Rising mortgage rates leads to price softening of private residential properties

The price softening of private properties is in line with a weaker macroeconomic projection against a backdrop of rising mortgage rates and spiraling inflation.

Rising mortgage rates

Private home prices in Singapore rose at a marginal pace of 0.2 per cent in the fourth quarter of 2022 from the previous quarter, according to flash estimates released by the Urban Redevelopment Authority (URA). This is in stark contrast to the 3.8 per cent increase seen in the July to September period. For the whole of 2022, prices rose 8.4 per cent, lower than the 10.6 per cent in 2021 but higher than 2.2 per cent in 2020.

Prices of non-landed private residential properties in the suburbs or the Outside Central Region (OCR) decreased by 2.6 per cent in Q4 2022, compared to a 7.5 per cent increase last quarter. Conversely, non-landed homes in the Rest of Central Region (RCR) or city fringe increased by 2.6 per cent, compared to a 2.8 per cent increase in Q3. Non-landed homes in the prime districts, or Core Central Region (CCR), rose marginally by 0.5 per cent after a 2.3 per cent increase in the preceding quarter.

Analysts say that the property price softening is in line with a weaker macroeconomic projection against a backdrop of rising mortgage rates and spiraling inflation.

Orange Tee which commented on the softening private property prices said that the higher borrowing costs lowered buyers’ housing affordability, and that the new cooling measures introduced in September have lowered the borrowing limits of many buyers.

Sales activities slowed dramatically during the year-end as many Singaporeans rushed to travel overseas this year since border controls were mostly removed worldwide. Developers held back launches during the holiday season, resulting in fewer new homes sold last quarter.

According to URA Realis data, only 666 new homes, excluding executive condominiums, were sold last quarter, down 69.1 per cent from 2,157 units sold in the preceding quarter. Resales, however, dipped only 36.4 per cent from 3,710 units to 2,360 units over the same period.

As a result, the proportion of new sales dipped as low as 21 per cent in Q4 2022 from 35.4 per cent in Q3 2022, whereas resales formed the bulk of 74.4 per cent of total sales last quarter, up from 60.9 per cent in Q3 2022. Therefore the weighted average price for the entire market may have been lowered by the higher proportion of resale transactions as these homes are typically sold at cheaper prices than new homes.

Orange Tee said that despite the rising mortgage rates, the price index may well snap back up for the next quarter as more projects will be launched in the coming months.

“More private homes will be launched in prime locations and city fringe areas. Sales of such pricier homes may uplift the overall price index.

“Nevertheless, housing affordability will be a key concern to most buyers. We expect buyers to stay prudent this year, given the rising interest rates, inflationary pressures and global economic uncertainties. Therefore, the net effect may see prices growing slower, between 5 and 8 per cent this year.”

Considering the increasing global interest rates, the rising mortgage rates are inevitable. Paul Ho, Chief Officer at iCompareLoan, said: “prospective buyers should bear in mind the soaring mortgage rates when making home purchase decisions.”

Home loan rates in Singapore have been on a steady uptrend since the fourth quarter of last year when three-year fixed rates were at 1.15 per cent. Home loan rates in Singapore have now gone past 4 per cent to a new high.

SORA will rise in tandem with the internationally rising borrowing costs

Our domestic benchmark interest rate – the Singapore Overnight Rate Average (SORA) – is set to hike up in tandem with US rates.

Mr Ho said, “how the FED interest rate hike works is by making loans more expensive and technically, should lead to reduced spending.”

“The move will put pressure on Singapore’s financial institutions to raise interest rates as well,” he added.

As most home loan rates are now pegged to SORA, you will not see interest rates prematurely rising too out of step with the US Fed Funds Rate. This is because although SORA is a “backward” looking interest rate mechanism which reacts to interest rate movements in Singapore, changes to the US Fed Funds Rate has global repercussions, so SORA is expected to react accordingly.

The biggest interest rate hike in the US will definitely dent some of the enthusiasm in the buoyant property market, and could pose a big problem for homeowners who are still servicing their mortgage loans. This is because banks and financial institutions calculate lending rates by adding a margin (which covers their costs and their profit) to a published financial index, like SORA.

If you are worried about the soaring mortgage rates and want to refinance your mortgage loan, you must be wondering about how SORA works.

SORA basically uses a volume-weighted approach where the average rate of all actual transactions traded and booked in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6:15 pm. The phrase “volume-weighted” simply means that the calculations consider the actual amount being lent.

Which means that a 3M compounded SORA rate is based on a compounding period of 3 months of the historical SORA rate which is published daily on the MAS website and a 1M compounded SORA rate is based on a compounding period of 1 month of the historical SORA rate which is published daily on the MAS website.

Mr Ho said, “All these terms, 3M, 1M, fixed rate, floating rate, etc can be confusing to some home owners who want to refinance. And also there may only be a short window of opportunity open if you want to refinance your mortgage loan.”

He added, “So, anyone who is worried about the soaring mortgage rates and yet wants the best home loan should speak to mortgage consultants. They can get the best rates for home owners who want to refinance their home loans by comparing across 16 banks and financial institutions. Mortgage consultants have the latest home loan info to guide home owners to make the right decision and best of all, their services are free.”

Savvy home loan borrowers will know how to navigate away from rising borrowing costs

What does this news mean for homeowners in Singapore? Well, it marks a closing window of time to refinance our properties and get the most savings out of our monthly repayments.

During a low-interest rate climate, savvy borrowers may prefer to capitalise on low interest payments by taking a market-pegged interest rate variable package. But when these borrowers are (like now) hit by the biggest interest rate hike, they may try to change the loan to a fixed rate package for some years so as to be able to lock in lower rates and better manage their cash flow.

Fixed rate packages are usually more expensive, but provide the most stability as rates are kept fixed for up to the first 3 to 5 years of the loan tenure. There is no perpetual fixed rate being offered by banks in Singapore at the current moment. This is where a refinancing guide can be useful to home owners to read-up on remortgage and be knowledgeable about the entire process.

Positive side of rising mortgage rates

Today, consumers have a wide range of home loan packages to choose from compared to several years ago, and this is a huge advantage to home buyers and investors.

Written by Ravi Chandran

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