No End in Sight for Slide in Singapore Home Prices as Rates Rise

  • Housing loan rate benchmark more than doubles in a year
  • Home prices seen set for biggest annual drop since 2001

Rising borrowing costs and a weaker currency bode ill for Singapore’s home prices amid their longest slide in more than a decade.

The three-month Singapore interbank offered rate has more than doubled in a year to the highest since 2008. The main benchmark for housing loans is seen rising further as it narrows the gap with the swap offer rate, a measure of borrowing costs influenced mainly by exchange-rate expectations. The spread reached the widest since 2009 as the Singapore dollar slumped 6.3 percent this year.

“If the Sibor catches up with the SOR in the next three to six months, that premium may be eroded and we will get further softening in property prices,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Buyers are going to factor in rate increases, so a further price correction is difficult to avoid.”

House prices may drop as much as 5 percent this year, set for the biggest decline since 2001, according to brokerage Knight Frank LLP. Developers are already grappling with falling values and lower sales after the government began introducing curbs on residential transactions as low rates and demand from foreigners prompted concerns that the property market was overheating.

The government’s curbs included a cap on debt repayment costs at more than half of a borrower’s monthly income, higher stamp duties on home purchases and an increase in real estate taxes. Property prices dropped for a seventh straight quarter in the three months ended June, the longest losing streak in 13 years, while private home sales slumped to a six-year low in 2014.

The three-month swap offer rate climbed 41 basis points in August, the most since December 2008, to 1.405 percent as the Singapore dollar plunged to its lowest level in more than five years.

The corresponding Sibor rose 13 basis points to 1.008 percent last month, and its its discount to the swap offer rate reached 49 basis points on Tuesday, the widest since 2009.

The three-month Sibor was at 1.075 percent on Wednesday, the highest since November 2008. Mizuho’s Varathan predicts it will rise to as high as 1.5 percent by year-end.

“The SOR will slowly pull up the Sibor,” said Rajeev De Mello, who oversees about $10 billion as head of Asian fixed income at Schroder Investment Management Ltd. in Singapore. “It will take time because foreign investors can’t borrow domestic funds to speculate," he said, citing central bank rules.

The Singapore dollar is set for its biggest annual loss since 1997. The currency reached S$1.4296 versus its U.S. counterpart on Tuesday, the weakest since September 2009, amid concern the Federal Reserve will start raising interest rates this year and as China’s yuan devaluation triggered weakness in Asian exchange rates.

Singapore’s export-driven economy has been damped by a commodities slump, China’s slowdown and uneven recoveries in the U.S. and Europe. The economy contracted the most since 2012 in the second quarter this year, while annual growth has slowed since a record high in 2010.

“The outlook for the Singapore economy is very weak," said Hee-Eun Lee, a rates strategist in the city at Standard Chartered Plc. So investors “think the currency will keep on depreciating,” she said. The three-month Sibor is almost at the U.K. lender’s year-end estimate of 1.1 percent.

Home sales could range between 6,500 to 7,500 units this year, compared with 7,316 in 2014, said Alice Tan, Singapore-based head of consultancy and research at Knight Frank. Mortgage loan growth cooled to 4.9 percent in June, the least since 2007, and was at 5.2 percent in July, according to data compiled by Bloomberg based on figures from the Monetary Authority of Singapore.

“The impact of rising rates would exert a downward pressure on prices for homes,” Tan said. “If the rate of increase is faster, then a recovery may not be in sight next year.”

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