Singapore mortgages may resist global rates downtrend - for now

Sibor-US Fed rate correlation may be mitigated by local factors like property demand-supply and MAS Singdollar policy moves

Wed, Aug 28, 2019


INTEREST rates are falling across the world - with some markets already mired in negative rates - but the flow through to Singapore mortgage rates may be mitigated by local factors.

"Most mortgage rates in Singapore are pegged to Sibor (Singapore Interbank Offered Rate) in one way or another; though sometimes they are called differently, like board rates, they all have to correspond to market interest rate (ie, Sibor) in order for banks to maintain their profit margins,'' said Duckju Kang, chief executive officer of ValueChampion, a consumer finance research firm.

Historically, the US Fed rate and Sibor - the rate banks borrow from one another - have been closely correlated. In anticipation of the Fed's cut, some local banks had already cut their home loan rates earlier this year.

In its last rate-setting meeting, which ended on July 31, US Federal Reserve chairman Jerome Powell pressed ahead with a 25 basis point cut in interest rate to a range of 2 to 2.25 per cent to mitigate the effects of the US-China trade row and a global growth slowdown. The cut - its first reduction in borrowing costs since the financial crisis a decade ago - left the market speculating what is in store for the next Federal Open Market Committee (FOMC) in September.

Mr Kang said: "The latest US Fed rate cuts will definitely put pressure on banks in Singapore to lower mortgage rates."

The three-month Sibor - a key benchmark for pricing most home loans - was seen at 1.88 per cent on Aug 15, down from nearly 2 per cent before the US Fed's rate cut.

However, James Cheo, Chief Market Strategist, SEA, HSBC Private Banking, said the factors behind the co-movements are not identical.

"Sibor is a reflection of demand and supply dynamics of the domestic Singapore dollar funding market while Fed funds rate is the policy rate in the US."

"Lower global rates will be one of the key factors driving corporate and home rates lower. However, domestic demand and supply dynamics in the corporate and property sector can act as countervailing factors,'' Mr Cheo said.

Indeed, Lim Beng Hua, Head of Secured Loans at UOB - which reviews its home loan packages regularly to ensure they remain competitive - expects home loans growth to be flat to muted for the rest of the year due to the impact of Singapore's property cooling measures.

Last July, the government raised the Additional Buyer's Stamp Duty (ABSD) rates and tightened the Loan-to-Value (LTV) limits for the purchases of residential property to cool the property market and keep price hikes in line with economic fundamentals. ABSD for Singapore citizens buying a second property is now levied at 12 per cent and 15 per cent for third and subsequent properties, up from seven per cent and 10 per cent respectively before.

Selena Ling, Head of Treasury Research & Strategy, OCBC Bank, reckoned that "while mortgage rates may gradually adjust lower over time, home demand may remain cautious given the weak economic climate and macro prudential measures".

"Ditto for corporate loan rates. In fact, in an environment where growth is slowing rapidly, there may be rising credit and non-performing loan risks, " Ms Ling said.

Another key determinant of Sibor is currency dimension - especially how the Monetary Authority of Singapore (MAS) is going to set Singapore dollar policy. Having said that, Mr Cheo expects with global rates going lower, Sibor will likely trend lower.

"With the slower global growth backdrop, the odds are higher now than before that the MAS would opt for a flatter nominal effective exchange rate (NEER) slope to provide some support for the economy.

Robert Carnell, chief economist and head of research, Asia Pacific at ING, added that the weak state of Singapore's export industries, hit by the global tech slump, as well as the trade and tech war, together with softer global trade, suggest that the next MAS move would be to ease policy.

"The current policy stance is a 'modest and gradual' appreciation of the SGD NEER path. We think this could be revised to flat,'' Mr Carnell said, adding that with the path of the SGD a part-market, part-MAS outcome, short-term rates play a role as they indicate the degree to which the authorities are working to maintain their NEER target.

Until recently, the three-month Sibor has been on an upward path, with discrete upward steps indicating successive tightenings of liquidity as the MAS worked to maintain the NEER path, Mr Carnell believes.

Given the uncertain environment, UOB's Mr Lim advised home buyers to choose home loan packages based on longer-term considerations as buying a home is a long-term commitment. These include ensuring that they have sufficient funds set aside for unforeseen circumstances.

Many homeowners tend to prefer fixed-rate home loan packages when interest rate environment is unclear. The fixed monthly repayment amount over a certain period within the loan tenor gives homeowners peace of mind and better control over how they manage their finances, Mr Lim said.

A check around home loan websites shows the first year rate for fixed-rate packages ranges from 2.08 per cent to 2.40 per cent with a two-year lock-in period.