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So check this out.

CNBC reported that Southern California suffers its worst housing slump in over a decade with home sales and prices much lower than the year before and historical norms. I’m not too surprised that prices are much lower than recent history because you have to remember that the housing boom of the first decade of 2000 caused prices to be inflated.

From the article, what’s more worrisome is this (emphasis mine):

LePage noted that while the median sale price was up 3.6 percent year over year in September, the principal and interest mortgage payment on the median-priced home was up 14.2 percent because mortgage rates increased about 0.8 percentage point over that period.

It appears that interest rate hikes are beginning to have an impact on the housing market in the U.S.

 

Mortgages in Singapore will get more expensive

In Singapore, things are still pretty ok. I haven’t heard much about homeowners complaining about the interest on their mortgage.* Most homeowners in Singapore are on some form of 25 to 30-year loan with floating rates so interest rate hikes in the U.S. will definitely hit home at some point.

The reason why it hasn’t hit home is probably due to some combination of the fact that we’ve allowed the U.S. dollar to appreciate against the Singapore Dollar (the USD has gone from about 1.31 since the beginning of the year to about 1.38) and the fact that regional currencies (like the IDR) are doing worse than us**.

If the SGD moves in line with the USD, we’ll kill our trade with Indonesia but if we don’t allow a full adjustment of the exchange rates, we’ll have to run our stash of USD in our reserves down. I suspect this is the middle of the road scenario that MAS prefers unless interest rate hikes in the U.S. start to pick up even more. When that happens, we’ll have less choice but to have rates in Singapore follow the path of U.S. interest rates a little more closely. If you want to understand the mechanism, I have a post on that here.

Back to interest rates, our 10-year Singapore Govt Bond yields have been moving up which is great news for the many mom-and-pop investors that love the Singapore Savings Bonds (SSB) but from the yields, you can also see that short-term yields are heading north (see the chart in the post).

 

Back-of-the-envelope Calculations

I’ve said it before. Singaporeans are obsessed with property.

Recently, two close friends of mine bought new properties for their own stay. A reasonable guess is that one of them took a loan of $1m and the other, a loan of $1.5m. This means that a reasonable estimate of their mortgage payments (assuming it’s a 30-year, 2% p.a. loan) comes up to $3,696 and $5,544 per month respectively.

Just picture that. The median household income in Singapore is $9,026 so obviously, my friends are doing much better than most people.

Both their spouses work (albeit one less than the other) but even so, to service the loans from their CPF contributions alone mean that their household monthly incomes must be $16,069.57 and $24,104.34 respectively. That’s certainly possible for two adults working white-collar jobs close to the peak of their careers. However, if their incomes are any less than those numbers, then they will be servicing a decent amount of the loan using cash.

My worry for them is that it doesn’t leave any room for bad luck or errors.

For the next 30 years, they will essentially have to hope that the family doesn’t experience any shortfall in income due to loss of jobs. It will also mean that they have to find a job that either pays as well or better in the event their current work environment is no longer as fulfilling as it once was.

Looking further down the road, if they use their CPF-OA to service the mortgage, then I hope they are putting some of their cash aside for life after work. If they are using cash out of pocket to service some of the loans, then life after retirement becomes a lot harder.

In any case, what my friends have done is ensure that for the next 30 years, they have to play a very strong offensive game. They have to continue to work as hard as they have or even more to find other sources of income.

Oh yes, and they have to hope that interest rates don’t go up much.

 

It all comes down to rate hikes in the U.S.

Which way the markets are going to move will depend heavily on future rate hikes. I’m pretty sure we haven’t seen the end of rate hikes because the U.S. economy has been reporting strong numbers on the employment front. That’s also what the markets seem to expect and the Fed could even throw everyone off by hiking more than expected.

The point is, I’m quite sure I’m not alone when I say that no one is expecting interest rates to get lower in the near future. If anything, we need to expect that interest rates will go up. And if you’re not comfortable seeing the interest rates on your mortgage go up at least a percentage point, then I guess you’re in trouble, my friend.

 

Notes:

*This would apply more to investors that own private property in Singapore. HDB flat owners have the choice of taking the loan from HDB directly which pegs the interest on the loan to the CPF rate + 0.1%. I don’t think CPF rates will move up and cause more pain to flat owners with a mortgage.

**Against the USD, the IDR has depreciated more than it has against the SGD.