On the lowest home loan packages offered in Singapore currently, first-year interest rates can go as low as under 1%. This is about the lowest it has ever been.
While interest rates were actually on the rise in early 2020, the economic blow from COVID-19 pushed interest rates back down to near-zero levels. More than one year on, the pandemic is still having widespread effects on economies worldwide.
Low interest rates typically encourage businesses and individuals to invest their money and discourage saving as returns poorer. One way that many Singaporeans wish to invest their money is to buy a property.
How Low Interest Rates Benefit Property Owners
One obvious question that arises in a low interest rate environment is whether this is a good time to buy a condominium in Singapore. This is because lower interest rates mean:
#1 Lower Monthly Mortgages
With all things equal, borrowing the same amount on a lower interest rate would mean lower monthly mortgage repayment.
For example, a person taking a 25-year home loan of $500,000 on 0.99% interest rates will have to pay $1,883 per month in mortgage repayments. For the same loan, but with a 2.6% interest rate tag, the monthly mortgage becomes $2,269 – or almost 20% more per month. Snowballed over 25 years, it may amount to a substantial amount.
#2 Higher Returns
Assuming rents hold firm, a lower interest rate will translate into a higher return for property investors.
For example, a $1 million property is fetching $5,000 rent a month. This is roughly 6% return per annum. If the investor is paying 0.99% in interest rate on their mortgage, their return and cash-in-hand each month would be higher than if they had to pay a higher interest rate on their home loan.
#3 The Ability To Invest With Lower Income
Because property buyers will pay lower interest payments on their mortgages, they can afford to take a larger loan.
In Singapore, there is a 60% cap on the Total Debt Servicing Ratio (TDSR) when getting a home loan. The TDSR is a cap on the monthly repayments we can make on all loans in our name.
For example, a person earns $5,000 a month. If he or she is buying a $1 million home, they need to pay down at least $250,000 in down payment.
On a 25-year home loan at 2.6%, he or she needs to repay $3,403 each month. This means the person needs to earn at least $5,672 a month. This means they cannot afford to purchase the property.
If interest rates fall to 0.99%, the same person will only need to repay $2,824. This means their salary now needs to only be $4,707. They can now buy the property
Home Prices In Singapore Are Indeed Increasing
This isn’t just theory either. Home prices in Singapore have been increasing. According to the Urban Redevelopment Authority (URA), the private residential property market increased 3.3% in the first quarter of 2020.
In fact, it has been on an uptick even throughout the COVID-19 uncertainties. Whereas, prior to COVID-19, in the period between 2018 to end-2019, interest rates had actually been rising which corresponds to prices plateauing in the chart below.
While lower interest rates provide better scenarios for those looking to buy a property, there are vital considerations before committing to one.
Will Interest Rates Stay Low?
While vaccination programmes are underway in most countries, the threat of getting infected with different strains of COVID-19 still looms large. This has already been seen in Singapore, as we have reverted to Phase 2 (Heightened Alert) measures to reduce community infections.
As long as COVID-19 remains an ongoing health crisis, interest rates may be kept to near-zero levels.
In the US the US Federal Reserve (Fed) has committed to keeping interest rates at near-zero levels until 2023. This will definitely have a knock-on effect for other countries, especially Singapore being a small and trade-centric economy.
In short, it does look like interest rates will stay low until at least 2023.
However, another equally important consideration is the longer-term interest rate trends. Most people purchase a property with home loans lasting two to three decades, rather than two to three years. The last thing we want is to be unable to refinance or afford our mortgages if interest rates adjust upwards.
Will The Government Step In?
Even in a low interest rate environment, home prices cannot soar without income also rising. And, even if they can run ahead of income, the government has already shown that it will intervene to ensure that it doesn’t by making policy adjustments.
Over the years, we have had numerous rounds of cooling measures already. If property prices continue rising unsustainably, more cooling measures may be implemented. This includes the TDSR and the Additional Buyer’s Stamp Duty (ABSD) and others.
Are Home Prices Affordable?
The 2020 median income in Singapore is $54,400 a year. For couples looking to buy or invest in a home, you can double this figure to $108,800.
To crunch the numbers for affordability, we derived home prices in February 2021 (which itself is based on past home prices). This means prices of flats are likely higher today.
|Housing Type||Average Housing Price||Affordability (How Many Years It Takes To Pay For The Flat Earning The Median Income)|
|Executive Condominiums||$1 million||9.2 years|
|Condominiums (OCR)||$1.2 million||11.0 years|
|Condominiums (RCR)||$1.6 million||14.7 years|
|Condominiums (CCR)||$3 million||27.6 years|
We can see that it can take between a decade and close to three decades to pay for a condominium. This may not be so affordable for those earning the median income.
At the same time, we should understand that condominiums may not be meant for everyone. Today, more than 85% of people here are living in an HDB flat. This means condominiums and other private property are intended for those earning higher than the median income.
Will COVID-19 Impact Ability To Pay More For Homes?
In contrast to most other economic crises, home prices in Singapore did not suffer. It is likely that the government close to $100 billion stimulus packages in 2020 supported home prices and measures such as deferring mortgages allowed people to continue holding on to their homes in the interim.
If the situation worsens, as it has already been, and the government does not provide equal support measures, home prices may come under pressure.
Aspiring home buyers need to ask themselves whether current prices can be maintained as the government has already tightened safe management measures twice in the space of two weeks.
Home Supply In The Coming Years
Due to a slowdown in the construction sector, supply-side has been heavily affected. Many projects have been delayed and/or deferred. This also means more supply will be coming on board in the next few years.
At the same time, a slowdown in the jobs market in Singapore could see foreigners and expats who rent condominium properties dwindling. This will mean greater vacancies, which could lead to rents going down and prices potentially following suit.
Many Other Considerations – Apart From Interest Rates
While interest rates will definitely have a bearing on home prices, there are many other facets we need to look at when deciding whether now is a good time to purchase a condominium. At the same time, just looking at short-term rates may not be so sustainable either.
How well Singapore is able to cope with the currently second wave of COVID-19 infections may well be the biggest indicator on whether property price increases are able to sustain in the current landscape. As will the support measures from the government.
We need to think about all of these things holistically and in the long-term when deciding to buy a condominium. After all, buying a property is a two to three-decade commitment.
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