Fussing Over The Mortgage Rate
This post was written a week ago for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading…
Writing this piece 2 days before the MAS announces their semi annual monetary policy statement.
For all the investor education initiatives we are seeing out there spearheaded by various regulatory bodies, the main gripe is that if Singapore interest rates were easier to understand, then perhaps people will take a more active interest in managing their investments ?
Singapore has one of the most complicated interest rate mechanism in the world – the market determined rate which is commendably laissez-faire and yet quite impossible for the average Singaporean to understand how SIBOR is derived.
Can Singaporeans do any better for themselves in their little mortgage market that is characterised by the few options of just SIBOR loans or fixed rate loans that do not go beyond 5 years ?
Perhaps investor education should start at home and fussing over that mortgage rate ?
With the 4th highest home ownership rate in the world, Singapore, at 90.3%, has also one of the highest level of household borrowing relative to GDP at some 76%. Of that number, home loans account for three-fourths.
Home Equity In Our Daily Lives
Mortgages are a subject close to the heart of many a Singaporean, even for the ultra high net worth individuals and their stable of properties, industrial, commercial or residential. For it has been a trend since the days of the Global Financial Crisis when minuscule returns on assets and low borrowing costs created a horde of yield hungry investors who took the opportunity to cash out on their home equity, borrowing to invest in higher yielding investments. Others took advantage of the low rate environment to load up on the investment property, some of which were hawked at distressed levels. For the more savvy investor, it represented a whole new opportunity of doubling up on their leverage when they leverage on their capital to buy even more assets to enhance their returns.
It has worked out well for most especially during the days in 2011 when Singapore’s SOR (Swap Offer Rate) rates dipped into the negative territory and remained contained between 0.25-0.5% for the 3 years that followed. SIBOR (Singapore Interbank Borrowing Rate) also held steady, under 0.5% for the entire period, giving investors a peace of mind and lulling and dulling the investing acumen a little to ignore the financing cost angle.
SIBOR rates have risen about 150% from 0.45% to 1.13% within a span of 9 months and suddenly has become a cause for concern as the media picked up on it and we have MRT stations billboards and screens advertising solutions for the higher interest rates that should be eating into pockets of some although we have the authorities to thank for their pre-emptive loan measures aimed at curbing speculation back in June 2013 which saved many a potential home investor the horror of not just buying at the high (debatable if the “high” was the result of the loan measures) but facing higher financing costs too. A far sighted move indeed, public welfare at heart, with the general level of ignorance on how Singapore interest rates work.
The Double Whammy From Various Angles That We Pointed Out Before
- If cost of financing rises, the cost of the asset adjusts lower commensurately for the returns to remain the same.
- If returns on the asset, such as rentals, fall then the price of the asset has to adjust lower commensurately, yet again.
- If the price of the asset, such as a bond, falls for other reasons than the higher cost of financing, then the opportunity cost of investment is negatively impacted.
Using the extreme example from a previous post https://tradehaven.net/the-widow-maker-in-real-estate/ :
“My question is this : How much will property price come off by for a 1% up move in interest rates? This is entirely plausible because our mortgage rates are still about 1% and moving on to a 2% handle is not an impossible scenario. It will really start to burn when it hits 3% bringing about the dreaded margin calls on those loans that are leveraged to the hilt (= sub prime foreclosure scenario).
Using rough math, 1% for 25 years = 25% more you will be paying (the amount should be less due to amortisation effect), on 80% leverage, so we have about 20%! Unless you have a wage hike of 20% or a rental hike of 20%, the property prices should come off by 20% to equalise ?”
It is not true of course because the latest statistics show that real estate loan to valuation ratio is about 40% for Singapore, and thus we should be working on a 10% number for a start. In addition, that is not how property markets work, simply based on returns, because we have the demand and supply side to the equation for home owners who are willing to put up with negative equity for the roof over their heads. Investors typically react the same way given that real estate is a long term investment and their investment horizons stretch much further.
In the case of other investments such as fixed income instruments which is the popular asset class of choice for home equity proceeds, given that they promise steady returns, investors usually do not mind the pinch of higher financing costs as along as the returns are in the positive zone. That is mostly the case unless if they are forced out of their investments on margin calls on extreme price drops.
Fussing Over That Mortgage Rate