Near Zero Interest Rates: Buying Property in Post-Pandemic Singapore

·6-min read
Near Zero Interest Rates: Buying Property in Post-Pandemic Singapore
Near Zero Interest Rates: Buying Property in Post-Pandemic Singapore

The U.S Federal Reserve rates will be pegged near zero for at least the next five years, and is not expected to increase until the second half of 2023.

The spillover effect in Singapore is that consumers are now encouraged to buy houses and cars, and take on more bank loans in general, as reported by CNA. This may be linked to the lower-than-normal Singapore Interbank Offered Rate (SIBOR), which is highly correlated to the Federal Reserve rate.

Related article: SIBOR vs SOR vs SORA: What Do These Rates Mean for Your Home Loans?

It might be tempting to jump onto the bandwagon and sign up for a home loan in present times. However, attractive interest rates at the moment should not by itself be a reason to jump into a long loan tenure with a bank.

Instead, we have come up with a simple guide to navigate purchasing property in this time and how best to take advantage of the current property market during COVID-19.

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Assess the Market Situation: Is Singapore’s Residential Property Market heading for a Bull Run?

Low SIBOR rates are also complemented by the recent Monetary Authority of Singapore’s (MAS) extended mortgage deferment measures to help Singaporeans with their mortgage payments. As a result, purchasing a home in this climate has seemingly become cheaper, seeing a rise in demand for residential property in Singapore, and hence a rise in borrowing and refinancing.

Generally, homeowners can take advantage of the current climate if they fall in the following categories:

  1. There is a genuine need for a more suitable home. For example, if the COVID-19 Pandemic has resulted in a difficult work from home situation forcing the need for a housing upgrade

  2. You have the financial means to upgrade your current home or invest in a second property

  3. The eventual rise in market rates will not severely impact your disposable income

  4. You are not looking to make a quick buck in a recession but rather invest in a long-term investment

  5. You have been waiting for the right time to purchase a new property

Related article: What is a Property Bull Run and Is It Already Happening in Singapore?

What Kind of Property are You Looking to Purchase?

Your decision may also depend on the type of property you are eyeing.

HDB Flats

At this time, the HDB resale market is congenial to those looking for larger spaces in the heartlands, as the low interest rate environment coupled with housing grants will make resale flats an attractive and increasingly affordable option. With some 50,000 units estimated to enter the market between 2020 and 2021 due to new HDB flats reaching their MOP, the increased supply will also offer more options to those looking for a new home. However, HDB resale prices have also faced their first price increase for the first time in 8 years, with transaction volumes reaching a 10-year high. For the entire 2020, HDB resale prices rose by 4.8%.

Executive Condominiums (ECs)

As an affordable luxury for locals in the ‘sandwich class’, Executive Condos (ECs) have become more popular in recent years and are likely to grow in popularity. With consistent launches entering the market in 2021, and low interest rates in the finance market, they remain an attractive buy for those who can afford it. However, do note that although ECs are treated as public housing for the first few years, they are not eligible for HDB loans, and can only be financed by home loans from banks. Additionally, like HDB flats, the Mortgage Servicing Ratio of 30% applies.

Private Condominiums

The near-zero interest rate environment has created an attractive situation for private property purchase. Although prices have been moving upwards, they are generally stable, seeing marginal gains from Q2 to Q4 2020.

In addition to making financing private property easier and bringing higher-value properties within reach, this is also a suggestion of price resilience and continued price appreciation that holds some promise that the investment can turn a profit.

This is even in the face of continuing cooling measures, travel disruptions preventing potential foreign buyers from visiting Singapore, as well as circuit breaker measures putting viewings and showflats on hold.

Is Your Purchase for an Investment Property?

When looking to invest in property, it is important to ask yourself the reason behind it. If you have purchased this property primarily as a source of additional income, then there are a couple of things you will need to take note of. Future capital appreciation is not a guaranteed outcome for any investment, although one can make educated guesses about a particular property based on current data.

Furthermore, with the curtailment of international travel, retrenchment among the foreign working community in Singapore, and a corresponding decline in foreigner population, finding tenants might be hard in 2021 if not sometimes even impossible. If you had been intending to purchase a property primarily for rental, this is something that should give you pause.

After accounting for your miscellaneous expenditure such as property tax, Additional Buyer’s Stamp Duty (ABSD), repayments and renovation costs, you should consider worst-case scenarios such as an empty apartment for several years—as long as it takes for the pandemic to end and for the property and rental markets to return to normal. With Education Minister Lawrence Wong recently saying that the pandemic may be with us for 4 to 5 years, take this duration as a worst-case scenario. Can you sustain your property being unrented for that long? Once you have taken these factors into consideration, you might realise it might be more lucrative to look into other investments instead.

Conversely, if the reason for this purchase is for a retirement home or something for your kin this might be the best time to do so. The low interest rates will make your home loan an attractive package and if your cash flow is consistent there is little cause for concern.

To Buy or Not to Buy?

In every recession there are winners and losers. If you intend to stay on the winning side, then caution is key. Assessing your personal situation and measuring it against market sentiments is the best way to gauge if your purchase decision is a smart one. Taking into account the above guide, unless the decision to buy is one that is inevitable such as upgrading a home due to lack of space or being a first-time home buyer it is best to exercise caution and see where the market lands in 2021.