Time for action on home loan rates?

Home loan rates are back in the news. In the latest move to maintain loan volumes in an uncertain market, at least two Singapore banks have reportedly been dangling some of the lowest rates, currently pegged at about 0.2 per cent to market benchmarks, on selected properties.

The offered mortgage rates are pegged against two commonly used benchmark interest rates. These are the Singapore interbank lending rate (Sibor) and the swap offer rate (SOR). The three-month Singapore dollar Sibor has been at a record low of 0.438 per cent since January, while the three-month SOR has moved between 0.189 and 0.3 per cent since April. It now stands at 0.21 per cent.

The fact that these deals have not been offered to the rest of the market yet and with the marketing kept low-profile, suggests that the banks themselves recognise that it would be counter-productive to engage in an open mortgage war at this time.

However, it may not be too long before this happens, given the global economic situation where at a recent meeting of the United States Federal Reserve, policy-makers discussed “Quantitative Easing Three”. And Fed chairman Ben Bernanke said on Wednesday that further stimulus might be needed to help the US recovery.

Quantitative easing is a tool to try to revive the US economy by expanding the money supply via huge purchases of government bonds. If this happens, foreign investors are likely to head back to our region in a big way as they switch out of developed markets, such as the US and Europe, which have recently been spooked by concerns of slowing growth.

The upsurge of fresh money seeking higher yields may trigger what one analyst calls the “mother of all bubbles”.

At 0.2 per cent, the first step towards buying a home must be almost painless. It may be the reason for some of the recent buying in some projects in an otherwise gloomy market.

Buying sentiment had been significantly affected by the ongoing euro zone debt crisis. The last time our private housing market was similarly downcast was in April last year when the Greek crisis erupted.

So, it was not the “Khaw” effect as some have suggested, referring to the uncertainty that has clouded the market since Mr Khaw Boon Wan took over as Minister of National Development. Nor was it the anxiety felt by the industry arising from the frequent blog postings of the minister.

It was due to macro-economic events. You cannot help notice the strong correlation every time a major economic crisis looms on the horizon. But why should macro events play such a big part in affecting buying sentiment? After all, home purchases are for the long term and should not be derailed by short-term developments.

Perhaps it is because most buyers these days are investors rather than owner-occupiers. Investors always have their eye on the stock markets and when regional equity markets are rattled, they become ultra-cautious.

When it became clear to me about a year ago that there is a strong possibility that home loan rates may remain low longer than anticipated, I sounded out to those around me that maybe we should contemplate some official action to edge mortgage rates higher to reflect the longer term and to have them at a more sustainable level. This would protect some of the naive home buyers or novice investors from being seduced by the very low promotional rates for the initial loan period.

The first time I brought up the idea, many reacted in horror and dismissed it quickly without giving me a chance to flesh out my suggestion. But as the months went by, each time I revisited the subject, I noticed that the reaction, though still strong, was less vehement. Some were even beginning to be more receptive to the idea.

More recently, I suggested that we change the rules by which the banks compete for home loans. All loans should be on offered at a fixed rate for a fixed period, say, three or five years, but the banks should be allowed to freely determine this rate. This means the banks can continue to offer 0.2 per cent if they want to. However, the risk of assessing interest rate risks is passed onto the lenders.

Banks can protect themselves by hedging some of the risks by, say, offering better rates for fixed deposit to cover themselves during this period.

Let me put it this way: Who is more able to gauge interest rate risks? As corporations with more resources and being players in the financing industry themselves, banks are definitely better placed than individuals to assess these risks.

By Colin Tan – head of research and consultancy at Chesterton Suntec International.

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