Singapore Homes Most Affordable as Rents Climb: Mortgages
Shivram Anantharaman paid a monthly rent of S$2,650 ($2,069) until March. Now, he’s paying S$40 less every month after buying a three-bedroom condominium in Singapore’s East Coast region.
“The clincher in Singapore is that monthly installments toward repayment of your loan are lower than what you would pay in rent,” said Anantharaman, a private banker at ICICI Bank Ltd., who took out a S$1.04 million mortgage for his S$1.3 million property late last year. “It’s one of the few countries in the world where that is possible,” because of the low interest rates, he said.
Homebuyers like Anantharaman are taking advantage of mortgage rates at an all-time low in the Southeast Asian island- state, even as prices are almost at a record high and the government introduced measures to cool the property market. Home affordability in Singapore has risen to the highest in a decade because of historically low interest rates and flexible payment options available to buyers, according to Jefferies Group Inc.
Average mortgage rates are about 70 basis points above the Singapore Interbank Offered Rate, or Sibor, according to Maybank Kim Eng Holdings Ltd. The three-month Sibor is at an all-time low at just under 0.4 percent, compared with a peak 3.56 percent in 2006, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Anantharaman, 29, pays 55 basis points over Sibor on a 40- year mortgage, effectively giving him a home-loan rate of less than 1 percent. By contrast, mortgage rates in India, his home country, are about 11 percent, according to Rajan Tandon, the Singapore-based head of Housing Development Finance Corp., the largest home-loan provider in India.
Hong Kong’s average mortgage rate is about 2.15 percent, while China’s is 7.43 percent, according to Barclays Plc. Indonesian rates range from 8 percent to 10 percent while in South Korea they are about 5 percent, according to the bank. Hong Kong banks raised interest rates last year from the lowest since 2004 to counter a drain on liquidity as deposits were moved out of Hong Kong dollars into yuan. Similar to Singapore, Hong Kong mortgage rates are set according to the Hong Kong Interbank Offered Rate or the prime rate.
In New York, the $1.1 million median price of a condominium makes renting a better option, with the median monthly rent of $3,100. The average rate for New York 30-year fixed jumbo mortgage is 4.24 percent this week, according to Bankrate.com. Using those numbers, the monthly payment for a mortgage would be more than $4,500.
Demand for homes in Singapore has prompted the government to introduce five rounds of measures since 2009 to rein in property prices. The latest, in December, imposed additional taxes on private residential property purchases by foreigners and existing homeowners to curb excessive investment that may stoke risks in the banking system and economy.
Foreigners and corporate entities have to pay an extra 10 percent stamp duty under the rules introduced on Dec. 8. The extra levy is 3 percent for permanent residents purchasing a second home, as well as for citizens’ third residences.
“The property market continues to be buoyant,” said Linda Sim, Singapore-based senior vice president of secured lending at DBS Group Holdings Ltd., Southeast Asia’s largest bank. “Foreign buying is currently on the lukewarm side, but it’s replaced by local buyers, with the bulk of those purchases for own occupation.”
A measure of home affordability in Singapore is below 35 percent, based on mortgage payments and median household income, according to the May report by Jefferies. The lower the value, the higher the affordability, according to the report.
The monthly mortgage repayment for a private condominium in Singapore in the first quarter was 36.7 percent of a two-income household’s average earnings per month, the lowest since 2005, according to data compiled by Bloomberg. The calculations are based on the average price of a 100-square-meter (1,076-square- feet) condominium, the mortgage set at the average Sibor rate and a 30-year repayment period.
Variable-rate and Sibor-pegged packages are more popular among home-loan borrowers than fixed-rate packages because they expect interest rates to remain low, said Phang Lah Hwa, the head of consumer secured lending at Oversea-Chinese Banking Corp. (OCBC), Southeast Asia’s second-largest bank. The Singapore-based bank offers fixed, variable and Sibor-pegged home loans.
The low interest rates are luring buyers to real estate as “a hedge against inflation,” said Wilson Liew, Singapore-based analyst at Maybank Kim Eng, a unit of Malayan Banking Bhd., Malaysia’s largest lender. Property accounted for 60 percent of total household wealth in the island-state in 2010, up from 56 percent in 2005, according to government data.
The Monetary Authority of Singapore does not control the monetary system via interest rates. Instead, it manages the Singapore dollar exchange rate against a trade-weighted basket of currencies of the island’s major trading partners and competitors.
Most floating-rate mortgages are priced at a margin above the three-month Sibor or the three-month swap offered rate, said Liew at Maybank. The swap rate tracks U.S. interest rates and foreign-exchange movements quite closely, he said. The swap rate will remain between 0.4 percent and 0.6 percent for the next six months, Maybank forecasts.
Housing loans in Singapore account for almost a third of the lending market, higher than in other countries in the region, said Wee Siang Ng, a banking analyst at BNP Paribas Securities Singapore Pte. In Indonesia, they made up 9 percent of total outstanding lending as of the end of March, and 20 percent in Thailand as of April.
“The importance of housing loans to the banking system is very high,” said Ng. “The immense competition for them among banks ensures that they are offered at low spreads above the Sibor.”
Still, concerns over Europe’s sovereign debt crisis and China’s economic slowdown are denting demand as the supply of homes grows, said Maybank’s Liew. Sales this year have mainly been driven by so-called shoebox developments, raising expectations the government may step in with more cooling measures, he said. Shoebox apartments in Singapore are smaller than 550 square feet.
“The longer the euro-zone crisis and China growth concerns prevail, the more likely it is that buying confidence may begin to wane in fear of greater repercussions on the Singapore economy, and hence job stability,” Liew said. “Demand may dry up overnight if there is a crisis of confidence.”
Singapore’s May private home sales fell 32 percent from a month ago to the lowest this year. Private home sales fell to 1,702 units last month from this year’s peak of 2,496 units in April, according to data from the Urban Redevelopment Authority.
“Developers’ sales had been very robust as buyers continued to flock to the property market amid persistently low interest rates and availability of small units in the suburban areas,” OCBC’s Phang said. “We saw a 30 percent increase in home loans take-up in the first four months this year compared to the same period in 2011.”
Wider financing options are also helping lure buyers. Permanent residents and citizens can use part of the payments that have accumulated or get paid every month into Singapore’s Central Provident Fund, the national pension, to make down payments on property purchases and to service the monthly mortgage installments, according to the fund.
Demand is driven by buyers who want to use the homes to live in, rather than speculative trading in the property market, said DBS’s Sim. About 25 percent of the mortgages taken out this year were for investments or speculation, down from 35 percent a year ago, she said, citing property usage details given by customers when a loan application is made.
Prem Bhagat, 36, a human resources manager at Cisco Systems Inc. (CSCO), said he wants to buy a home in Singapore to reduce the S$3,200 he currently pays every month in rent for his east Singapore condominium. When he buys, he intends to restrict his monthly payments to S$2,800 to S$3,000, he said.
“The current interest rates are way too low, the CPF takes care of a large portion of the monthly payments, and there’s not too much of a risk of property prices coming down in Singapore over the longer term,” said Bhagat.