What will happen to private homes with rising interest rates

I have been posting and commenting about rising interest rates on my Property Soul Facebook page since August last year.

The first country that raised its interest rate was South Korea, followed by Norway, New Zealand, Poland, Russia, Brazil, The Czech Republic, Singapore, Pakistan, Hungary, Chile, and finally, the US. The next coming up will be Australia and Canada. In the meantime, countries that have hiked rates a couple of times in just a few months’ time include the UK, New Zealand, South Korea and the Czech Republic.

The low-interest era has come to an end. Good for savers, but bad for borrowers.

Money printing led to runaway inflation

Blame it on the pandemic.

Governments all over the world saved their countries from recession by increasing money supply to stimulate the economy. With plenty of liquidity, banks lured companies and individuals to borrow with low interest rates. New money flowed into the stock market, real estate and cryptocurrencies.

Thanks to easy financing and close to zero interest rate. Whatever high valuation of properties could easily be justified. Homes were sold at high prices but they all looked very affordable. When prices shot up, homebuyers simply borrowed more. Governments also encouraged home purchase with buyer incentives and tax rebates.

Money printing created asset bubbles and runaway inflation. To cope with highest inflation in 40 years, the Federal Reserve raised interest rate last month. The Central Bank hinted six more rounds to come this year.

In January 2021, the average interest rate of a 30-year mortgage was 2.65 percent. A year later at the beginning of 2022, it was still at 3 percent. Now it stands at 5.25 percent – the highest since the end of 2018.

In Singapore, amid pressure of high inflation, the Monetary Authority of Singapore (MAS) is expected to have another round of aggressive tightening of the Singdollar this month. This is the third time in a row after Singapore tightened its monetary policy last October and this January. Lower monetary supply implies rising interest rates.

When the money printing wheel stops, what is going to happen next in the housing market?

1. More supply but less demand

Under the pandemic, the appreciation of home prices was largely sustained by easy and cheap financing. Homes look affordable to both first-time homebuyers and home upgraders.

Besides, homeowners could now take advantage of lower rates to refinance. Even those with financial difficulties were able to hold onto their homes. Banks offered mortgage deferment or pay-interest-only schemes for borrowers under stress. Governments ordered temporary banning of repossessions. Consequently, there were less homes for sale in the market. Less supply but more demand further pushed up housing prices.

In the US, unemployment rate is low after over one million died from Covid-19. But salary increment can hardly keep pace with inflation, especially from housing. In the past two years, home prices have gone up 32.6 percent. But wages have grown less than 10 percent in the same period. In Australia, housing prices have surged 22.6 percent between March 2020 and December 2021, compared with an income growth of 3.3 percent.

When money printing stops, housing becomes unaffordable for many first-time homebuyers. Tightened borrowing and rising interest rates automatically screen out marginal buyers who cannot meet the banks’ strict debt-to-income ratios. According to the US Mortgage Bankers Association, mortgage applications fell 9 percent in the last week of March compared with the same period last year.

Similarly, the volume of home refinancing applications was also down 62 percent from the same time last year. Higher interest rates mean higher monthly mortgage payments. Homeowners who have overstretched themselves may have to sell or downgrade. More homes will be in the market soon.

Demand is shrinking. Supply is on the rise.

2. Demand can’t catch up with supply

In Singapore, demand for private homes from new projects is shrinking too. March’s estimated new private home sales of 651 units is a disappointing 50 percent drop from last March. A month earlier in February, developers only managed to clear 527 units – the lowest new homes sales transaction volume since May 2020 during Singapore’s circuit breaker.

On the other hand, Singapore developers still have over 40 new condominium projects waiting to launch at the right time. Yet unfavorable factors keep piling up – last December’s new cooling measures (lower TDSR but higher ABSD), Budget 2022 wealth taxes (higher property taxes and GST), rising interest rates, economic uncertainties from the Ukraine war…

Likewise, the collective sale market has hit the wall. It started when Shun Tak Holdings abandoned the $556.7 million High Point condo en bloc deal days after last December’s cooling measures announcement. Other on bloc hopefuls trying to relaunch their home for sale were met with lukewarm interest. Four months into 2022, only 31-unit Gloria Mansion and 24-unit Haig Road apartment were sold. It proves that the harsh 35 percent ABSD slapped on developers is a big deterrent.

According to URA’s 4th quarter 2021 real estate statistics, there are 51,609 private residential units including ECs in the pipeline with planning approvals. The authority stated clearly in the report that the current level of private home supply “will sufficiently cater to the housing needs of the population when completed over the next few years”.

3. Higher household debt and mortgage-to-income ratio

According to the Federal Reserve Bank of Atlanta, a median American household spends 34.2 percent of its gross income to service mortgage payments on a median-priced home. That means Americans are paying their mortgage with over one-third of their income before taxes.

The Fortune just published a new articled titled “The housing market just hit a level not seen since 2007” (The Fortune, 11 April 2022). It mentions that the mortgage-payment-to-income ratio in the US averaged 19.9 percent during the 2010s. Now the ratio has climbed to a high level of 29 percent last seen in 2007, right before the outbreak of the subprime crisis.

Is the bursting of a housing bubble looming in the dark?

In its annual Financial Stability Review in December 2021, MAS said it is concerned about Singapore household debt rising steadily since 2020. Under anticipated rising interest rates, we are advised to carefully assess our ability to meet mortgage obligations. Borrowers saddled with a heavy debt load should not take on more loans.

Mr Tan noted that although there is a need for prudence in borrowing as interest rates are expected to rise in the coming years, Singaporean households have generally been able to service and manage their debts.

Last year, the median total debt servicing ratio (TDSR) was at 43 per cent, well within the TDSR threshold of 55 per cent …

– “Exercise financial prudence in home purchases given potential rising interest rates: Alvin Tan”, The Straits Times, 4 April 2022

Honestly, the 43 percent median TDSR figure does not say much about the impending risk under rising interest rates. Singapore’s 55 or 60 percent TDSR assessment came into effect during the low interest era. It is calculated based on an interest rate of 3.5 percent. It will be more relevant and convincing if the minister can let the public know two figures:

1) What is the exact number of households with debts above the 55 percent threshold; and

2) What is the number of households that are likely to have difficulties servicing their debts should interest rates raised by, say, 2 points.

In comparison, US has increased its average 30-year mortgage interest rate by 13 percent in one year’s time (from 2.65 percent in January 2021 to 3 percent in January 2022). In the last three months, the rate was up 75 percent from 3 percent to 5.25 percent.

4. More landlords will throw in the towel

Banks lend customers umbrellas on a sunny day, but they take them back when it is pouring.

Many homeowners are not aware of the fact that local banks do not necessarily need a Fed rate hike to raise the interest rates of housing loans. For instance, after the announcement of new property curbs in July 2018, Singapore banks priced the interest rate of their mortgage packages higher to protect themselves for slower loan growth.

Once the economy recovers, the hikes in mortgage rates can be fast and frequent. In mid-2005, I was still paying an interest rate of 1.3 percent for my rental properties. After three to four rounds of interest rate revisions, it had already gone up to 4 percent by the end of 2006.

– Vina Ip, Behind The Scenes of The Property Market

I remember the last time when interest rates jumped like nobody’s business was in the year 2006 and 2007. Every few months the banks would inform me a revised higher interest rate and the corresponding higher monthly repayment. Some letters even had the effective backdated to a month earlier. As a result, I had no time (chance) to refinance or reprice to avoid paying higher interest.

Imagine you were a multiple property owner. All your investment properties would be affected by rising interest rates at the same time. Unfortunately, interest rates might be revised up a few times a year. But your tenants were still paying the same rent because it was fixed in the tenancy agreement.

In particular, rising interest rates will have bigger impact on two types of landlords:

1) Landlords who overstretched themselves financially during purchase and borrowed maximum loan-to-value; or

2) Landlords who bought their investment properties at high prices. The rent cannot cover outgoing expenses, including monthly loan repayment, property taxes, maintenance fees and repair costs.

Nonetheless, there are three types of landlords who will not be affected by rising interest rates:

1) Landlords who paid their investment property in cash with zero loan;

2) Landlords who bought many years ago and have their properties fully paid up or almost loan-free; or

3) Landlords who bought at the bottom of the market last time with a very good price.

Preparing for rising interest rates

Working with banks to finance my investment properties all these years have taught me a thing or two:


1) Borrowing is a double-edge sword

Leverage can help you acquire assets. But it can also turn against you when market direction changes. Banks are most approachable and helpful when they want you to borrow from them, not when they want you to pay them back. When you are borrowing, you are a customer. When you are paying back, you are a debtor. Banks lend customers umbrellas on a sunny day. But they take them back when it is pouring.


2) Opportunities are for the prepared

Usually, revisions of interest rate for housing loans will take effect one month after announcement. However, refinancing or repricing takes time for processing. After approval, it takes another three months to be effective. So be prepared to pay higher interests for some time before the adjustment of the monthly mortgage.

To enjoy lower interest rates, keep monitoring the latest interest rates and new housing loan packages available in the market. (Read my earlier blog post “Getting the most out of housing loans”)

If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.

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