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Rising Interest Rates: Impact of Rising Interest Rates on Property Prices

Recently, we have seen how the property prices have seen a huge spike, hitting the newest high growth of over 10% in 2021.

The property price increase has been mainly due to a few reasons:

  • Low supply in the pipeline for new launches

  • Sharp increase in construction manpower costs and material prices, forcing developers to readjust property prices to take into account the rise in building costs

  • Depleting land supply, leading a fiercer developer’s bids for land that drives up the property prices as well

There is also a greater emphasis on having a comfortable home in recent years due to the pandemic, where everyone is starting to look into the importance of having a conducive and quiet living space to work from home. Coupled with the increased time spent at home, many of us are now much more willing to spend big bucks for our dream home.

This has also driven the prices up, since the demand far exceeds the current supply.

However, some of you might be already worrying about the impending interest rate hikes, which might put a damper on the property price growth.

For those that do not know, the US has been experiencing record high inflation that has greatly affected people’s purchasing power. This has spurred the US government to impose an increase in their interest rates, which will inadvertently create waves around the world as well. Since Singapore is an open economy, our interest rates are also very much affected by US movements. This means that we can expect our interest rates to continue to rise in tandem with theirs too. In fact, we have already seen our banks raise increased rates on loans for HDB flats last month. Home loan rates are hitting a new high and experts are predicting that this hike will not be the last.

With that in mind, what will this interest rate hike mean for the property prices?

Well, an increase in interest rate will theoretically make it more expensive for homebuyers to purchase a home, since the loan packages will become pricier. Monthly repayment amounts will increase, causing a greater burden on homebuyers to repay them. This may force homebuyers to reconsider their purchases, or at least scale down the unit size of their choice to reduce the amount of loans payable.

Is the interest rate hike really something to worry about?

Based on our analysis, it may actually be too early to worry about the impending effects of rising interest rates. After all, an increase in interest rates in Singapore may be much more gradual in comparison to what we are seeing in the US.

This means that you will still have time to look through the units you want, and the loan packages you want to commit to. What’s more important is that you make prudent spending that is well within your means, and commit to a unit that you believe you will stay in for the long term.

How do I be prudent in my spending if home loan packages are bound to increase?

This is a good question – to begin with, there are multiple types of home loan packages in the first place. With the many offerings and promotions across many banks, it may be very difficult for you to pick out what suits you best.

The first thing we want to caution would be to look past the promotional period repayments and big-ticket gifts that come with signing the loan packages. Instead, look at the long-term repayments you have to pay overtime, since that matters the most.

There are also some home loan packages that have a cap on the interest rate chargeable. They usually provide a range of interest rates they can charge over the lifespan of the package, which may increase or decrease depending on economic conditions. With the current interest rates being relatively low, it will be good for you secure your home loan package now and lock down the range possible before the hike. That way, you will be able to rest easy knowing that the maximum interest rate payable is still well within your means.

Moving forward: What will really happen to property prices in the months to come

In the end, we want to look at the bigger scheme of things and consider all factors to think about what will happen to the property prices in the months to come. After reading this far, you might already be fairly confident that a high interest rate = property price increase.

That is true – only if there are no other factors to take into consideration.

Source: MAS, URA, ERA Research & Consultancy

In reality, this is not usually the case. In fact, in the last 25 years, only 35 out of 64 times did a higher increase rate result in a higher property price!

Why? This could be due to a positive outlook on economic growth or a good job market that boost buyers’ confidence. Other indirect factors that are specific to Singapore markets could also be in place, making it difficult to rely on interest alone to determine property prices.

Hence, it really depends. However, what matters is your reaction to impending change. Some people take action during periods of uncertainty as an opportunity, while others back away seeing it as a risk. It depends on your own risk threshold and knowing what your needs are at this juncture.

Knowing how to manage property investment or home purchasing risks can be difficult, especially if you don’t have the most up-to-date market information. If you need guidance and help from someone with the right experience and knowledge, reach out to us to find out more.


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