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