Rising Interest Rates vs. Rising Property Prices — Should I Act Now Or Wait?

2021 was an attractive period to buy properties. With Covid-19 bringing about construction delays and all-time-low interest rates, people were more willing to purchase homes that were ready to move-in or invest in properties. The spike in demand brought about an increase in private home prices by 10.6% and HDB resale prices by 12.5%. Naturally, this double-digit growth called for cooling measures on 16 December 2021 to cool the market.

In January 2022, the US Federal Reserve (Fed) announced that they will be increasing interest rates. Unfortunately, Singapore’s interest rates is closely pegged to that of US. It is without a doubt that many investors would be scurrying to source for attractive re-financing packages to mitigate the impact of any interest rate hikes.

But what about that group of upgraders/investors who are sitting on the fence, hoping for prices to dip amidst the hike in interest rates? Should we expect prices to dip in 2022? Will developers offer discounts to incentivise people who are concerned about rising interest rates? In this article, I will share some data and my opinion on how 2022 will unfold for the property market.

Let us begin by first understanding how we can navigate about the rising interest rate environment.

Rising Interest Rate Environment

With US inflation rates at a 39-year high of 7%, it is inevitable that the US reacts by increasing interest rates to curb rising inflation rates. However, it is worthy to note that Singapore will only bear the full brunt of it in 2023. Hence, buyers may want to lock-in the low interest rates while they still can.

History of 3-month and 12-month SIBOR rates (source: propertymarketinsights.com)

If it is any comfort, there were only 2 periods where interest rates peaked at 8% (in 1990 and 1998) which lasted for less than a year before tapering down. I guess the transient nature of interest rate hikes offers some assurance to those who are concerned that rate hikes would remain high for prolonged periods.

Rising Property Prices

PPI vs STI Index from 1997 Q1 to 2020 Q2

The PPI has been commonly linked to the STI Index as an indication for future performance. When interest rates peaked in 1998, the property market hit a downturn and property prices started to fall for approximately 2 years before recovering. Interestingly, during the period of interest rate hikes in 2005–2007, property prices increased.

STI Index over the past year (source: tradingeconomics)

Since there seems to be a positive correlation between the STI Index and PPI, we can take reference to how the STI Index has been performing the past 1 year to know roughly which direction property prices will be heading. 2022 onwards, the STI Index registered a growth of 2.50%. If this rising trend continues, we can expect property prices to follow suit.

PPI growth vs GDP growth

Looking at Property Price Index (PPI) growth vs Gross Domestic Product (GDP) growth, we notice that PPI is still running ahead of our GDP. Comparing this to the period in 2013, it further strengthens the prediction that property prices will continue north.

What Will Property Prices be Like in 2022?

Over the past couple of years, we have witnessed how property prices are increasing but unit sizes are shrinking. It’s not surprising to think that at the upcoming Outside Central Region (OCR) new launch price, we could have gotten a Core Central Region (CCR) property 10 years ago.

In 2018, slightly over 10% of new launches transacted at $2000psf or higher. Today, almost 50% of new launches are transacting at above $2000psf. One would expect some resistance from buyers but Piccadilly Grand which has sold 78.13% (as of 18 May 2022) is a testament to how buyers are accepting this new price tag.

Projected New Launch Prices 2022–2023

While this is not an exhaustive list of upcoming new launches that will be injected into the inventory for 2022 and 2023, it gives us a rough understanding of what prices will be like moving forward.

Why are Property Prices Increasing?

  • Rising material costs
  • Land scarcity translating to higher land bid prices
  • Demand outweighing supply

The fact that the pandemic and the ongoing Ukraine-Russia war has increased the cost of raw materials, developers are managing a very tight profit margin. It also does not help that developers now face higher ABSD rates, land bid prices and development charges. Since developers are for-profits, it is only natural that they pass on this additional costs to consumers, translating to higher property prices in the future.

Furthermore, the higher prices we are experiencing now is not due to speculative reasons but rather higher material costs and supply shortages. For that reason, prices will continue rising until the demand and supply for housing units reaches an equilibrium at least.

Singapore Private Property Price Index 1975–19/05/2022 (source: tradingeconomics)

We notice that with every trough comes a peak that is higher than the last. Before the cooling measures on 16 December 2021, the last property cooling measures were introduced on 5 July 2018. Following which, private housing transaction volume fell for two consecutive quarters while prices eased by 0.7% over the same time frame.

In Q1 2022, the December 2021 cooling measures caused transaction volumes of both private homes and HDB resale flats to dip. However, prices maintained their upward trajectory though the growth was muted. I would expect prices to continue growing albeit at a slower rate until Q3 2022. Transactional volume will start to pick up along with the upcoming new launches for the rest of 2022.

Conclusion

While we cannot predict the future, we can certainly prepare for it. If there is one takeaway from how the property market has performed thus far, it is that we can never time the market. In an earlier article , I shared about the current unsold inventory and how developers might behave moving forward. Based on the laws of demand and supply, a certainty is that property prices will continue moving north and unit sizes will become smaller.

That being said, interest rates are constantly fluctuating but price growth remains a constant. What we need to consider is whether the increase in property prices will cause properties in the future to be more unattainable than if we were to take actions now and tide through temporary interest rate hikes. Thankfully, government regulations on loan-to-value ratio and mortgage servicing ratio help buyers by not overleveraging so that we can prepare for any hikes in interest rates.

I hope this article serves purposeful in helping you make a more well-informed decision, regardless of whether you’re purchasing a property for own-stay or investment. As always, feel free to share your opinion in the comment section and I will take time to address them when I can. Till next time!

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manfred lau

manfred lau

Real Estate Agent based in Singapore sharing bite-sized content while trying to keep it light. If you’re reading my stories, I hope you enjoy them!