Singapore skyline, BLUTA,We wrote about the recent property loan regulations announced by Monetary Authority of Singapore (MAS) in our article on 2nd July. We also posited that the introduction of a mandated 3.5% interest rate for total debt servicing ratio (TDSR) calculation implies an unspoken expectation of an interest rate hike in the short to medium term.

As we mentioned in the second article, such a hike in interest rate would surely be accompanied by some market corrections and turbulence. And needless to say, there will be some whose pocketbooks are exposed to a direct hit, due to their property investments.

We will attempt to identify these groups of home and property owners, so that they can take corrective action before things really take a turn for the worse.

So, just who are those at risk, should the interest rate rise to 3.5%?  These are the ones we have identified:

(a) Those who bought their properties at a relatively high purchase price

You may be lucky enough have a friend or two who did not borrowed much, being cash-rich. Logically, they may have the impression that an increase in interest rates is not likely to have an impact on their relatively smaller loans. However, you should caution them if your friends bought at a high price in the past year or so. In this current property climate, even sub-par properties demand an outrageous premium. This phenomenon extends to even public housing, where we saw cash-over-valuations (COV) spike in the beginning of this year.

“… according to the Singapore Real Estate Exchange (SRX), the overall median cash-over-valuation (COV) for HDB resale flats reached a peak of S$35,000 in January.” – Channel News Asia1

Should the interest rate rise towards 3.5%, it would most likely trigger a tumble in property prices. Overpriced, sub-par properties would be hit the hardest, as their poor qualities would no longer be masked by a buoyant seller’s market. Buyers who ignored the fundamentals and just bought at a high price for the sake of owning property will find themselves in negative equity.  This is not unheard of; in fact it is such a prominent and serious matter that in Hong Kong, these property owners who were then bound to the liabilities of paying high interests to a deflated property were nicknamed “大闸蟹”.

As observed in 2011, “[t]he estimated number of mortgages in “negative equity” jumped to 1,653 at the end of the third quarter from 48 three months earlier, with the value of those loans rising to HK$4.1 billion ($528 million) from HK$58 million, the Hong Kong Monetary Authority said Oct. 28.” – Bloomberg2

(b) Those whose loan and other expenses are at the limit of their regular income

This group is at the forefront of the mind of the BLUTA team members. However, we gave this group a secondary priority, since they have taken these risks with their eyes wide open by borrowing to the limit of their income. By stretching their resources to the maximum in order to secure a loan, they have allowed any change in the ratio of loan/expenses versus income to have a great impact on their daily juggling of finances. In other words, they have borrowed a lot on very little capital, increasing their debt exposure to dangerous levels, which leaves them vulnerable to a rise in interest rate.

In our opinion, those who have taken home loans at or exceeding 80% of the purchase price in the last 3 years will need to do a thorough reassessment; and for the risk assessment to be meaningful, it must include the potential pitfalls pointed out here and elsewhere.

(c) Those who borrowed at very low interest rates

There are those people who rely heavily on low interest to buy property. We are talking about those who are utilising loan packages with interest rates that start off very low but balloon with the ordinary rate, and any other methods to leverage on a currently low interest rate, thereby actually putting themselves in an over-leveraged position. This position is extremely susceptible to changes in interest rate. And with interest rates already so low, the more likely change would be a disastrous upward direction. Those among this group, who have also fully, or for the matter, nearly maximised their borrowing ability, are most at risk.

(d) Those whose income source is at risk

There are those who would still be able to service their loans even at a 3.5% interest rate, as long as they are gainfully employed. The trick, of course, is to be gainfully employed when the economy is undergoing a correction. Loss of a job could be a trigger for foreclosure if one does not have enough financial reserves to fall back on. Vulnerable sectors would include the usual suspects: the construction industry, luxury goods, retail, tourism (if the crisis is on a global scale), and of course property. Sectors prone to cutbacks when funds are tight, such as marketing, advertising and ironically, banking and finance, would also be at risk.

For example, in the 2008 crisis triggered by the sub-prime mortgage events in the United States, Singapore experienced “its worst recession in history.” In the same article, it is stated “Singapore’s financial companies were severely impacted by the credit crunch. Services slowed 5.3% in the fourth quarter of 2008 compared to the previous period, and the construction industry only grew 13.3% in the last quarter, much less than the previous forecast of 18.6%.” – Asia Economic Institute3

Anyone who works in these sectors may be more vulnerable than they think.

We would caution these groups of people to be more aware and take preparatory steps in order to minimise the potential impact of any downside risk. Our observations of the risk inherent in the Singapore property market are mirrored in the article on Moody downgrading the outlook of Singapore’s three main banks to “negative” from “stable” on Monday.

In our next article, we will explore the various options available to minimise exposure to such risk.  So if you reckon that you may fall into the “at risk” group, you will certainly do well with more research or at minimum read our follow up article on how to minimise your risks.

Do you have any opinions or responses to add? Let us know in the comments below, or reach us on our social media channels, FacebookTwitter, and Google+.

1. source article: COV for resale flats could continue downward trend: analysts, 25 May 2013

2. source article: Hong Kong Homes Face Rising ‘Negative Equity’ on Sentiments, Barclays Says, 31 Oct 2011




  One Response to “Who will be Hardest Hit by 3.5% Interest Rate”


    I’m not sure that even this latest tightening will do the trick.

    Let me share with you some of my personal observations when I went house-hunting ~5 years ago. I was then renting a pte apt (Background : I own another pte apt in town that was bought years ago. I rented that out instead of staying at the prime location, and “arbitraged” by renting a condo unit at a suburb area) but with the ever escallating rent, decided that its more worthwhile to buy instead of rent an apt.

    My experiences were very interesting and eye-opening.

    I liked the apt I was currently renting in so looked around for resale HDB flats in the vicinity. To my astonishment, I found that 20+ years old HDB 4 room flats are going for around $600+-$800k. I repeat – 20+ years old old HDB 4 room flats. It seems that buyers (including, the MSM press, the Govt and even KBW) are obsessed with COV and COV alone. No one seems to be perturbed by the “market price” alone. Because the entire market price can be borrowed from HDB so no one cares about that. 20 years loan tenure that used to be the norm becomes 25 years tenure and then becomes 30 / 35 years and for a while, even talk about 50 years loan. So it was a no brainer to me – for a little bit more, I can buy a condo thats 10-15 years old. In other words, the ridiculousness of public housing prices (where 100% loan can be obtained from HDB) cause high private property price to look affordable, by comparison.

    The other observation was that I understood better why rentals were going through the roof. I came across many pte apts where the entire unit had been leased out to foreigners and as many as 10 were packed into the unit. 3+1 room apt, 3 to a room in the 3 rooms and 1 in the maid room. In another unit, I saw how rooms are re-partitioned. So if each tenant is charged an affordable $400 or $500 monthly rent, its a no-brainer win-win. The tenant gets to enjoy a full condo facility at $400 or $500 monthly rent. Yes, he/she needs to squeeze 3 to a room (double decked beds) but most of them are working their butts out in the office anyway and are renting a room to sleep for the night. Over the last 4 years, the price of the apt unit increased by 50%. Prior to that, it had doubled from 8-10 years ago to 4 years ago. In other words, the relentless influx of foreigners (especially work permit holders with absolutely no intention to sink their roots to Singapore) caused rental to increase, making rental yields so attractive, causing apt prices to increase and stay stubbornly high. I’ve also come across HDB units where many are packed inside. Lets take a 3-room flat as an example, where $2,500 rental is not uncommon. Say you have 6 persons sharing (again, 3 to a room, double-decker concept). This works out to just $400 rental per month. Quite affordable. So resale HDB flat prices stay stubbornly high.

    The Govt made a big mistake years ago by opening the floodgates to all and asunder without planning for it. If we’re still shooting for 6.9 million population, this may not be a bubble. In other words, don’t assume that if and when interest rates do go up, its doomsday.

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