A weaker currency and rising borrowing costs do not bode well for Singapore’s home prices amid its longest drop in over 10 years, reported Bloomberg.
Notably, the three-month Singapore interbank offered rate (SIBOR) more than doubled within a year to its highest level since 2008. The main benchmark for home loans was seen rising further and narrowing the gap with the swap offer rate (SOR), a measure of borrowing costs mainly influenced by exchange rate expectations.
The spread was the greatest since 2009, as the Singapore dollar fell seven percent this year. Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd, said: “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. Buyers are going to factor in rate increases, so a further price correction is difficult to avoid.”
Knight Frank LLP said home prices may decline by as much as five percent this year, the biggest drop since 2001. Property developers are already struggling with lower sales and falling values after the government introduced curbs on residential transactions, as demand from foreigners, alongside low rates, prompted concerns of an overheating property market.
The curbs included higher stamp duties on home purchases, an increase in real estate taxes, and a cap on debt repayment costs at over half the borrower’s monthly income. This saw property prices fall for the seventh consecutive quarter in the three months ending in June, its longest losing streak in 13 years. Private homes sales also plunged to a six-year low last year.
In August, the three-month SOR increased 41 basis points to 1.405 percent as the Singapore dollar fell to its lowest level in over five years. The corresponding SIBOR increased 13 basis points to 1.008 percent in August, with its discount to the SOR reaching 49 basis points on Tuesday. At the same time, the three-month SIBOR stood at 1.074 percent, its highest level since November 2008. Mizuho’s Varathan expects it to increase to 1.5 percent by end-2015.
Meanwhile, the Singapore dollar is set for its largest annual loss since 1998. The currency stood at S$1.4296 against the US dollar on Tuesday, its weakest since September 2009. This came amid concern that the Federal Reserve will begin raising interest rates, and as the devaluation of China’s yuan triggered weakness in Asian exchange rates.
The city-state’s export-driven economy has been dampened by China’s slowdown, a commodities slump and uneven recoveries in Europe and the US. In Q2 2015, the economy contracted the most since 2012, while annual growth slowed following a record high in 2010.
“The outlook for the Singapore economy is very weak,” noted Hee-Eun Lee, a rates strategist at Standard Chartered Plc. As such, investors “think the currency will keep on depreciating,” she said.
With this, Alice Tan, Singapore-based head of consultancy and research at Knight Frank, expects this year’s home sales to range between 6,500 and 7,500 units, compared with 2014’s 7,316 units.
“The impact of rising rates would exert a downward pressure on prices for homes,” said Tan. “If the rate of increase is faster, then a recovery may not be in sight next year.”