Property Investment LOANS SINGAPORE: Will low sibor Sor rate lead to property prices escalating ?

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

,19^th 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

Online news reports and articles have been saying that Singapore Bank interest rates being low causes Property asset bubble. This is a motherhood statement. Though it cannot be very wrong, but the validity of the statement varies.  

Looking closely, property prices can be inelastic to interest rates drops and therefore lower interest rates may not necessarily lead to a corresponding increase in property buying. 

 Can Singapore Low Interest rates cause problems? 

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 regurgitating 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 even so, it was not entirely Interest rates that did the job of slowing the property market, it was the FINANCIAL fall out   .

 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. 

POINTS 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.

People buy properties in Singapore for different reasons such as  : -

• Need a home 
• Don’t want to rent anymore
• Property available in their locality
• Price of Property  
• Property meeting their lifestyle
• Investment reasons – Income (very few)
• Investment reasons – Capital appreciation (Quite a lot)
• Interest rates are very low Not many people told us this was their main reason for considering property purchase. 

Based on some 50 clients which we served in months  , population of 5 million people, 90% of our clients   did not state interest rates being low as buying criteria (only 10% stated low mortgage interest rates as property buying criteria).

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

Singaporeans  based their decisions on many other factors rather than bank rates  (We are 95% certain)    

We use a simple methodology. In order to validate that our sample is correct, we look at the range distribution. And we look for clustering of data. We found that the property buyers in our simple survey is not related and the range of properties prices are also quite wide.  

We can say with a 95% confidence level that between  81.68% to 98.32% of people buying properties in Singapore , they are NOT buying due to low Singapore property loans rates . 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 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.

 As banks will naturally assume that interest rates will fluctuate, they will test property buyer’s affordability based on a higher interest rate threshold.   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 Sibor rates being low is not a direct demand creator for Singapore property.  

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?

1%). 

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. 

POINT THREE – IF PROPERTY INTEREST RATES ARE HIGH AND YOU NEED A PLACE, within acceptable price, you will still buy 

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).

IF YOU WANT TO BE A SINGAPORE PROPERTY INVESTOR – YOU CANNOT TAKE GENERIC STATEMENTS AT FACE VALUE

We are not practicing 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 sounds nice, but have no value.  

So, Interest rates must raise significantly ( at least 2 to 3%  ) before it dampens property buying sentiment and ease the rising property prices. At this point, we would not go into why Singapore’s Ministry of National development get the supply and demand wrong again leading to massive hike in prices, what has happened has happened. Policy levers are more effective than raising or dropping interest rates.

So Low interest rate is not a key driver of demand of housing , but rather the shortage of housing due to poor timing and planning by the Singapore government is the cause of it.