Implications of Lower Interest Rate Environment on Singapore’s Residential Market

To curb inflation and maintain maximum employment while keeping the economy clear of recession, the United States (US) Federal Reserve (Fed) had hiked interest rates by 11 times between 2022 and 2023, commencing from March 2022. With the last hike of 0.25% in July 2023, this brought the Fed funds’ rates to 5.25% - 5.50%. This has made borrowing more expensive for banks, businesses and individuals and exerted a profound impact on the overall financing condition, and consequently business and investment decisions and sentiments. As a regional and global financial hub, Singapore has witnessed a similar situation, underscored by the higher interest rates locally such as the 3-month Compound SORA and 3-month SIBOR which have increased in lockstep with that of US.

 Chart 1: Fed Funds Target Rate, Compound SORA – 3-month, 3-month SIBOR 

Following the 50 bps rate cut by Fed, would this be a boon or bane for Singapore’s residential market?

If history is any guide, a downward interest rate cycle should commence and credit conditions should sequentially begin to loosen in Singapore, on the back of easing inflation alongside anticipated rate cuts in US. In turn, this could help alleviate the pressure on borrowing costs and business expenses providing some relief to the rising costs of doing business, and potentially lift the overall market sentiment as concerns of the economy having a hard-landing reduced. However, the impact on the real estate market would vary by the sub-markets as it is very much dependent on the interplay of the drivers specific to the respective sub-markets.

As the majority of home purchases in Singapore are completed through mortgages, the lowering of the interest rates should translate to more affordable borrowing costs which will be welcome by the existing or potential new homeowners. In turn, this may lead to higher transaction volumes and property prices as demand rises. However, the evolution of the market may not be as straightforward as outlined earlier. A glance at the historical trend between the private residential property price index and interest rates seems to suggest that there are other drivers at play in driving the residential market. 

For example, against the headwinds of elevated interest rates and global economic uncertainties, it is observed that prices of private residential properties had continued to increase for the fourth consecutive quarter, albeit at a more moderated pace of 0.9% in Q2/2024. However, during the pandemic in 2020 in which interest rates were low while Singapore’s economic growth was in negative territory, the private residential property price index rose. Taking a further look back, it appears that the implementation of property cooling measures by the Singapore Government  had a notable tempering effect on the residential market as evidenced by the softer or negative growth in the prices of private residential properties and/or lower transaction volumes in general, while noting that the aforementioned observations could be due in part to the drop in the number of launched units and/or softness in the overall economic environment.

Chart 2: Compound SORA – 3-month, 3-month SIBOR and Singapore Property Price Index of Private Residential Properties

As such, rather than interest rate being a primary driver, it is instead an interplay of factors - such as population (including immigration), employment rate, demographics, economic growth, market sentiments, housing policy, supply of land for residential and new property launches, amongst others - underpinning the demand and supply that shape the residential market. Notwithstanding, one should not disregard or underestimate the influence of interest rate over the residential market as it is inextricably linked to market sentiments, the state of economy and affordability, amongst others.

While the above is outlined in relation to the private residential market, these same underlying factors also underpin the dynamics of the public housing market