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  • Writer's pictureBrian Loh

How Interest Rates Affect Property Prices In Singapore?

Updated: Oct 7, 2022

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Rising mortgage interest rates are nothing to worry about, and participants' anxiety will be reduced by comprehending the topic. It is vital for individuals participating in the housing industry to understand that rising mortgage rates have a substantial impact on practically every aspect of home acquisition.

In a competitive free market, lenders—whether supported by the government or operated privately—compete for the business of homebuyers, which affects how much the average monthly interest rate on mortgage loans changes.

The average interest rate on 30-year fixed mortgages has remained close to historic lows from 2013 to 2021 but has started to rise in 2022, while they are still at historically low levels, due to rising house prices, stricter credit rules, and a decreasing surplus of unsold properties.

According to common wisdom in the real estate industry, dropping interest rates make purchasing and selling a home easier while rising interest rates make such tasks more challenging.

Just an illustration purpose, for instance, Johnny's monthly mortgage payment would be $4,558 if he chooses a 1.5% rate on a $1,569,000 home with a 26-year fixed mortgage. However, Johnny's monthly payment would increase to $5,134 if he was only approved for a 2.5% rate on a 26-year fixed mortgage. Johnny's payment goes up by $576, or around 13%, with every 1% increase of interest. What does this mean for those looking to buy a home, then?

From the standpoint of a home buyer, affordability declines as mortgage rates rise. In the aforementioned example, Johnny wishes to be approved for a 75% loan of property price which is $1,176,750 loan at 1.5% interest, however at 2.5% interest, lenders can only provide Johnny a loan for $1,131,750 due to his qualifications. Johnny's purchasing power is reduced by $45,000 for every 1% increase in mortgage interest.

Both buyers and sellers are clearly impacted by rising interest rates. Hypothetical scenarios demonstrate the direct relationship between property worth and housing prices and mortgage rates, but the economy's state is what underlying both scenarios.

Rising mortgage rates won't have as much of an impact on home values and prices if the economy expands quickly enough. For instance, a one-point increase in mortgage rates would result in a $576 increase in monthly payments for a $1.156M Property; however, an expanding economy would enable businesses to raise wages sufficiently to offset the increase in interest rates.

A rise in interest rates shouldn't prevent the housing market from expanding as long as the economy is expanding and jobs and wages are increasing.

Real estate investing may benefit if mortgage rates increase. Less people can qualify for mortgages, which will raise the market for rental houses. Despite this, rising interest rates often make it more advantageous to buy because they drive down prices.

Additionally, if interest rates rise, fewer real estate transactions will occur because of tighter lending guidelines. Therefore, the demand for rental homes will increase until more people can afford a mortgage. In the proper housing market, a 1% increase in interest for an investor can result in a windfall profit.

As a matter of fact that finding the correct mortgage ultimately depends on getting the right guidance from a seasoned real estate professional who personally owns a large number of properties and has completed a large number of real estate sales for others. Prospective investors can feel more informed, certain, and secure about their financial decisions by working with an expert.

However, by looking at the correlation between interest rates and property prices, we found that the relationship between the two variables are not very significant. In fact, things like market conditions, employment rates, foreign direct investment and location were found to have higher correlations with property prices.

A possible reason for this is because investors have accepted that interest rates will fluctuate frequently as many loan packages are currently pegged to SIBOR or SOR rates. As a result, investors would have already priced in interest rate volatility in their decisions to buy a property.

Moreover investors know that they can always opt to refinance the property; as a result, interest rates tend to have a lesser impact on their buying decisions. Thus, as long as interest rates do not suddenly spike beyond what is deemed reasonable, investors generally would not be significantly influenced by interest rates.

Author By:

Brian Loh CN

MSc. Applied Finance, University of Adelaide, Australia

Registered Real Estate Salesperson by CEA Singapore

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