Home prices set to drop as interest rates rise

PHOTO: Home prices set to drop as interest rates rise

SINGAPORE - No surprise that the European Central Bank and the Bank of England are keeping interest rates low, as the region grapples with debt.

No surprise too, that what's happening there is unlikely to spark a free fall here, with analysts expecting housing prices in Singapore to dip by up to 10 per cent.

CIMB Research economist Song Seng Wun said: "Europe plays a very minor role. The primary driving force on the Singapore Interbank Offered Rate (Sibor), which determines interest rates in Singapore, is interest rates in the US."

And signs are pointing to a rate increase here, as the US prepares to end quantitative easing and China tightens credit.

The result: less money available.

For home owners and those shopping for property, that means paying more for their mortgages.


Associate professor Sing Tien Foo, deputy head of real estate at the National University of Singapore, said: "Home loans are pegged to a floating rate, which fluctuates.

"As interest rates rise by, say, 1 per cent, current home owners would have to fork out more cash to cover their monthly mortgages."

ERA Realty Network's key executive officer Eugene Lim said: "An increase in interest rate means monthly mortgage instalments will rise and this may dent demand.

"Less demand (also pulls) property prices downwards, as home buyers and investors are expected to become more discerning in their purchases."

Home buyers and investors already have to fork out more cash, due to the increase in additional buyer's stamp duty, lower loan-to value ratios and higher down payment.

Introduced last month, the 60 per cent cap on total debt servicing ratio also reduces the loan a buyer can take - inevitably lowering demand for property and softening prices, Mr Lim added.

Latest figures suggest this is already unfolding.

Cash premiums for Housing Board flats are dipping.

Data from the Singapore Real Estate Exchange showed the overall median cash-over-valuation for HDB units has slid to $24,000 in June - the lowest figure in more than two years.

Private home sales volume has also been down since March, with property agents saying the average wait for a sale can take up to six months compared to a maximum of two months a year ago.

The rental market is also expected to slow down, with a "huge supply of completed homes vying for a limited pool of tenants", said ERA's Mr Lim.

Based on the expected project completion dates that developers report to URA, more than 64,000 new private units will come on the market over the next three years.

The impact on overall housing prices? A gradual 5 per cent slide over the next few years, said NUS' Prof Sing, while Mr Song predicts up to a 10 per cent dip. W

What less money means:

Rising interest rates here

• Less money in the system means banks are more careful about who they lend to.

• Borrowing (like getting a home loan) becomes more expensive.

• Since home loans here are pegged to a floating rate, a rate increase translates to a significant rise in the monthly mortgage repayment.

• Current homeowners have to come up with more cash to finance their mortgage.

• Potential buyers are less likely to take loans for big-ticket items like property.

Rentals Down

• Limited pool of tenants as the Government tightens foreign expat numbers.

• So tenants can pick and choose from what's available - and bargain for lower prices.

More Supply/A Glut of Units?

• More than 64,000 new private property units coming onto the market over next three years.

• Those wanting to avoid paying seller's stamp duty for property bought in 2010 (after the three-year time limit) will also be looking to off-load their purchases

What lies ahead

US: Things improving?

• The Federal Reserve has hinted that quantitative easing (QE) is being tapered off.

• Less money is printed and circulated around the world

Europe's austerity drive

• Deep spending cuts and political turmoil as the region grapples with debt crisis.

• Consumer confidence is likely to plunge further.

• Minor knock-on effects in Asia and Singapore.

China's slowdown

• Beijing's move to tighten credit: Harder for people to borrow money and buy goods and services.

• Trade shrinks and investments slow down.

• Chinese investors less keen to snap up new property abroad. September 2009

Two different schemes - Interest Absorption Scheme and Interest-Only Loans - withdrawn.

February 2010

A seller's stamp duty (SSD) levied on those who buy residential property and sell it within a year. The SSD applies to all residential properties and residential lands, except for HDB flats.

August 2010

Seller's Stamp Duty (SSD) time limit increased to three years. Second mortgage that banks can loan buyers decreased from 80 per cent to 70 per cent of the property's value. HDB resale flat buyers must sell off any existing private property they own - including property overseas - within six months of buying the flat.

January 2011

The SSD for private homes is now 16 per cent, if the property is sold within a year. It goes down progressively and is 4 per cent if the home is sold in the fourth year. Second mortgage that banks can loan buyers further decreased from 70 per cent to 60 per cent.

December 2011

Additional buyer's stamp duty (ABSD) on residential property purchases introduced. Foreigners pay 10 per cent duty; permanent residents pay 3 per cent for second and subsequent properties, and Singaporeans pay 3 per cent for third and subsequent homes.

October 2012

Home loan period capped at 35 years. (MAS rule.)

Lower loan limits for those taking loans past 30 years, or which extend beyond retirement age of 65 years. Such buyers can take a loan of only 60 per cent of the property's value, down from 80 per cent.

January 2013

ABSD raised between 5 and 7 percentage points across the board. To be imposed on PRs purchasing their first residential property and on Singaporeans' second property.

Loan-to-Value (LTV) limits for second housing loan lowered to 50 per cent, or 30 per cent if loan tenure exceeds 30 years. LTV of 40 per cent applies to third or subsequent housing loans, or 20 per cent if tenure exceeds 30 years.

Minimum cash down payment for second or subsequent housing loan raised from 10 per cent to 25 per cent.

New seller's stamp duty (between 5 per cent and 15 per cent) for industrial property, depending on selling date.

June 2013

Property buyers cannot borrow more than 60 per cent of their gross monthly income, including other debt obligations.

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