO Residence, introducing too much supply will stress the market if and when the economy performs poorly. “This probably explains the authorities’ cautious approach to increasing the supply of new private homes,” Dr Lee explained.
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