More rate hikes ?

[havetheveryfun]

If interest rates rise 25% from 4%pa to 5%pa, would HDB prices drop by 25%?

ppl can opt for HDB loan at 2.6%

 

[reddevil0728]

ppl can opt for HDB loan at 2.6%

not everybody can qualify for that

 

[stanlawj]

No the yield curve was inverted for 20 months between 1978 and 1980, and it was inverted for 12 months between 1980 and 1981. Current yield curve has only been inverted for 9 months so it can definitely stay this way for another 10 months or maybe more before the fed starts cutting (bringing 2s 10s spread back into positive territory).

Either way I dun see this situation lasting very long unless its "different this time".

inversion only ends some time after the Fed stops hiking rates. Because the speculators are still shorting the short duration debt, causing its yield to rise while the Fed is still hiking rates.
Speculators will stop shorting when the Fed stops hiking, but since the Fed says no pause, then its forever, but my guess is Fed will pause in Q2 2023 to see the effects for some time.

 

[hwmook]

That time nobody complain why CPF no follow ..

I don't complain because my CPF OA no money, I take out to invest.

 

[dork32]

I don't complain because my CPF OA no money, I take out to invest.

i agree with your attitude. when oa dont raise their interest, you can
1. kpkb or
2. be a bit more proactive and invest it yourself

 

[BBCWatcher]

If interest rates rise 25% from 4%pa to 5%pa, would HDB prices drop by 25%?

No, not as a result of the mortgage interest increase. (See below.)

ppl can opt for HDB loan at 2.6%

That's one reason. There are some others, though.

Let's start with some sample math. Let's assume a family wants to buy a HDB resale flat, will take out a 25 year bank mortgage (and will finance 75% of the purchase price), the family can afford a slightly higher down payment using OA dollars (a big assumption actually), and the family can afford (is willing to afford) a mortgage payment of up to $1,500 per month. How much can this family borrow (rounded to the nearest $1K)?

At 4.0%: $284K ($379K home)
At 5.0%: $257K ($343K home)

That's about a 9.5% reduction in price with a 1 percentage point increase in the mortgage interest rate. With these assumptions. In reality potential buyers are in all sorts of situations. Many are similar to this hypothetical family, and they are sensitive to the monthly mortgage payment amount. Higher mortgage interest rates should eventually put downward pressure on home prices. However, it's difficult to predict how much downward pressure and when.

 

[hwarzoner]

For those cash rich is good news, can buy without loan.

 

[stephenbishop]

That's why CPF OA has to remain at 2.5% so that HDB loan stay at 2.6%.

Large CPFOA outflows via CPFIS into SGS tbills will put pressure on CPFB to make the CPFOA interest rate more competitive viz the financial markets. If the outflows happen but the CPF OA interest rate remains unchanged, the Government rather than the CPF OA savers will need to subsidise the HDB loan borrowers.

 

[stephenbishop]

in fact got a formula. so it is accounted for.

Regrettably, the so called "formula" relies on third parties (local banks) who have a deep vested interest (pun intended) in keeping the formula variables as low as possible!

 

[proton_cannon]

Looks like Fed is looking at a much higher terminal rate > 6%. But higher rates = higher economic slowdown risk. And if USA goes into recession, it is more likely that the central banks will be rushing to reduce rates back near 0 and restart QE.

So likely the higher rate will be a short-term situation.

 

[Darwinson]

meanwhile.. cpf-oa still stuck at 2.5%

Just remember. If this rate has to be increased lots of peasants on hdb loan will die co ck standing. Usually the more talented and capable people just take bank loan. It’s commoners with average financial knowledge will suffer if hdb loan interest increase

 

[BBCWatcher]

For those cash rich is good news, can buy without loan.

That doesn't mean they should. I've bought a couple big items on credit when I could've easily paid cash. It's all about what the credit offer is.

One very nice lender offered me 0% financing with all payments deferred for about 6 years. Of course I took that deal. Then I paid off the loan just before payments were due to start and a moderate interest rate was set to begin. (It was a medium interest rate. Not attractive, not horrible either. Worth paying off, though.) So I got $X, then I paid $X about 6 years later. And that was the end of the loan. What a deal!

Just remember. If this rate has to be increased lots of peasants on hdb loan will die co ck standing. Usually the more talented and capable people just take bank loan. It’s commoners with average financial knowledge will suffer if hdb loan interest increase

Well, let's test that hypothesis. Let's pick the following hypothetical HDB dwellers:

• Bought a $450K HDB resale flat at age 35 (couple)
• Financed 80% of it with a HDB loan ($360K)
• 25 year term
• Have made 1 year of payments so far at 2.6%
• the 2.6% rate then instantly jumps up to 4.0%
• each spouse earns $4,000/month with traditional 13th month bonuses ($52,000 per year each)

OK, so what happens to the monthly payment in this scenario? Let's take a look....

Before the interest rate hike: $1,633.21
After the interest rate hike: $1,890.46
Difference: +$257.25 per month (+15.8%)

Yeah, that doesn't look terrific. But let's continue. In their age bracket the percentage of compulsory CPF contributions that lands in OA is 56.77%. At $104,000 of total earnings this couple should get $21,845 per year flowing into their OAs. That's $1,820 per month on average. A big interest rate hike could mean that they'd have to find about $70 per month in cash to make the new mortgage payment, and that's assuming they somehow fully drained their OAs between the down payment and 2.6% rate period (probably not). $70 per month is annoying perhaps, but it doesn't seem like the end of the world.

A couple or few years later the 2.6% returns (let's suppose), this couple's monthly payments decrease, and then the ~$70/month of "top up" cash goes away.

Obviously there are other possible scenarios, but this one seems pretty reasonable doesn't it?

 

[andyhtc]

Looks like Fed is looking at a much higher terminal rate > 6%. But higher rates = higher economic slowdown risk. And if USA goes into recession, it is more likely that the central banks will be rushing to reduce rates back near 0 and restart QE.

So likely the higher rate will be a short-term situation.

Possibly just around 6% terminal rate.

 

[rest1ess]

That time nobody complain why CPF no follow ..

By law, that's the stipulated *floor* (not stipulated rate). So no complaints lah, else must change law liao.

But now it's different, no law saying that interest rate cannot rise with market wor.

 

[Darwinson]

That doesn't mean they should. I've bought a couple big items on credit when I could've easily paid cash. It's all about what the credit offer is.

One very nice lender offered me 0% financing with all payments deferred for about 6 years. Of course I took that deal. Then I paid off the loan just before payments were due to start and a moderate interest rate was set to begin. (It was a medium interest rate. Not attractive, not horrible either. Worth paying off, though.) So I got $X, then I paid $X about 6 years later. And that was the end of the loan. What a deal!

Well, let's test that hypothesis. Let's pick the following hypothetical HDB dwellers:

• Bought a $450K HDB resale flat at age 35 (couple)
• Financed 80% of it with a HDB loan ($360K)
• 25 year term
• Have made 1 year of payments so far at 2.6%
• the 2.6% rate then instantly jumps up to 4.0%
• each spouse earns $4,000/month with traditional 13th month bonuses ($52,000 per year each)

OK, so what happens to the monthly payment in this scenario? Let's take a look....

Before the interest rate hike: $1,633.21
After the interest rate hike: $1,890.46
Difference: +$257.25 per month (+15.8%)

Yeah, that doesn't look terrific. But let's continue. In their age bracket the percentage of compulsory CPF contributions that lands in OA is 56.77%. At $104,000 of total earnings this couple should get $21,845 per year flowing into their OAs. That's $1,820 per month on average. A big interest rate hike could mean that they'd have to find about $70 per month in cash to make the new mortgage payment, and that's assuming they somehow fully drained their OAs between the down payment and 2.6% rate period (probably not). $70 per month is annoying perhaps, but it doesn't seem like the end of the world.

A couple or few years later the 2.6% returns (let's suppose), this couple's monthly payments decrease, and then the ~$70/month of "top up" cash goes away.

Obviously there are other possible scenarios, but this one seems pretty reasonable doesn't it?

Good Write up bro. We can conclude that cpf interest should be raise and resulting hdb loan rate increase is very small change and people can afford.

this again strong supports my consensus thaT hdb are damn good value. They are way too cheap and even at 5% interest most properties are worth it.

 

[RedsYWNA]

Looks like Fed is looking at a much higher terminal rate > 6%. But higher rates = higher economic slowdown risk. And if USA goes into recession, it is more likely that the central banks will be rushing to reduce rates back near 0 and restart QE.

So likely the higher rate will be a short-term situation.

Based on futures, 5.5 - 5.75% is the expected peak for the time being...

 

[BBCWatcher]

Good Write up bro. We can conclude that cpf interest should be raise and resulting hdb loan rate increase is very small change and people can afford.

Who's "we"?

A hypothetical HDB loan rate hike (for this hypothetical couple) still has negative impacts. Specifically, this couple's OA balances will stop accumulating and will fall instead. That in turn means they'll have to delay or skip other housing purchases (such as that shoebox condo they're eyeing after their MOP that they really shouldn't buy) and/or have a smaller CPF nest egg for retirement. OA money is still their real money. They're also a bit more financially vulnerable during periods of employment interruption. There would be some number of households that'd run into trouble.

There would also be some households tempted to pay off 4.0% HDB loans. And then some of these households would later run into trouble because they end up "property rich and cash poor." So they'd have to sell their flats. All of these households would probably lose that bet because the interest rate would probably fall back to 2.6% soon enough, and they could've done so much better investing instead, assuming that's the alternative they'd pick. (Even 6 month T-bills are currently yielding ~4% for context.)

this again strong supports my consensus thaT hdb are damn good value. They are way too cheap and even at 5% interest most properties are worth it.

Well, I agree with the first part. HDB flats are "darn useful." I wouldn't call them cheap, though. Ever been to Kansas or Ohio?

 

[reddevil0728]

Large CPFOA outflows via CPFIS into SGS tbills will put pressure on CPFB to make the CPFOA interest rate more competitive viz the financial markets. If the outflows happen but the CPF OA interest rate remains unchanged, the Government rather than the CPF OA savers will need to subsidise the HDB loan borrowers.

Logically that might be how it works. but policy wise that might not be how it works.

Regrettably, the so called "formula" relies on third parties (local banks) who have a deep vested interest (pun intended) in keeping the formula variables as low as possible!

well it can be argued it is a flawed formula. my point still stands that there isn't a cap

 

[reddevil0728]

Who's "we"?

A hypothetical HDB loan rate hike (for this hypothetical couple) still has negative impacts. Specifically, this couple's OA balances will stop accumulating and will fall instead. That in turn means they'll have to delay or skip other housing purchases (such as that shoebox condo they're eyeing after their MOP that they really shouldn't buy) and/or have a smaller CPF nest egg for retirement. OA money is still their real money. They're also a bit more financially vulnerable during periods of employment interruption. There would be some number of households that'd run into trouble.

There would also be some households tempted to pay off 4.0% HDB loans. And then some of these households would later run into trouble because they end up "property rich and cash poor." So they'd have to sell their flats. All of these households would probably lose that bet because the interest rate would probably fall back to 2.6% soon enough, and they could've done so much better investing instead, assuming that's the alternative they'd pick. (Even 6 month T-bills are currently yielding ~4% for context.)

Well, I agree with the first part. HDB flats are "darn useful." I wouldn't call them cheap, though. Ever been to Kansas or Ohio?

cheap is relative. is there anything cheaper in Singapore since that's what matters here.

 

[BBCWatcher]

cheap is relative. is there anything cheaper in Singapore since that's what matters here.

Singaporeans are free to move to other countries as long as they can clear immigration hurdles (and have fulfilled National Service obligations if applicable). They often can, often easily.

We discuss geographic arbitrage all the time in "Money Mind." There's nothing particularly novel about it. Approximately 200,000 Singaporeans (and rising) live overseas last I checked.