Residential property under construction in River Valley in Singapore, on Monday, Nov. 20, 2023. Photographer Lauryn Ishak/Bloomberg
SINGAPORE: Home loan rates here are expected to head lower over the coming 18 months, despite concerns that policies imposed by incoming US president Donald Trump could reignite inflation.
Inflation has been falling in the United States, but an uptick after Trump returns to the White House could put the Federal Reserve (Fed) on course for fewer rate cuts in 2025.
Higher US rates mean rates here will also stay elevated. However, they will still decline, but at a slower pace than initially expected, said Mortgage Master chief executive David Baey.
Trump’s pledge to cut taxes and slap tariffs on imports during his election campaign could usher in a period of inflation in the United States and the global economy if the policies are enacted.
With Republicans winning control of both Houses of Congress, he will find it even easier to push through his agenda.
Winson Phoon, head of fixed income research at Maybank Securities, said the market is still pricing in a “good amount” of interest rate cuts in the next 12 to 18 months, but these will be pushed back if inflation expectations rise.
The Fed said after its Nov 8 meeting that the US elections will have no “near-term” impact on its policy decisions.
The US central bank cut interest rates by a quarter of a percentage point at that meeting, after shaving off half a percentage point in September.
Markets are looking for another quarter of a percentage point cut on Dec 18, the last meeting for 2024, to take US rates to between 4.25% and 4.5%. Beyond that, the outlook for rates will be dependent on economic data and the Trump administration’s policies, Phoon said.
“We are mindful of the risk of inflation re-acceleration, which could lead to additional upward repricing in the terminal Fed funds rate,” he noted.
The terminal Fed funds rate, now at 2.9%, is the long-term target rate at which prices are stable and there is full employment. Singapore’s monetary policy is centred on the exchange rate, and interest rates here are largely determined by the global rate trajectory and foreign exchange market expectations of the Singdollar.
While higher rates in the United States could lead to tighter monetary conditions and push up rates here, Mortgage Master’s Baey said fixed home loan rates will drop below 2% within 12 to 18 months.
He added that the Singapore overnight rate average (Sora), which is the benchmark used to price floating rate loans, will drop by 1.5 percentage points to 2% by the end of 2025.
Banks typically use a compounded average of the daily Sora readings over the previous month or three months to set what is called the one-month compounded and the three-month compounded Sora.
These Sora rates are then used to price floating-rate mortgages, with the banks adding a bit – called the spread – for their own bottom line.
Baey had predicted in September that fixed and floating mortgage rates would fall to around 1.8% to 2% within the next 12 months.
Rates will take a longer time to fall because Trump’s import tariffs may spark inflation and push up rates while also slowing global economic growth, said Baey on Nov 8. Central banks will have to keep interest rates low to support their economies, he added.
Louis Koay, senior financial services director at Phillip Securities, expects lower home loan rates, but noted that the declines might be “smaller than anticipated”.
Deputy Prime Minister and Trade and Industry Minister Gan Kim Yong, who is also chairman of the Monetary Authority of Singapore, said on Nov 11 that domestic interest rates are expected to ease, along with global interest rates.
Gan was responding to a parliamentary question on the impact of the US Fed rate cut on home mortgages here.
His written response read: “Financial markets currently expect the three-month compounded Sora to decline from 3.3% to about 2.5% at the end of 2025.”
Sora fell from 3.4% ahead of the US central bank’s decision to cut rates by half a percentage point in September, to 2.9%, while the three-month compounded Sora was at 3.29% as of Nov 15.
Meanwhile, fixed rate packages fell from the peak of about 4.5% at the end of 2022, to about 3% in the first half of 2024, Gan said.
The three local banks are staying the course on home loan rates for now.
DBS chief executive Piyush Gupta said the bank is not leading the market to cut mortgage rates.
He added: “Some of the mortgage pricing is not entirely sensible. If you compare funding costs today, fixed deposits are higher than mortgage pricing. That is kind of illogical.”
OCBC chief executive Helen Wong said the bank will not cut mortgage rates just because a competitor does so.
“It depends on what our pipeline is like, on what our relationship with the customer is like,” she said.
UOB chief financial officer Lee Wai Fai said the bank has to be competitive in the mortgage space, adding that “if the market is aggressive, then technically we do not mind losing money, but hopefully make it back later”.
Any fall in home loan rates will be welcome news for existing mortgage borrowers. The latest Central Provident Fund (CPF) trends report showed that 80% of home owners aged 50 and below, who used CPF to pay their loans, had sufficient savings for at least six months of installments.
However, 54% of those over 60 – they number 22,140 – only have CPF savings for less than six months of payments.
Housing and Development Board (HDB) home owners over 65 could monetise their HDB flat through the Lease Buyback Scheme, which involves selling part of their flat’s lease to the HDB. — The Straits Times/ANN
