The US Federal Reserve just announced the second Interest Rate Hike in 2018. And it hints at least another 2 more hikes for the later part of the year.
With the increase of interest rates by 25 basis points from the FOMC meeting yesterday, the current federal funds rate is now at 2%.
The Federal Reserve signaled it will raise rates to 2.5 percent in 2018, 3.0 percent in 2019, and 3.5 percent in 2020.
Singapore manages an exchange rate based monetary policy, pegging the Singapore Dollar to a basket of currencies, which the US Dollar is a primary component. This explains why US interest rates have a strong positive correlation with Singapore’s interest rates as seen in the chart below:
What does this mean for Real Estate Investment Trusts? (REITs)
As REITs require borrowing to develop properties, a rise in interest rates would essentially mean a rise in the cost of borrowing. A higher cost of borrowing would mean that REITs are taking a higher risk of default.
The FTSE S-REIT Index has also began to show a sell down since the beginning of the year, when there was the first Fed rate hike of 2018. The FTSE S-REIT consists of 31 SGX-listed REITs.
What does this mean for home buyers?
Since the start of 2018, banks have hiked interest rates for both fixed and floating home loan packages by 10 to 30 basis points. Note, this would not be affecting HDB loans, which carry an interest rate of 2.6% currently. Typically, homeowners have to refinance their mortgages every two to three years to benefit from lower interest rates, after coming out of a fixed rate. For those coming off promotional fixed-rate packages, they could see their home mortgages increase by close to 1.0%.
DBS Bank is now charging 1.95 per cent a year for each of the three years for its 3-year fixed rate package. UOB has increased its 3-year fixed rate package to 2.05 per cent a year for each of the three years according to The Straits Times.
The key 3-month Sibor or Singapore interbank offered rate surged towards the end of December to a high of 1.5 per cent on Jan 4, 2018; it had been range-bound for much of the second half of 2017 at around 1-1.1 per cent.
With the hikes from the US Fed Fund Rate in 2017 and the expectation of further hikes into 2018, market interest rates have been rising, said a DBS spokesman.
“This has translated to an increase in mortgage loan rates,” he said.
To illustrate the impact of the rise of interest rates, a 30 basis points increase for a S$1 million loan means an additional S$144 monthly.
Rising interest rates may skim some of the froth off the buoyant property market which has seen sales rebound sharply last year.
Bankers caution buyers to assess the impact of higher rates before they make the leap, especially if they are looking at investment properties.
Property prices are affected by various factors, one of which will be mortgage rates, said Vasu Menon, OCBC Bank vice-president and senior investment strategist.
“Rising interest rates may curb the rise in property prices here, but it may not be enough to hurt property prices too badly on its own – especially if there are other positive drivers like a strong economy, a healthy job market and good wage growth,” he said.
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