Watch out for rising interest rates

Some homes seem affordable because of low interest rates now but this won't always be the case

Mass market home prices have surpassed the previous 2008 peak.

But because home loan interest rates remain at an all-time low, these homes are still seen as affordable, property consultancy DTZ said.

Its head of South-east Asia research, Ms Chua Chor Hoon, said its mass market affordability index shows that such homes at the end of the first quarter of this year were more affordable, compared with the period between the first quarter of 2006 and the third quarter of 2008.

But this does not mean that home buyers in this segment – which includes public flat owners upgrading to private property – will continue to find such homes affordable for long, if prices or interest rates move up.

It is only a matter of time before the low interest rates head north, said DTZ.

The questions are when that will happen and how much the rise will be, said Mr Alvin Liew, an economist with Standard Chartered Bank.

He said that the three-month Singapore Interbank Offered Rate – now at 0.65 per cent – is expected to be ‘very benign in 2010′.

Many home loans are pegged to Sibor, which is the rate at which banks lend to one another.

‘We see rates picking up slightly by 5 to 10 basis points from the first half of 2011, in anticipation of the United States Federal Reserve hiking its rates,’ he said.

‘By the tail-end of 2011, it could rise to 0.8 per cent. The year 2012 is when we expect to see a rapid hike.’

The three-month Sibor rate will likely rise to 3 per cent that year, Mr Liew said.

Ms Chua said mass market housing could become generally less affordable if the interest rate rises by one percentage point with no change in prices.

This will be the case too if prices rise by 5 per cent with a 0.5 percentage point increase in interest rates, or if prices rise by more than 10 per cent this year, she said.

For the first quarter of this year, the Urban Redevelopment Authority’s flash estimate showed that private home prices have continued their climb, moving up 5.1 per cent, compared with 7.4 per cent in the previous quarter.

Ms Chua advised potential buyers to look beyond the current interest rates to assess their ability to repay the monthly mortgage payments over the next 20 to 30 years, as interest rates will go up.

‘Buyers also have to be cautious as there’s still a lot of economic uncertainty now, unlike in 2005 and 2006, when the outlook was very clear.

‘If the recovery is not as strong as expected, any anticipated capital appreciation may not materialise,’ she added.

Mr Justin Chiu, executive director of Hong Kong’s Cheung Kong (Holdings), told The Sunday Times that interest rates are one key risk factor here.

‘If the rates rise, they may rise very quickly,’ he said.

He was in town for the launch of his company’s well-received West Coast project, The Vision.

Buyers should make sure they can still afford to pay their loans even if interest rates go up to 3 per cent to 4 per cent, he said. If not, they could be overstretched.

Source: Sunday Times, 4 Apr 2010