Interest rate effect may threaten property prices in Singapore

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A sudden New Year jump in Singapore interest rates threatens to push up mortgage costs and steepen the on-going growth in house prices. The three-month Singapore interbank offered rate, against which most home loans are benchmarked, has risen 18 basis points this year to the highest since April 2010, primarily caused by a strong US dollar and new liquidity requirements for Singapore banks.
A sudden New Year jump in Singapore interest rates threatens to push up mortgage costs and steepen the on-going growth in house prices. The three-month Singapore interbank offered rate, against which most home loans are benchmarked, has risen 18 basis points this year to the highest since April 2010, primarily caused by a strong US dollar and new liquidity requirements for Singapore banks.

House prices may fall a further 10% by mid-2016, while short-term interest rates could top 1% this year, more than double since 2014, said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore. ‘About 30% to 40% of the price decline could come from the interest rate effect’, he added.

Data collected by Bloomberg based on figures from the Monetary Authority of Singapore showed that government measures imposed since 2009 to cool the property market will help moderate the effect of rate increases on borrowers. The curbs helped to slow mortgage loan growth to 6.2% towards the end of last year, the slowest pace since 2007.

If home prices fall faster, it may accelerate the decision to remove some property curbs, said Vikrant Pandey, an analyst at UOB Kay Hian Pte in Singapore. ‘Once we have a 10 to 15% decline in property prices and with interest rates rising, then the government may not need to continue with such strict measures in case it slows more than is beneficial’, Pandey said.