Analysis: The Impact of the Federal Rate Cut on the Housing Market

Authored by Raymond Tiah

As the Federal Reserve cuts rates, all eyes are on SORA and its potential impact on the housing market. How will these changes shape refinancing opportunities, housing affordability, and property prices? Let's dive in to find out.

Fed rate cuts to lower SORA

The recent reduction in the Federal Reserve's interest rate is expected to result in a decline in the Singapore Overnight Rate Average (SORA), which will lead to reduced monthly payments for homeowners with variable-rate mortgages.

As of now, the three-month compounded SORA has fallen from 3.7% per annum to approximately 3.5% per annum.

However, these Fed rate cuts do not influence holders of HDB mortgages. Homeowners who are within their lock-in periods or have fixed-rate loans will not face any immediate changes.

Although refinancing after the lock-in period is a possibility, banks have preemptively modified their loan offerings in response to the anticipated rate cuts, making it unlikely for significantly lower rates to be available for new loans or refinancing.

Boosting housing affordability and refinancing opportunities for homeowners

Potential further rate cuts by the Federal Reserve could enhance housing affordability, which may increase buyer confidence and lead individuals to contemplate larger or more upscale homes due to the decrease in mortgage.

These reductions might also result in a lower SORA, encouraging banks to provide more attractive loan options. Homeowners may consider refinancing after their lock-in period, and HDB loan holders might opt to transition to bank loans if interest rates dip below 2.6%.

However, it's important to note that bank loans will eventually convert to floating rates, and once this transition occurs, homeowners cannot revert back to HDB loans.

How will declining interest rates affect housing prices?

In 2008, both the Federal Reserve's interest rate and SORA reached their lowest points, while Singapore's GDP experienced a growth of 1.9% alongside an inflation rate that hit a record high of 6.6%.

Today, however, Singapore's economic outlook is more robust, with a projected GDP growth of 3% for the first half of 2024 and anticipated inflation at 2.9%. Residential property prices have also increased, with the average resale price for condos standing at $1,697 per square foot, up from $1,624 per square foot last year.

While market sentiment is on the rise, a further decline in interest rates is necessary for a complete market recovery. Historical trends indicate that lower SORA rates typically align with an increase in home sales, as observed following the global financial crisis and during the pandemic.

Although housing prices are expected to rise this year, the growth is likely to be more moderate than in 2012, largely because current SORA rates remain higher than they were during that period.

Will SORA continue to fall?

Historical patterns indicate that the SORA rate closely aligns with the Federal Reserve's decisions. During the financial crisis in 2008, the Fed reduced rates from 3.5% to nearly 0%, which resulted in a drop in SORA from 1.57% to 0.44%.

After a series of gradual increases starting in 2015, the Fed again lowered rates in 2019 due to the pandemic, keeping SORA below 1% until mid-2018.

Following the Federal Reserve's rate hikes in 2022 to address inflation, SORA increased to between 3.4% and 3.8% this year.

Given their strong correlation, any additional cuts from the Fed are likely to result in a decrease in SORA, subsequently leading to lower monthly payments for homeowners with variable-rate loans.