While the latest property loan measures announced by Monetary Authority of Singapore (MAS) covered quite a lot of situations and scenarios, one small little 3.5 – in a foot note, no less – caught our attention. We’d like to present our opinion on the implications of this number in this article.

What is the significance of this number? Well, the 3.5% interest rate has been officially recognised by the MAS as the benchmark to be used for all property loans when calculating total debt-servicing ratio (TDSR), as we explained in our prior article. Despite the current sub-2% interest rates for home and housing loans, the MAS has deemed it necessary to plan for a 3.5% interest rate when assessing loan risks. This will, of course, directly affect whether a loan should be given or not.

We believe this number represents an insight into the Singapore government and the direction of their thinking. It is an indirect indicator that they are preparing, or even expecting, that interest rates will climb up to 3.5% in the medium term. They have probably assessed that the chance of reaching a 3.5% interest rate is quite high, although rising further than 3.5% is quite a bit less likely.

The next thing we asked is: “What has got the government thinking in this direction?”

The nearest event that would have a large impact on global economy and finance is the upcoming end of quantitative easing (QE) by the United States government. In fact, just the expectation of this event has already spooked the market, causing stocks to take quite a beating. Without QE, the excess money supply will start to dry up. That means less money for investments, and less available for borrowing. Since the supply of available, borrowable cash is reduced, the premium paid for borrowing, that is, the interest, will go up due to demand remaining relatively constant.

Despite its troubles in the recent years, the United States is still an economic powerhouse. Any interest rate spike in US will be felt worldwide, reaching all shores just like ripples in a pond. We will likely see rate hikes around the world in the coming months and years.

In Singapore, the state currently keeps interest rates low to remain competitive, but there are downsides to this strategy. If interest rates start to climb globally, the Singapore government would be unlikely to continue keeping local rates low. We would expect them to allow local interest rates to climb as well, on the heels of a global rate hike.

But that’s not all. There is also a potential outflow of money from Asia. While fund flow is a complex phenomenon, with many variables and influences, there are two main reasons for funds to stop flowing into Asia, and actually reverse direction. The higher interest rates in US will start attracting excess funds back to US markets. Since Asia has been the main destination of such funds created by the QE scheme, these funds would most likely flow out of Asia now. Moreover, the cessation of QE is a milestone in terms of US market stability, reflecting a confidence that the US economy can now stand on its own. At the same time, stopping QE also allows the US government to start recovering strength.

When seen together, all these factors are indicative that investment funds will start redirecting to the US from Asia.

Should this combination of a rise in local interest rates and outflow of funds from Singapore come to pass, the potential for  a market correction to occur becomes very real. At the beginning, the stock markets would feel the brunt of it, but eventually the property market would be hit as well.

It is our opinion that this little 3.5% footnote is the product of our government gazing into the crystal ball and seeing some rough weather ahead; and we’re not talking about just some haze. In our upcoming articles, we will discuss who we think will be impacted the most by such a market correction, and also how one can rectify a bad financial stance caused by over-leveraging in this low-interest environment.


  One Response to “Does Government Expect Turbulence in Singapore Property?”


    Gd move by govt…late on mass mkt tho

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