Impact of Interest Rate on Singapore Property Prices
The interplay between interest rates and property prices is a dynamic and influential aspect of the real estate market in Singapore. Interest rates serve as a critical determinant in shaping the affordability, demand, and investment decisions within the property sector. As interest rates fluctuate, they exert a profound impact on borrowing costs, mortgage rates, and overall financing conditions, consequently influencing the attractiveness of property investments. In Singapore, a country characterized by a robust and ever-evolving real estate landscape, understanding the intricate relationship between interest rates and property prices is essential for stakeholders, investors, and policymakers alike.
Here are 5 ways in which changes in interest rates can affect the real estate market:
Mortgage Affordability
When interest rates are low, the cost of borrowing decreases. This makes mortgages more affordable, leading to an increase in demand for homes. As demand rises, property prices may also increase.
Conversely, when interest rates rise, borrowing becomes more expensive, reducing affordability. This can lead to a decrease in demand for homes, potentially causing property prices to stabilize or decline.
This is exactly what we are seeing in Singapore Property market; low interest rate, high transaction volume, high interest rate, decreasing transaction volume.
Investor Behavior
Real estate is often considered an attractive investment. When interest rates are low, the returns on other investments, such as bonds or savings accounts, may be less appealing. As a result, investors may flock to real estate, driving up property prices.
On the other hand, when interest rates are high, the opportunity cost of investing in real estate increases. Investors may choose alternative investments with better returns, leading to a decrease in demand for properties and potentially lower prices.
Same as point 1, since less investor during this period of high interest rate environment, transaction volume is set to decrease.
Housing Market Activity
Lower interest rates can stimulate housing market activity. Homebuyers may be more motivated to purchase or upgrade their homes when financing costs are low, contributing to increased demand and higher property prices.
Higher interest rates can have the opposite effect, slowing down housing market activity. Potential buyers may delay or reconsider their plans due to higher borrowing costs, leading to a potential decrease in property prices.
Same for the above 2 points, currently we can see that there is a decrease in market activity.
Speculation
Low interest rates can encourage speculative behavior in the real estate market, as investors seek capital gains through property appreciation. This speculation can contribute to higher property prices.
When interest rates rise, speculative demand may decline, leading to a potential cooling of the property market and, in some cases, a decrease in prices.
The good news is with the Seller Stamp Duty, the government has remove any speculation on Singapore Property market.
Economic Conditions
Interest rates are often influenced by broader economic conditions. In times of economic growth, central banks may raise interest rates to control inflation. Economic growth can positively impact property prices as people have more confidence in making significant financial commitments like buying a home.
Conversely, during economic downturns, central banks may lower interest rates to stimulate economic activity. Lower interest rates can support the real estate market by making financing more accessible, potentially stabilizing or boosting property prices.
It’s important to note that these relationships can vary depending on other factors in the economy, such as employment rates, inflation, and overall market conditions. Additionally, real estate markets can be influenced by local factors that may not align perfectly with broader economic trends.
Interest Rate vs Property Prices
In the above chart for the past 21 years (2002-2023), I do not see any significant relationship.
- 2004-2006: Increasing Interest rate, increasing pricing
- 2007: High Interest rate of 6%, prices eventually reach all time high in Q1 2008
- 2008: Decreasing Interest Rate, falling property prices.
- 2009-2016: Low interest rate, property price increase by 86%
- 2017-2019: Increasing Interest rate, increasing prices.
- 2019-2020: Decreasing interest rate, increasing pricing.
- 2020-2021: Low interest rate, increasing pricing
- 2022-2023: Increase Interest rate, increasing pricing
We highly believe that although interest rate is one of the several factors that affect Singapore property prices, it is not the main factor. The main factor is still supply and demand and Singapore having very limited land, is heavily regulated by the government.
The Singapore Government basically controls 3 aspect which it comes to controlling Singapore Property Prices
(a) Supply of Land in terms of Government land Sales (GLS)
(b) Immigration Policy: Current population at 5.5m yet we aim to hit 6.9m in 2030. Increase in number of foreigners getting Permanent Residences (PR) Status
(c) Cooling Measures: Not just higher taxes for purchases of second property, PRs & foreigners and also other aspect such as borrowing criteria like Total Debt Servicing Ratio (TDSR) & Loan-to-Value (LTV) ratio.
Our data still shows that the above 3 factors are the main driving force of Singapore Property Prices.
Interest Rate vs Transaction Volume
However, I do see a relationship of transaction volume and Interest rate. Low transaction volume basically means people take a longer time selling off their property.
During low interest rate environment, more people are buying and selling houses due to the points listed above. The past 14 years (2008-2022) of low interest environment had supported home buying activities.
The good news is that with interest rate expected to moderate, home-buying activities and transactions are expected to receive a boost in 2024.