Will rising rates hit housing demand?
Factors such as migrants, strong rental yields may shore up market in coming years
Letter from Wong Toon Tuan 04:46 AM Oct 07, 2011
I refer to the report "Private property demand not expected to ease up" (Sept 19), which asked what would happen post 2013, with a potential increase in interest rates and a large amount of supply becoming available.
The property market is driven by a combination of fundamentals, such as demand and supply, population growth, job growth, interest rates and rental yields. Seldom can a single factor like rising interest rates affect the market significantly.
Undoubtedly, it will make property less affordable and thus reduce demand. The reduction in demand will vary and depend largely on how high interest rates rise.
A recent National University of Singapore study on housing affordability indicated that affordability decreases significantly when mortgage rates rise to 5 or 7 per cent.
Will we see these sort of figures come 2014 and 2015, especially under the current global economic uncertainties?
Current rental yields are between 3 and 4 per cent and reported to be strengthening till the end of the year due to the arrival of new foreigners. Presently, housing loan rates are below 1 per cent.
Interest rates rising to 3 or 4 per cent will be unlikely to have significant impact due to a strong rental market and pent-up demand. For instance, when interest rates rose to around 3.5 per cent in 2006 and 2007, housing demand and prices continued to increase.
Looking at the demand and supply situation, the report "Oversupply risks in Outside Central Region" (Sept 23) puts the average annual supply of private homes from now to 2015 at 13,965 units.
On the demand side, developers sold 16,290 units last year. Based on the demand till August, 16,000 transactions is achievable this year. It seems likely there will be no oversupply till 2015.
For 2014 and especially 2015, there appears to be a demand shortfall, as a supply of 21,642 units in 2015 looks huge. However, any excessive supply can be easily absorbed by new migrants.
In order to support sustainable economic growth, we must welcome 30,000 migrants annually. Based on 3.5 persons per household, up to 34,000 additional homes may be required from next year till 2015.
The fear of a slowdown in demand is overblown if such concern is because of interest rates and oversupply.
http://www.todayonline.com/Voices/EDC111007-0000161/Will-rising-rates-hit-housing-demand?
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Originally Posted by hyenergix
