Many folks are troubled that the current low interest rate environment in Singapore could end by the end of the present year, driving up the price of mortgages and putting force on the property market. In this article we take a look at how rates in Singapore are determined, and where they are likely to head for the remainder of the year and beyond.
How are rates determined?
In a 1999 paper titled "Interbank Interest Rate Backbone in Singapore and its Linkages to Deposit and Prime Rates", staff of the Monetary Authority of Singapore (MAS), the central bank, discovered that "only changes in US interest rates or market expectations of future movements in the exchange rate have a major result on the domestic interbank rate."
But other researchers have revealed that the SIBOR has often been definitely interrelated to the movement of the bank loan to deposit ratio, even after controlling for the impact of US interest rates. This suggests that if bank loans grow faster than deposits, SIBOR tends to head upwards.
So to review, exactly how interest rates in Singapore are determined is a debatable subject and there's no easy formula! But we know there are three serious factors that may influence it: 1) US IRs 2) Market expectations of the Singapore Dollar exchange rate (will it appreciate or depreciate?) and 3) Demand and supply for loans and deposits in Singapore.
So where are IRs heading?
Hong Kong mortgage rates have recently risen by as much as 1% during the last 3 months, driven by tight liquidity in the bank system as the growth of loans have outpaced the expansion of deposits. Will interest rates in Singapore also head upwards due to the demand-supply dynamics in the local bank system, regardless of if US rates stay low for the moment?
In a corresponding situation to HK, loans have been growing faster than deposits, with loan growth till April of 21.9% versus deposit expansion of 12.7%. If the distance between the expansion of loans and deposits continues, this may increase the bargaining power of local banks and increase the likelihood of a higher SIBOR and also rate spread above SIBOR for mortgages.
But HK has its own specific dynamics "there's been a growing shift into Renminbi from Hong Kong Buck deposits, which has been absent in Singapore as the MAS has let the Singapore Dollar appreciate against the US buck, whereas the HK Buck is pegged to it. In reality the Singapore Greenback has even appreciated against the Renminbi over the past two years! But if the MAS comes to a decision to slow the appreciation of the Singapore Dollar, we could begin to see higher interest rates.
Also, the Singapore government's contemporary moves to moisten speculation in the property sector could lead to both lesser transactions and therefore mortgage volume, and also a lower mortgage per transaction (as the Loan To Valuation limit has been decreased for investment properties). This indicates that loan growth might begin to weaken, while deposit expansion remains healthy in spite of the low rates as folks prefer to park their cash in a "strong" currency.
As for where US rates are headed, it is anyone's guess. But Singapore's Asian neighbours China and India have recently been raising rates to attempt to deal with rising inflation. If inflation starts becoming a controversy in the US, and policymakers have faith in the strength of the economy, then rate hikes could come earlier than expected.
While we do not expect a large spike in rates soon, they actually can't go much lower, and borrowers should be prepared for scenarios where they start moving higher. For house purchasers, this means that you shouldn't assume that rates will always remain this low, and to plan your finances so you will still be in a position to meet your mortgage payments even if rates rise.
Hope you enjoyed reading this Singapore property market article!
How are rates determined?
In a 1999 paper titled "Interbank Interest Rate Backbone in Singapore and its Linkages to Deposit and Prime Rates", staff of the Monetary Authority of Singapore (MAS), the central bank, discovered that "only changes in US interest rates or market expectations of future movements in the exchange rate have a major result on the domestic interbank rate."
But other researchers have revealed that the SIBOR has often been definitely interrelated to the movement of the bank loan to deposit ratio, even after controlling for the impact of US interest rates. This suggests that if bank loans grow faster than deposits, SIBOR tends to head upwards.
So to review, exactly how interest rates in Singapore are determined is a debatable subject and there's no easy formula! But we know there are three serious factors that may influence it: 1) US IRs 2) Market expectations of the Singapore Dollar exchange rate (will it appreciate or depreciate?) and 3) Demand and supply for loans and deposits in Singapore.
So where are IRs heading?
Hong Kong mortgage rates have recently risen by as much as 1% during the last 3 months, driven by tight liquidity in the bank system as the growth of loans have outpaced the expansion of deposits. Will interest rates in Singapore also head upwards due to the demand-supply dynamics in the local bank system, regardless of if US rates stay low for the moment?
In a corresponding situation to HK, loans have been growing faster than deposits, with loan growth till April of 21.9% versus deposit expansion of 12.7%. If the distance between the expansion of loans and deposits continues, this may increase the bargaining power of local banks and increase the likelihood of a higher SIBOR and also rate spread above SIBOR for mortgages.
But HK has its own specific dynamics "there's been a growing shift into Renminbi from Hong Kong Buck deposits, which has been absent in Singapore as the MAS has let the Singapore Dollar appreciate against the US buck, whereas the HK Buck is pegged to it. In reality the Singapore Greenback has even appreciated against the Renminbi over the past two years! But if the MAS comes to a decision to slow the appreciation of the Singapore Dollar, we could begin to see higher interest rates.
Also, the Singapore government's contemporary moves to moisten speculation in the property sector could lead to both lesser transactions and therefore mortgage volume, and also a lower mortgage per transaction (as the Loan To Valuation limit has been decreased for investment properties). This indicates that loan growth might begin to weaken, while deposit expansion remains healthy in spite of the low rates as folks prefer to park their cash in a "strong" currency.
As for where US rates are headed, it is anyone's guess. But Singapore's Asian neighbours China and India have recently been raising rates to attempt to deal with rising inflation. If inflation starts becoming a controversy in the US, and policymakers have faith in the strength of the economy, then rate hikes could come earlier than expected.
While we do not expect a large spike in rates soon, they actually can't go much lower, and borrowers should be prepared for scenarios where they start moving higher. For house purchasers, this means that you shouldn't assume that rates will always remain this low, and to plan your finances so you will still be in a position to meet your mortgage payments even if rates rise.
Hope you enjoyed reading this Singapore property market article!
About the Author:
Propwise.sg, a top Singapore property blog, is dedicated to helping you understand the real estate market and make better choices. Visit us to read more Singapore property market articles.
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