Wouldn’t it be great if you could predict future real estate prices? Or if you managed to sell your assets right before a stock market crash?
Truth be told, a market crash does not happen overnight. It is actually a build-up of many factors, such as demand and supply, government measures and much more. It happens over months instead of hours. Being an illiquid asset, there is ample enough time to study and predict the rise and fall of prices.
For economic indicators to have predictive value for investors, it needs to be up to date, forward-looking and must take into account future values and the time value of money. This process is called discounting, deriving the present value of a payment that is to be received in the future. Given the time value of money, a dollar is worth more today than it would be worth tomorrow.
In this article, we will discuss how mortgage interest rates and government policies that indicate the property market performance.
Mortgage interest rates
So why are mortgage interest rates an indicator?
Properties are a big-ticket item and they are expensive, especially in a first world country like Singapore. Therefore, consumers are predisposed towards taking home loans from banks or financial institutions.
How do mortgage interest rate influence the residential market?
Essentially, the up and downward movement of interest rates affects a consumer’s decision on whether or not to purchase a home, thus affecting the level of demand for housing.
Demand is affected in two ways: in its direction (increase or decrease) and magnitude (degree of change).
In a low mortgage interest rate environment, it becomes cheaper for us to borrow and to purchase a home.
Logically, there is a lower monthly repayment, and this reduces the burden of servicing the mortgage. Potential home buyers would then want to secure a loan when rates are low.
Assuming that housing supply is inelastic, in the short run, prices of properties will rise due to an increase in demand.
Banks may offer attractive rates for the first 2-3 years with additional perks such as no lock-in period and so on.
Besides the mortgage interest rate, another contributing factor that may affect a home buyer’s decision to take up a particular loan is the lock-in period. Loans without lock-in period generally provide greater flexibility for homebuyers to refinance or change their loan package.
Very often, they would refinance their loan after the introductory rates. Thus, low mortgage interest rates coupled with such perks would incentivise potential home buyers, especially short-term investors. Hence we can expect an increase in demand in the residential market.
On the other hand, when interest rates are high, it becomes more expensive to purchase a home. The burden of servicing mortgages will be higher as monthly repayments become higher.
We can then expect a fall in demand for residential housing which results in a fall in housing prices.
That being said, rising interest rates may not be able to hurt property prices too badly on its own, especially if there are other positive drivers such as a good wage growth or a strong economy.
|BANK||LOAN PEG||Lock-in||YR 1||YR 2||YR 3|
|BANK A||Fixed||2 years||2.18%||2.18%||2.18%|
|BANK C||Board||2 years||1.98%||1.98%||1.98%|
|BANK D||1M SIBOR||2 years||1.95%||1.95%||2.27%|
These are examples of mortgage rates offered by banks in Singapore. There are loans that have fixed rates throughout the term, but most banks offer floating-rate loans. Over here you can see that for Banks B and C, the loans are pegged to board rate. Board rates are a type of floating rate pegged to the banks’ own benchmark rate. They can change anytime, but when interest rates fall, banks may not necessarily lower their board rates.
Those highlighted in yellow show the introductory or teaser rate for the first 2-3 years. Subsequently, the rates increase and homebuyers will incur higher monthly repayments.
How do government policies affect the housing market?
The purpose of these measures is basically to control and maintain a sustainable housing market.
Announcement of policies could come in the form of introducing a new “cooling” measure or making amendments to an existing one.
Fundamentally, tightening and easing of measures affect the demand and supply of residential housing. For instance, when the government wants to cool the market, they would do so through increasing stamp duties or tightening the loan-to-value (LTV) limit. In the short run, it increases demand as potential buyers rush to sign the sales agreement. However, in the long run, demand decreases.
On the other hand, easing of cooling measures aims to encourage the sale and purchase of residential homes.
On 5 July 2018, the Singapore government announced a tightening of cooling measures. You might be wondering, why did this happen? Simply put, the government did not want risk running ahead of economic fundamentals but instead, maintain a stable and sustainable residential market.
The property market is never affected by just one factor alone. There will be many other factors that come into play when determining price changes for the property market. Those listed in this article are solely economic indicators, and there are much more such as demographics, change in consumer preference, stock levels, the property price index (PPI), rental yields, vacancy rates and so on.
However, these economic indicators directly affect the demand for property, which directly correlates to its price. In simple economics, the law of supply and demand states that when demand increases, the price also increases.
We cannot predict actual prices, but it definitely gives us a feel on how the property market is doing, whether it’s doing well or about to take a turn for the worse.