Home buyers flood the markets to lock in home loan rates before they climb any higher. This is due to home buyers now facing higher borrowing costs. So to what degree will people be affected?

People with multiple properties, unstable income or single income owners will be the most affected. Whereas home buyers who own a single unit or have dual incomes will be least affected.

For the first time the top 30th percentile may be affected, most may not be able to afford a new private prospect on a 25 year loan tenure.

All borrowers must adhere to the total debt servicing ratio (TDSR) ruling, whereby the threshold for property loans uses a strict 3.5% interest rate computation. Since the fixed rate packages offered by some banks have already gone past 3% per annum, many buyers have now opted for a floating loan rate package.

The floating loan rate is currently at 2.1% to 2.3%. This floating loan rate is still below the 2.5% in the second quarter of 2019, the highest rate recorder over the past 10 years. So how will rate hikes impact the different market segments? Are you one of the people that will be affected the most?

HDB Resale And BTO Projects

For borrowers who have already applied for a private loan and are not qualified to take a HDB loan, the current interest rate increase may still be manageable since the loan value for flats are not huge.

For instance the median price for a resale flat is around 500,000. The monthly instalment on a 30 year loan term and 75 percent Loan to value (LTV) ratio increases by around $138 a month.

If the interest rates rises from 2.3% (1,443 a month) to 3% (1,581 a month). For a built to order (BTO) flat purchase, the monthly increase is only around $83 a month.

Interest rate hikes similarly may not have a significant impact on new home sales. Home buyers may not immediately feel the increase in monthly instalments due to the progressive payment schedule for new launch properties, and home loans tend to be smaller in the initial repayment period.

Private Homes

As the interest rate rises, mortgages will increase together with a more significant loan quantum.

The monthly instalment for a $1 million private property on a 25 year loan tenure and 75 percent LTV rises by $267 a month from $3290 to $3557 monthly when rates move up from 2.3 percent to 3 percent. For a 3 million purchase under the same loan tenure and LTV, the increment increases by $801 a month from $9,869 to $10,670 monthly for the same interest rate increase.

Therefore, we may expect more borrowers to refinance or down pay their loans, especially for mid range or pricier properties. Although restructuring loans or early loan redemption can come with a penalty fee, some borrowers may still find it cheaper to pay the fees compared with the monthly mortgage increase.I’m sure you’re probably feeling that investing in property in Singapore is not a good choice now due to rising interest rates. However, the 3 reasons I’m about to share with you are why Singapore is still a good place to invest in property.

TDSR Can Reduce The Prices Of Property

The interest rate impact may be more keenly felt when rates move above 3.5 per cent, the interest rate used for the TDSR calculation. Buyers’ housing affordability may also be affected when the TDSR computation is revised. When interest rates inch towards 3.5 per cent, the TDSR computation may be tightened, which will adversely impact the purchasing power of all borrowers.

For instance, if the TDSR calculation uses a 4% interest rate, the maximum loan for borrowers with a $10,000 household income on a 30-year loan tenure will be reduced from $1.23 million to $1.15 million. Therefore, a buyer can purchase a property only up to a value of $1.53 million instead of $1.63 million without an additional cash outlay.

If the rates are revised to 4.5 per cent, the maximum loan quantum will drop to $1.09 million, and the maximum purchase price will be $1.45 million. Therefore, with lower borrowing power, buyers will have to settle for a smaller unit or incur greater cash outlay if the TDSR is tightened.

Which in turn will reduce the property prices of Singapore over time due to lesser people being able to afford pricier properties.

But won’t this affect the potential gains of property as an investment?That’s where the next factor comes in to add security and boost the growth for the real estate market in Singapore.

Spike In Family Offices Entering Singapore

Interest in setting up family offices in Singapore has soared in recent years, driven by increasing global uncertainty and geopolitical risks. Thanks to Singapore’s reputation as a safe haven for wealth and attractive tax incentives.

The number of family offices here jumped fivefold between 2017 and 2019, and almost doubled from 400 at the end of 2020 to 700 a year later. A small family office costs anywhere from $1 million up to $2 million to operate annually to very large family offices with an operating budget of $14 million to $20 million.

So why is this important?

It’s because family offices tend to do impact investing which includes investing into real estate in Singapore. This ensures that the Singapore property market is stable and secure because of the large amount of capital. About 44 percent of all family offices respondents reported that over 25 percent of their portfolio was assigned to direct investments. This will increase the incentive of investing in property in Singapore as it is secure and has a high chance of appreciating.

But I’m sure you’re thinking “won’t that mean property prices will stay high?” Luckily, the next factor may have a big impact on the supply of the property industry for years to come, reducing the price of real estate.

Movement Of Paya Lebar Air Base

Due to the movement of Paya Lebar Air Base (PLAB) due to take place in 2030 will free up 800 hectares of land. Making room for 150,000 new public and private homes.

The First BTO project would be ready in 5 years after relocation of the air base. Redevelopment will take in stages due to the size of PLAB it can span over 20-40 years. PM Lee also stated redevelopment of neighboring towns can lead to better use of the space and more amenities.

Hence due to the movement of PLAB it will provide a constant supply of both public and private housing in Singapore which can offset the increase in price.

Conclusion

In conclusion, even with the rising interest rates of loans which can decrease the borrowing power of home buyers.

Property is still a viable investment in Singapore.

Because of a multitude of factors such as increase in family offices and the movement of PLAB.

Which helps to ensure property in Singapore is still affordable yet a safe investment that has a high chance of appreciating.

In addition, our property market may withstand the interest rate impact better than those in many other countries. Speculative activities are low, and many safeguards are in place to ensure most borrowers are not overleveraged.

Moreover, the aggressive rate hikes are likely to be temporary. Interest rates may revert to normalcy once inflation comes under control.

For buyers who purchase properties for investment, the rental income can offset the mortgage increases after temporary occupation permit (TOP) since rents have been on an uptrend in recent years.

Thus in my opinion Singapore is still an excellent place for real estate investment for many years to come.