Highly leveraged homeowners may face double whammy from inflation, housing supply
Highly leveraged homeowners may face double whammy from inflation, housing supply. Inflation and housing supply may hit highly leveraged homeowners twice. A PERFECT storm, according to the National University of Singapore’s Institute of Real Estate and Urban Studies (IREUS), could be on the horizon for Singapore’s private residential property owners, particularly those who are highly leveraged.
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, according to the research institute’s analysis of historical data.
Due to rising funding costs, several Singapore banks suspended fixed-rate home loan packages in late April 2022, according to the Business Times (BT). Mortgage rates in the city-state could be raised three times this year, according to mortgage advisers polled by BT.
The 3-month Singapore Interbank Offered Rate (Sibor) usually moves in lockstep with core inflation as Singapore’s central bank adjusts monetary policy to support long-term growth, albeit with a lead-lag effect between the two time series.
Despite higher inflation between the end of 2011 and the first half of 2012, the three-month Sibor remained relatively stable between 2010 and 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 charged to each other by Singapore banks. It is a popular floating-rate home loan benchmark, but it will be phased out by the end of 2024, replaced by the Singapore Overnight Rate Average (Sora).
The movements of global markets, particularly those in the United States, have a significant impact on Singapore’s domestic interest rates. Today, as inflationary pressures appear to be increasing, central banks around the world are under pressure to raise interest rates in order to keep prices under control.
“As a result, the Sibor, and thus mortgage rates, are expected to rise further,” IREUS said.
According to Lee Nai Jia, deputy director of the research institute, these higher rates will most likely put financial strain on low-income homeowners.
The current strong rental market for private homes, on the other hand, provides a silver lining for investors leasing out their properties, as the rent can help provide a buffer to cover their higher mortgage payments.
“Buyers must also adhere to the total debt servicing ratio (implemented in 2013), which is 3.5 percent or the current market interest rate, whichever is greater.” This means that borrowers who took out loans after 2013 and 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 put to the test 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. 16,978 private residential units are expected to be completed in 2023, followed by another 10,850 in 2024.
According to Dr Lee, 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.
“When combined with the possibility of a recession, rent-paying homeowners 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 precautionary measures to encourage financial prudence last December, the private housing market would have been particularly vulnerable to external shocks.
And, while there appears to be strong demand for private housing as with the upcoming new development in Ang Mo Kio, AMO Residence, introducing too much supply will stress the market if and when the economy performs poorly. “This likely explains the government’s cautious approach to increasing the supply of new private homes,” Dr Lee said.
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