Marina Bay Sands

Supply and demand determine the market price. High prices, according to economic theory, reduce demand and increase supply. Nonetheless, Singapore’s red-hot real estate market has been defying such forecasts for months.

According to the URA, private residential property prices increased by 3.5% in the second quarter of 2022, following increases of 0.7% in the first quarter and 10.6% for the entire year of 2021.

In July, SRX data showed that HDB resale prices had increased for the 25th month in a row. The average price was up 11.6% year-over-year, while a S$1.4 million 5-bedroom loft unit at SkyTerrace@Dawson was the most expensive HDB selling transaction ever.

Population estimates for Singapore show a decline from June 2019’s 5.7 million to June 2021’s 5.45 million.

For what reason is demand so high? And can it be quelled by anything?

According to observers of the market, purchasers include both first-time homebuyers and seasoned investors who often purchase multiple properties. As loan rates rise, however, the second group may have a harder time making a return on their property investments.


Target market Segmentation

The epidemic is often cited as a reason for the real estate market boom over the past year. Buyers in need of a home quickly have been forced to the resale market as construction delays on new construction projects have resulted from Covid-19 regulations.

Property Price Index

DBS Group Research’s head of property research, Derek Tan, suggests putting the Covid-19 years in the context of potential buyers who delayed their 2020 purchases until the following year.

He adds that Singaporeans who have been away could require a place to stay once they go back, thus demand might have been more than expected.

Additionally, the average size of American households has decreased. More little families “means a lot more demand for housing as well,” says Professor Sing Tien Foo, director of the Institute of Real Estate and Urban Studies (IREUS) at the National University of Singapore.

However, he maintains that these underlying causes of demand do not provide a complete explanation for consumer behavior: How many of these buyers are investing in second, third, fourth, or even five homes is more difficult to gauge.

According to Christine Sun, from OrangeTee & Tie, the increasing availability of studio and one-bedroom apartments has encouraged more people to enter the real estate market.

They don’t have the numbers to back it up, but “if you turn left and right, you will find that a lot of people are owning numerous properties,” she says. Since the overall cost is lower, more people will be able to afford to buy a second or perhaps a third home.

The extremely low interest rate environment over the past few years has undoubtedly helped fuel consumer spending.

Prof. Sing calls this a “really crucial factor.” “People are lured in by the prospect of a return on their money when the interest rate is one percent or less (a “teaser rate”).


Is there a storm on the horizon?

We will “not likely return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades,” Prime Minister Lee Hsien Loong stated in his National Day statement.

Certainly, such possibilities should give multi-homeowners a lot to unpack — and worry about.

Depending on the amount people borrowed from the banks, even a 1% increase in interest rates might have a “significant impact,” according to Prof. Sing.

If you borrow S$500,000 at 1% interest for 30 years, your monthly payment will be S$1,608. This is according to MoneySense’s mortgage calculator.

Repayments at 3% interest are S$2,108 per month, a 31% increase from current levels and significantly more than most workers can anticipate to get in yearly wage increases.

The monthly payment for this loan would be S$2,684 if interest rates increased to 5%, a 66.9% hike.

MortgageWise Darren Goh thinks that monthly repayments’ balance between principal reduction and interest will have an effect on borrowers.

“Since “nearly 70 percent” of your monthly payment goes toward principal reduction and “only” 30 percent goes toward interest, “when (the interest rate is) 1.5 percent – many of us are extremely used to this – you see your loan drop down very quickly. “The situation reverses if the percentage is 3.5%.

Despite the several potential outcomes, including a greater debt burden, many market observers seem unfazed, at least for the time being.

According to statistics compiled by MortgageWise, the range of banks’ floating interest rates was 1.9% to 2.11% in early August.

According to Sun of OrangeTee, interest rates reached a high of 2.5% in the second quarter of 2019, but are still comfortably low.

Sun points out that HDB flats continue to be the most popular property type in Singapore, with the median resale price hovering around S$500,000.

Taking into account a loan-to-value of 75% and a term of 30 years, an increase in interest rates from 1.9% to 3% would result in a monthly payment increase of about S$214, bringing the total paid over the life of the loan to about S$1,581.

However, when examined in the context of dual-income homes, the actual impact to one’s finances may be less, as the numbers may imply only a 15% increase in monthly expenses.

She explains that “borrowers can utilize both CPF and cash,” which includes both the husband and wife’s income. An additional S$214 may not seem like much.

The Singapore Department of Statistics reports that in 2021, the median monthly household income from labor increased by 3.6% annually in nominal terms, reaching $9,520. This was more than any year prior to Covid-19.

Last month, at a news conference, Ravi Menon, managing director of Singapore’s Monetary Authority (MAS), remarked that, “generally speaking,” Singaporeans’ personal debt levels were stable.

It will be kept in control by Singapore’s tough standards for obtaining loans to purchase real estate.

Total debt servicing ratio (TDSR) is a rule that stipulates a mortgagor’s total debt obligations cannot exceed 55% of their income for Singaporean homebuyers.

Mortgage payments are used to determine this ratio, and the interest rate used is the greater of 3.5% and the current market rate.

According to Leonard Tay, head of research at property consultancy Knight Frank Singapore, “the TDSR acts as a sort of cushion or buffer against over extending debt.” If interest rates rise, they won’t be financially crippled because of their safety net.

The MAS reported a median TDSR of 43% for new loans in the most recent lending period. As of the first quarter of 2022, the loan-to-value ratio of the whole inventory of mortgages was below 50%.

In spite of potential rapid interest rate hikes and considerable income losses, most people “should be able to service their loans,” as the central bank’s stress tests put it.

DBS’s Tan claims that housing prices are more closely linked to economic growth and job creation than interest rates are.

Some property owners, he adds, would have locked in fixed rates when they were cheaper; the impact of increasing rates wouldn’t be felt until much later.

He explains, “I feel no genuine strained sellers, just because the employment situation is still fairly healthy for now.”


Increasing demand for rental housing

Homeowners’ hopes are buoyed as well by the prospect of stable rental income.

Lim is a property investor with this outlook; she currently owns four titles, two of which are paid in full, all of which are located in the city’s core business district.

Lim (who requested anonymity) said there has been “great amount of interest from tenants.

She points out that interest rates of 6% to 8% are not unprecedented. She continues, “With inflation already at such a high rate, I will be forced to raise rent as well, and I expect other homeowners to follow suit in short order.”

Investors have been able to easily increase rents in the current robust rental market due to high demand and low supply, say market observers.

The URA rental index, which had been trending upward since 2017, picked up speed at the beginning of 2021. During the first six months of the year, it increased by almost 11.2%. Similarly, the vacancy rate for private, newly constructed homes has remained low (5.4%).

Tay, from Knight Frank, claims that rent increases have been caused by both domestic and international demand, with the latter causing rents to rise at a more rapid rate than property values.

With new residents arriving and long-term residents still waiting for their homes’ construction or completion, he says, “there’s so much stress.”

Investors and industry experts agree that the presence of owners like Lim means property values are likely to remain stable.

If anything, DBS’s Tan adds, it’s the fringe customers, like upgraders, who are most likely to rethink their purchases.

In his opinion, the second half of 2022 will be weaker than the first, but this will be reflected in volumes rather than the price index as a whole.

“If you ask me whether a Dawson unit would move from asking S$1 million to S$900,000 – it may, but I don’t think it will come instantly,” he says, referencing the HDB estate in Queenstown where a handful of million-dollar flats have changed hands.

When new property cooling measures were revealed in December 2018, Knight Frank revised their “conservative projection” for private home price growth from 1 to 3 percent to a more optimistic 5 to 7 percent for the entire year of 2022.

Home prices have continued their upward trajectory so far in 2022, but volume has dropped significantly. For all of Singapore, the number of private residential units transacted dropped by 26.6% yearly and 28.5% compared to the previous half of 2021.

On the other hand, Sun of OrangeTee points out that HDB flat prices have not been dropping despite the fact that interest rates have been on the rise since the previous year.

Perhaps the fact that the increase (in rates) has been so moderate explains why we have not witnessed a situation where buyers are pulling back or buying smaller units. She claims that we have not encountered such a case up to this point.

According to H1 2022 HDB data, the volume of HDB resales fell by about 6.1% annually.


Where it hurts most

However, as Sun points out, interest rates and cooling measures are related, and rising rates could affect TDSR.

Many people’s capacity to finance a house would be “significantly affected” if TDSR were computed using the higher interest rate of 4.5 percent.

It will have an impact on the private and public markets, she argues. I believe that when TDSR reaches that level, it will have a greater impact on the market than interest rates.

Based on some back-of-the-envelope math performed by The Business Times, assuming a 30-year loan, consistent household income, and the current TDSR cap, a change from 3.5% to 4.50% would cut the maximum loan quantum accessible to buyers by 11.4%.

In the opinion of many market analysts, a four percent interest rate could be the breaking point for the real estate industry.

The Cushman & Wakefield H2 market forecast study mentioned that if medium-term interest rates were to rise beyond 4%, it might have an effect on demand. They do, however, think that unless there are additional cooling measures and an unexpected deterioration in economic conditions, the dangers of a major decline in prices may be limited.

The difficulty arises, according to DBS’s Tan, once the rate reaches 4%. For that reason, I anticipate some strain on family budgets in that area.

However, Tan does not anticipate mortgage rates to remain at or above the 3.5 percent threshold used in calculating TDSR for a lengthy period of time.

Goh from is optimistic about where interest rates are headed and advises buyers to learn about the interest rate cycle rather than panic and lock in increasingly expensive fixed rates.

At the beginning of the year, he says, it was “a no-brainer” to choose a fixed rate because interest rates were so low (below 2 percent).

His assessment of the second half is less certain. We forecast that by September the 3-month SOR average will have risen to between $1.5 and $1.8. The TDSR threshold of 3.5 percent might be reached by the end of the year, he said, along with variable rates in the range of 2.6 to 2.7 percent.

However, he believes that the tightening action taken by central banks would eventually have an effect on inflation.

“The (US Federal Reserve) seems to be on a downward trajectory, thus we expect (interest rates) to decline in 2023.

While Prof. Sing of IREUS is concerned about persons who may have gone beyond their loan-to-value and TDSR limits, these are not enforceable laws.

He warns, “I think that’s extremely risky.” It doesn’t matter if this is a one-time hike in rates, but current inflation trends suggest that additional rate hikes are likely over the next three months to a year.”

He advises that prospective buyers proceed with caution and prudence, paying great attention to their financial stability, when making any major purchases.

Why do you feel the need to rush in here right now?

“Consumers are spending as though the market will keep rising… “Prices rise and fall historically,” he explains. In other words, “It can be brought down.”