Invest in Singapore Property: Will Low singapore SOR rates inflate property prices?

Invest in Singapore Property: Will Low singapore SOR rates inflate property prices?

Quotes -->

“Analysts say the Sibor drop may complicate recent government efforts to rein in rising asset prices, in particular a surging real estate market.” (David Roman and Gaurav Raghuvanshi, Dow Jones Newswires, online.wsj.com/article/BT-CO-20100519-718371.html

,19th May 2010)

"Property is the most interest-rate sensitive sector of the economy," said David Carbon, an economist with DBS. "The economy is growing very fast, rates are very low: You can draw your own conclusions." (David Roman and Gaurav Raghuvanshi, Dow Jones Newswires, online.wsj.com/article/BT-CO-20100519-718371.html



Some financial news reports or articles have been saying that Sibor at an all time low is making the situation more complex as low interest rates cause asset bubbles especially in the property market.

Though the statement looks correct universally and is more or less so, but if you bother to drill down, a lot of so called Universal truth is not so Universal afterall.

How much movement in interest rates before something happens? Is property most sensitive to interest rates? (Maybe but maybe not)

The general hypothesis is that when Interest rates are low, people can afford the properties, therefore bidding up the property prices . We are usually very careful about being a parrot and repeating statements such as these.



While in the extreme, that statement "Property is the most interest-rate sensitive sector of the economy" is usually true, but the degree of sensitivity of property to that is suspect.



Because if you look at 2007 to 2008, during the property boom, the run up in prices as well as interest rates are almost in tandem. It took quite a lot of interest rates hike (from about 2% home loans singapore rates to almost 5%) to slow down the property market. So there is a substantial lag effect.



And eventually it was the break-out of the global financial crisis that made people lose jobs and lose confidence that did the job or slowing the property market.

So how will Singapore condominium prices be affected by varying property loan singapore rates.

At Property Buyer Singapore Mortgage consultants, we like to research it and present the facts.
Tel: 6100 0608
Sms: 9782 8606
http://www.propertybuyer.com.sg/articles/about-us



Arguments FOR AND AGAINST " Low Interest rates complicate recent government efforts to rein in rising asset prices"



Our customers are buying for reasons that are NOT how much Singapore bank interest rates they have to pay.

Then they will check the repayment schedule, only then they will realize that they are over-stretching or not.



The cases that we have seen are very different.

It is often not just about the Home loans Singapore, it's more than that.

Property Buyers who are getting home loans in Singapore do so for the following reasons : -

Need a place to stay
Replacement for their renting
Property available in their locality
Property meeting their budget
Property meeting their lifestyle
Investment reasons – Income (very few)
Many people stated Capital appreciation as a reason
Interest rates are very low Not many people told us this was their main reason for considering property purchase.


We have a sample size of 50 clients over the past many months , population of 5 million people, 90% of people did not state interest rates being low as buying criteria (only 10% stated low mortgage interest rates as property buying criteria).

Based on a statistical tool at (://www.surveysystem.com/sscalc.htm) we have arrived at a figure of 90% +/- 8.32% using a 95% confidence level.



Property investors ARE NOT BUYING DUE TO LOW Property LOANS RATES!!! (We are 95% certain) - Based on our 30min rough estimation



People that bother to read our research material are typically skewed towards private properties, their range do vary a lot, from property purchase between $1m to $10m. And as these people are not related, we can therefore assume that they are fairly homogeneous and representative of Singapore’s Private property buyers.



We can say with a 95% confidence level that between 81.68% to 98.32% of people buying properties in Singapore , they are buying for reasons other than low interest rates. Between 3% and 1% bank interest rate, it makes little difference to their property buying intentions. Of course it would still make a difference to them if interest rates are between 10% and 1% (But historically unlikely as it has only happened once within this 20 years) . Of course there are between 1.68% to 18.32% @ 95% confidence level are buying due to low interest rate reasons.

So low interest rates is one of the many factors that cause property asset prices to rise, but only a small reason .



Low interest rates don't mean that banks can grant you loans, you must pass the bank affordability test



Singapore Banks practice a safety threshold for property mortgage loans interest rates. Therefore only those who have a healthy income (cash flow) minus off their liabilities meeting a certain debt servicing ratio (typically 50%) are granted a loan.



Singapore banks generally set a property loans interest threshold at between 3.5% to 5% at this point in time. Even if the prevailing interest rates are 1% or less on your home loans, you will be tested for your servicing ability at between 3.5% to 5% home loans rates. You must pass the bank's credit department test to get a loan . As there is some buffer between existing rates and the bank's threshold, there is some time lag .

Therefore singapore bank residential interest rate is INELASTIC to creating property demand when interest rates are low.



So if you cannot pass the affordability test, you cannot buy a property using bank's financing, so how will you add to the demand to force property prices to rise?



Singapore's SIbor interest rates have peaked at about 3.6% within the last ten years. And the banks usually Lag in increasing interest rate means threshold.



When banks set their threshold for interest rates, they look at historical interest rates. No matter how low the prevailing rates are, they will still keep it at a higher level just to make sure that you can afford to repay the loan.



Therefore dropping Sibor from 3.5% to 1% or thereabouts is INELASTIC to create any demand and hence will NOT push up Singapore property prices.


Therefore your affordability do NOT increase with lowering interest rates in Singapore. It's whether the bank will lend to you, or NOT (if you fail the cash flow criteria).

The interest rates from about 3.5% to 1% is inelastic to actual demand in Singapore's context aided by bank's interest threshold setting.




Third point - IF PROPERTY INTEREST RATES ARE HIGH AND YOU NEED A PLACE, WITHIN THE INELASTICITY RANGE OF INTEREST RATES YOU WILL STILL BUY (If you can afford it)



Say you need a place to stay, you will still buy a place even if interest rates increases. So interest rates increases beyond a certain (will cause the bank to raise their safety threshold interest rates even higher) and eventually cause people to shun away from buying a property.



But Low interest rates alone do not do the opposite. It may not cause people to want to buy a property. When the rates are low, it could be more of a need based demand.



As there is a safety threshold, however low the interest rates go, the bank's safety Sibor interest rate threshold typically do not fall further. (But it is the bank's decision).



novice property investors cannot simply believe in news reports and rumours



We are not Singapore economists, we are mindful and wary of generic motherhood statements . Because this is how most news work. They report something that is easy to read and digest.



Though the print media always try to get things right, because some of them are under a lot of time pressure to churn out sensational news on a daily basis, therefore it is also prone to dishing out generic motherhood statements that does nothing to help the investor.



So, Sibor must raise significantly (say several percentage points say 2 to 3% ) before it dampens property buying sentiment and ease the rising property prices. Singapore government got it wrong again leading to the treasury coffers swelling due to high prices for land sales. But nonetheless, we think policy levers are more effective than interest rates.



With this we conclude that low interest rates will not complicate housing demand or property asset bubble , but rather the shortage of housing due to poor timing and planning by the Singapore government is the cause of it.