Will mortgagees be repenting? Property prices will fall further

In Economy, Property on 17/09/2015 at 4:55 am

On Monday SIBOR rate was up to 1.131%, a seven yr high, up 5.3%  up on the week before abd 147% since 2 January before.

Rising borrowing costs and a weaker currency bode ill for Singapore’s home prices amid their longest slide in more than a decade.

The three-month Singapore interbank offered rate has more than doubled in a year to the highest since 2008. The main benchmark for housing loans is seen rising further as it narrows the gap with the swap offer rate, a measure of borrowing costs influenced mainly by exchange-rate expectations. The spread reached the widest since 2009 as the Singapore dollar slumped 6.3 percent this year.

“If the Sibor catches up with the SOR in the next three to six months, that premium may be eroded and we will get further softening in property prices,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Buyers are going to factor in rate increases, so a further price correction is difficult to avoid.”

House prices may drop as much as 5 percent this year, set for the biggest decline since 2001, according to brokerage Knight Frank LLP. Developers are already grappling with falling values and lower sales after the government began introducing curbs on residential transactions as low rates and demand from foreigners prompted concerns that the property market was overheating. (Note the Bloomberg report was last week  but the analysis for property prices and interest rates still stands.

SOR which is used for commerial property loans was up to 1,561% also the highest since lat 2008; 108% up since 2 Jan 2008.

Pricier money could also be bad both for indebted companies, Reits (they are leveraged more than the average cat,  and stocks in general.

And this is all because there’s a 28% chance the Fed will raise rates later today.
So if the Fed raises rates there could be serious problems as a probability becomes a fact:

Even if the Fed has been shouting to the world that rates will rise soon, it cannot be certain that evasive prophylactic action has been taken from Brazil, to Turkey, South Africa and Malaysia. Accidents will happen on the fateful day that the target for Fed Funds rate is lifted, if only by a smidgeon.

And there is no market oracle who can be wholly confident these accidents will be small whoopsies rather than clanging calamities.

One more thing – psychology matters.

As Haldane of the Bank of England has pointed out, we all still bear the emotional scars of the 2008 financial and economic catastrophe.

Who knows quite how anxious we will feel when confronted with the harsh reality that interest rates can rise as well as fall?

Why these fears of accidents, psychological damage?

.. a huge amount of cheap credit poured into economies all over the world. It has fuelled investment by businesses. It has been used to buy properties and shares. And it has spurred growth and significant – perhaps excessive – rises in the price of assets.
And of this $9.6tn, more than $3tn had been borrowed by companies and other institutions in emerging economies.

So here is the vice squeezing the half of the global economy represented by emerging economies.

On the one hand, the fall in commodity prices and the slowdown in China is undermining their growth. On the other, the cost of servicing their dollar-denominated debts is rising, because the dollar is strengthening on the expectation that interest rates will rise.

And more than that, the tap of cheap dollar funding is gradually being turned off, which means that the flow of money to these economies has been cut – and by more than just the value of reduced dollar lending, because dollar loans often sit on balance sheets and in banks, and are used to make additional local-currency loans.

But even if the Fed doesn’t raise rates, interest rates will trend higher because the Fed wants to raise rates. Come Nov, Dec, we will have the same uncertainity. Best if it raises rates, and tells us that it’s all over for the time being?

Note this post has been edited since first posting.

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