The US Federal Reserve raised its benchmark lending rate by half a percentage point on December 14. What does this mean for homeowners in Singapore in 2023?
The Fed’s interest rate hike has led to a continuous rise in mortgage rates, which could affect those who already own property in Singapore or are looking to buy their first home in the coming year.
Lenders can keep an eye on the latest moves from the Fed, which raised its benchmark lending rate by 0.5 percentage points on December 14 to curb inflation. Fed Chairman Jerome Powell stressed that there is still “some way to go,” with further rate hikes highly likely.
The US central bank has raised interest rates seven times this year, with the latest hike bringing the benchmark lending rate to between 4.25% and 4.5%, the highest level since 2007.
According to median forecasts, policymakers expect interest rates to be higher than anticipated next year, reaching 5.1%.
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How Will This Affect Mortgage Rates?
Leo Kwek, a senior real estate agent at AnjiaSG, said that the 5.1% forecast is “not far off” from market expectations that rates will reach 5% in 2023.
He added that the latest change is unlikely to have a significant impact on mortgage rates. Based on current conditions, the three-month Singapore Overnight Rate Average (SORA) is expected to reach 3.3% to 3.5% in the first quarter of 2023.
The three-month SORA on December 15 was 3.0910, up from 0.1949 at the beginning of the year.
In Singapore, floating-rate home loans are typically pegged to SORA. The interest rate varies throughout the loan tenure, depending on economic and market conditions.
Leo added, “Currently, interest rates are already at levels not seen in the past 15 years. So it will still go higher, but probably not as high as before.” This is because there is a “resistance level” when it comes to SORA. Historically, the Fed funds rate has climbed above 5%, but that doesn’t mean SORA will follow suit.
Leo also pointed out that local mortgage rates will inevitably rise with US interest rates. “The interest rate for HDB concessionary loans is 0.1% above the CPF Ordinary Account (CPF OA) rate. If the OA rate increases, it’s very likely that the concessionary loan rate will also increase slightly.” Due to the cooling measures and tightened Total Debt Servicing Ratio (TDSR) implemented by the government, Singapore’s property market “has always been resilient.”
TDSR refers to the ratio of a borrower’s total monthly debt obligations to their total monthly income, including the loan being applied for.
Last September, the government raised the medium-term interest rate floor for property loans from private financial institutions, tightening the assessment standards for borrowers’ repayment ability and helping them act more prudently.
“As Singapore remains a popular place for foreign investors, our market should remain stable,” Leo added.
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What Should Current and Future Homeowners Expect?
Leo said that given the likely rise in mortgage rates, first-time homebuyers may be the most affected, as this is not the last wave of Fed rate hikes.
He added: “They might recalculate their finances, act cautiously, and adjust the scale of the property they intend to buy. During this period, they could also postpone their purchase, choose to live with their parents, or explore leasehold properties, including co-living spaces. Those eligible to buy an Executive Condominium (EC) can consider this special property type, as they may receive housing grants and potentially deferred payment schemes. People with more flexible timelines and no urgent housing needs could try balloting for a Build-To-Order (BTO) flat if they qualify.” Those who are better off financially can consider buying a new condominium, as uncompleted new launches are paid based on construction progress, which will significantly reduce the impact of rising interest rates.
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Leo noted that following the property cooling measures in September, transaction volumes in the secondary market have already declined. However, prices in sought-after areas remain “firm,” driven by demand and insufficient supply. Therefore, for those planning to buy a home, prudent financial management is key, especially as some economies are expected to enter a recession.
“The Singapore economy is largely dependent on the world, and we need to be prepared for a possible recession. Nevertheless, property is usually a significant asset for a person, and most homeowners are not highly leveraged. However, as interest rates rise and with the use of CPF, a larger portion of the budget will be allocated to housing installments. This will affect many people’s retirement plans.”
Leo pointed out the impact of rising rates on potential homeowners, whose borrowing capacity is “limited” by the increase. There are also concerns about job losses if a recession hits.
“Therefore, housing demand will certainly be somewhat suppressed. My advice is to be very careful and not to sign up for a home loan package that is beyond your means, especially paying attention to the lock-in period, particularly if you are applying for a fixed-rate package.”
Leo said that current homeowners can look for opportunities to reprice their loans to request a lower interest rate from their current financial institution or to refinance with another financial institution.
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He added: “For both current and future homeowners, it’s wise to ‘pay in advance’ on your home loan, meaning to transfer a larger installment amount into your home loan servicing account. For example, if a person’s installment is S$3,000, try to transfer a higher amount, such as S$3,500. This approach has a dual effect. First, it prepares one for the possibility of higher installments, and second, this method creates a financial buffer (in this case, S$500).”
Will Residential Rents Rise in 2023?
The rental market seems to offer little respite. Tenants often bear the brunt of the trickle-down effect of rising mortgage rates, with home rents hitting record highs this year.
Leo gave his forecast for the local property market in 2023, noting that residential rents and prices will rise amidst “geopolitical tensions and rising interest rates.”
Compared to the estimated 25% in 2022, non-landed private residential rents are likely to increase by 5% to 10% year-on-year in 2023, a “much slower rate of increase.”
Leo expects that it may take another 18 months for the market to start “cooling or correcting,” as by then, the inventory delayed by the pandemic will be cleared.
Given the insufficient rental stock, rents for high-end non-landed homes in the Core Central Region could see a “significant increase of 15%” year-on-year.
Leo noted, “Even if any correction occurs, it will likely be modest, as rents tend to be sticky in the absence of a crisis.”
For the residential sector, a “large influx of foreign professionals” is expected to keep rents on an upward trend, although the increase will be smaller than in 2022.
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