Understanding the effects of rising interest rates and inflation is an important part of staying ahead in Singapore’s highly competitive economy. Interest rates are often seen as a reflection of the health of the economy, and are used to control the money supply and limit inflation. Therefore, any increase in the base rate has significant implications for businesses operating in Singapore. In this article, we’ll take a look at how high Singapore’s interest rates could go and explore its impacts on businesses here.
Interest Rates and Inflation in Singapore now
Interest rates and inflation are still high in Singapore. In September 2022, Singapore’s annual inflation rate was 7.5 % (YoY CPI-All Items). Interest rates have risen to a high of 3.89 % and 3.85 % for fixed home loan rates. The convergence of these macroeconomic factors has also accelerated the market rollout of additional cooling measures, which began at the end of September. We are getting closer to the US Fed’s Terminal Rate of 4.6 % by 2023 Q1, which suggests that interest rate increases may be coming to a stop notwithstanding these negative trends for the Singapore property market.
However, if inflation persists in remaining stubbornly high, interest rate modifications to the upside are still conceivable. Despite recessionary worries, Singapore continues to operate rather well in terms of GDP (4.4% YoY, 1.5% QoQ) and Employment (75.6K growth). Compared to its counterparts in the US and China, which are experiencing major price corrections because of macroeconomic problems, the housing market in Singapore exhibits relative strength.
As demand begins to fall, risks associated with volatility begin to affect landed properties. Condominiums & Apartments are still showing geographic inequalities that could present lucrative market value opportunities. Executive condos are already starting to gain popularity as a more inexpensive alternative to the private property divisions, especially resale units. Housing prices in Singapore are still measured against HDBs, which have increased significantly since the epidemic and are still rising in line with inflationary trends. Pockets of opportunity in each of these property divisions are highlighted in this research.
Image: Singapore Interest Rate (source trading economics)
Causes of Rising Interest Rates:
The Monetary Authority of Singapore (MAS) sets monetary policy to manage Singapore’s exchange rate against other major currencies, while also encouraging sustainable economic growth through the use of interest rates. The MAS achieves this using tools such as foreign exchange interventions and monitoring economic indicators to assess overall macroeconomic conditions in Singapore. It then makes decisions that balance these two objectives – stability versus growth.
Amongst other factors, changes in global demand can affect how much money enters and leaves Singapore’s economy from investors abroad. These flows can drive up demand for government bonds and increase their prices, thus driving down yields (the effective interest rates on those bonds). When this happens, it makes borrowing more expensive for businesses which can lead to higher inflation.
Effects of Rising Interest Rates on Inflation & Money Supply:
Inflation is caused by an excess amount of money circulating in an economy relative to goods or services available – known as expansionary or loose monetary policies. Conversely, when there is less money than goods or services available – known as contractionary or tight monetary policies – it causes deflation due to a decrease in purchasing power.
The MAS monitors changes in price levels closely and will adjust the short-term policy rate accordingly if necessary – usually upwards during periods of inflation – to bring prices back into line with their medium-term target range (typically within -2%/+2%). This increases the costliness of borrowing money, thereby reducing supply (as people are less likely to borrow money), and reduces inflation as people are now less inclined to spend because they will have to pay back more later if they decide to borrow now. This process ultimately leads to a reduction in prices if it goes far enough eventually bringing them back into line with their medium-term target range again over time – lending credence to the idea that tighter monetary policy actually lowers future expected inflation rather than increases it (counterintuitively).
Effect of Rising Interest Rates on Property Prices
Interest rates have a significant effect on the real estate market as they affect the cost of borrowing and the attractiveness of property purchase versus other investment alternatives.
Given that interest rates have been low for over three years, we should be prepared for higher rates than the current unnaturally low levels.
Looking at SIBOR
The Singapore Interbank Offered Rate, or SIBOR, is a daily benchmark rate based on the interest rates at which banks in Singapore’s wholesale money market offer to lend other banks unsecured funds (or interbank market). In Singapore, a lot of mortgages are currently priced using SIBOR.
In the last 25 years, from a look at the SIBOR, interest rates have been low, but they have been above 3% from 2005 to 2007.
Image: 3-month and 12-month SIBOR (Source: Property Market insights)
The Impact of Higher Interest Rates on Mortgages
A buyer who takes a 30-year mortgage loan of $1,000,000 at a 1% rate will pay $3,216 for his monthly mortgage payment. If mortgage rates rise to 4% he will have to pay $4,774 instead.
Higher interest rates do not necessarily lead to lower property prices, as several periods of rising interest rates have also corresponded with rising property prices.
Image: Consumer perceptions on the current mortgage or home loan interest rates in Singapore from 2nd quarter 2022 (Source: Statista)
Predictive Modeling & Conclusion:
When predicting how high Singapore’s interest rates will rise, it is important to understand current economic conditions including GDP growth, unemployment levels and international trade trends amongst other indicators as these all play a role in influencing future changes in monetary policy from our central bank. Furthermore, an analysis should be done into recent movements within our currency markets which directly influence local borrowing costs; especially insofar as these may be affected by external moves that could see our currency appreciate/depreciate relative to others over time affecting our nation’s borrowing costs vis-à-vis foreigners looking for investments abroad (e.g., Chinese investors looking for offshore investments). Overall, however, one thing is certain when making predictions about what lies ahead – no matter how well-educated our assumptions may be – nothing ever quite goes according to plan! Ultimately though since we’ve been able to forecast potential shifts in interest rates reasonably accurately before; so too should we be able to trust ourselves assessing this data set going forward into 2023 irrespective of whether you’re expecting hikes or dips therein coming 2023 onwards!