,19^th May 2010)

“Property is the most interest-rate sensitive sector of the economy,” said David Carbon, an economist with DBS. “The economy is growing very fast, rates are very low: You can draw your own conclusions.” (David Roman and Gaurav Raghuvanshi, Dow Jones Newswires, http://online.wsj.com/article/BT-CO-20100519-718371.html

By Property Buyer Singapore Mortgage Consultants and Broker

Not Simply Cheap, but what Fits. We Research, You Save!

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Email: loans@propertyBUYER.com.sg

Some financial news reports or articles have been saying that Sibor at an all time low is making the situation more complex as low interest rates cause asset bubbles especially in the property market.

Though the statement looks correct universally and is more or less so, but if you bother to drill down, a lot of so called Universal truth is not so Universal afterall.

WHAT WILL LOW PROPERTY INTEREST RATES CAUSE?

The general hypothesis is that when Interest rates are low, people can afford the properties, therefore bidding up the prices. We are usually very mindful about generic motherhood statements such as these.

While in the extreme, that statement “Property is the most interest-rate sensitive sector of the economy”   is usually true, but the degree of sensitivity of property to that is suspect.

Because if you look at 2007 to 2008, during the property boom, the run up in prices as well as interest rates are almost in tandem. It took quite a lot of interest rates hike (from about 2% home loans singapore rates to almost 5%) to slow down the property market. So there is a substantial lag effect.

And even so, it was not entirely Interest rates that did the job of slowing the property market, it was the FINANCIAL CRISIS.

We always like to do some investigation and research. As our tagline goes, WE RESEARCH, YOU SAVE. And when we say Research, we mean it.

POINTS FOR AND AGAINST ” Low Interest rates complicate recent government efforts to rein in rising asset prices”

A lot of our clients who first come to see us to get property loans in Singapore have not yet a clue how much the repayment schedule will be. Therefore it would seem that it is not the low interest rates that draw them in the first place.

As far as the cases we have seen and our clients with whom we spoke to.

Property Buyers who are getting home loans in Singapore do so for the following reasons: -

• Need a place to stay
• Don’t want to rent anymore
• Property available in their locality
• Property meeting their budget
• Property meeting their lifestyle
• Investment reasons – Income (very few)
• Investment reasons – Capital appreciation (Quite a lot)
• Interest rates are very low (Very low amount of people that buy a property actually quote this point. Based on our Non-scientific sample size of > 50 people, which can to some extent be representative of Singapore’s population.

We have a sample size of 50 clients over the past many months, population of 5 million people, 90% of people did not state interest rates being low as buying criteria (only 10% stated low mortgage interest rates as property buying criteria).

Based on a statistical  tool at http://www.surveysystem.com/sscalc.htm, we have arrived at a figure of 90% +/- 8.32% using a 95% confidence level.

PROPERTY BUYERS ARE NOT BUYING DUE TO LOW MORTGAGE LOANS RATES!!! (We are 95% certain) – Based on our 30min rough estimation

Even though people that bother to read our research material are typically skewed towards private properties, their range do vary a lot, from  property purchase between $1m to $10m. And as these people are not related, we can therefore assume that they are fairly homogeneous and representative of Singapore’s Private property buyers.

We can say with a 95% confidence level that between 81.68% to 98.32% of people buying properties in Singapore, they are NOT buying due to low Singapore property loans rates. Of course there are between 1.68% to 18.32% @ 95% confidence level are buying due to low interest rate reasons.

So low interest rates is one of the many factors that cause property asset prices to rise, but only a small reason.

Second factor that somewhat disprove the Low interest rates causes property prices to rise

Singapore Banks practice a safety threshold for property mortgage loans interest rates. Therefore only those who have a healthy income (cash flow) minus off their liabilities meeting a certain debt servicing ratio (typically 50%) are granted a loan.

Singapore banks generally set a property loans interest threshold at between 3.5% to 5%. Even if the prevailing interest rates are 1% or less on your home loans, you will be tested for your servicing ability at between 3.5% to 5% home loans rates. If you fail this test, you will be granted a smaller loan size or NO loan at all.

So if you cannot pass the affordability test, you cannot buy a property using bank’s financing, so how will you add to the demand to force property prices to rise?

Therefore your affordability do NOT increase with lowering interest rates in Singapore. It’s either the bank will lend to you, or NOT (if you fail the cash flow criteria).

POINT THREE – IF PROPERTY INTEREST RATES ARE HIGH AND YOU NEED A PLACE, WITHIN THE ELASTICITY RANGE OF INTEREST RATES YOU WILL STILL BUY (If you can afford it)

Say you need a place to stay, you will still buy a place even if interest rates increases. So interest rates increases beyond a elasticity level (will cause the bank to raise their safety threshold interest rates even higher) and eventually cause people to shun away from buying a property.

But Low interest rates alone do not do the opposite. It may not cause people to want to buy a property. When the rates are low, it could be more of a need based demand.

As there is a safety threshold, however low the interest rates go, the bank’s safety Sibor interest rate threshold typically do not fall further. (But it is the bank’s decision).

IF YOU WANT TO BE A SINGAPORE PROPERTY INVESTOR – YOU CANNOT TAKE GENERIC STATEMENTS AT FACE VALUE

We are not practicing economists, we are mindful and wary of generic motherhood statements. Because this is how most news work. They report something that is easy to read and digest.

Even though they do try to get their facts right (at least their intentions are noble, but may otherwise appear a little lacking in subject matter expertise), and gather some sound bites from seasoned professionals, and then they churn out the news. The news are not research quality news and therefore of limited value in many instances and sometimes downright misleading (though never intentionally)

So, Interest rates must raise significantly (say several percentage points say 2 to 3%) before before dampen their buying sentiment that allows it to stop the rising property market.

However, when interest rates fall below a certain percentage, the bank’s safety interest rate threshold will limit the effectiveness of low interest rates in increasing demand.

So Low interest rate is not a key driver of demand of housing, but rather the shortage of housing is the driver of demand.

www.PropertyBUYER.com.sg

We are a Research-focused Singapore Mortgage Consultant which helps you compare Singapore Home loans either for new home loans or Singapore Mortgage refinance home loans, we balance risks versus rewards for each home loan to match your risk profile and financing needs.

Buying property is a serious affair, we do NOT advocate a Greed or fear based buying approach, we emphasize that you need to check your finances and property home loan affordability. Check out the mortgage calculators or call us so as to do your sums right.

Not Simply Cheap, but what Fits. We Research, You Save!

Tel:    6100 – 0608

SMS:  9782 – 8606

Email: loans@propertyBUYER.com.sg

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