The housing loan rate has decreased recently and resulted in a price war amongst several banks as reported in main stream newspapers. See below.

http://www.businesstimes.com.sg/real-estate/uob-hsbc-join-mortgage-war-with-3-year-fixed-rate-packages

We were taught that Singapore’s interest rates are pegged to US and hence any fluctuations here must be due to interest rate fluctuations from the Federal Reserves. In this case, the US clearly did not decrease their interest rates. So what could have caused the decrease? For the answer, we have to draw our conclusion from 2 chapters – namely Demand and Supply and Market Structure.

Demand and Supply

The demand for loans can come from both Private or Public Housing’s existing owners and new owners. For this analysis, we are only looking at Public Housing (HDB) owners since all private property buyers and owners must finance from banks. From the graph below, we can clearly see that the demand for bank loans from HDB owners has decreased significantly.

The reason for the drop is due to expectations of future interest rate hikes. As the Federal Reserves has highlighted on numerous occasions that there are impending rate hikes, numerous Singaporean Public Housing owners has fled to the safe haven of HDB loans to prevent any sudden increase in instalment payment. Historically interest rates were as high as 7% as compared to now 1.68%.

Hence it is not difficult to deduce that one of the reason why banks here have decreased their rates is to entice whatever customers that are left in the market. (From a peak of 22k to 8k per annum and dropping).

Market Structure – Oligopoly

The banking structure in Singapore is clearly an Oligopoly structure as characterised by the high barriers to entry and small number of players with significant market share. In an Oligopoly structure, we understand that there is such a thing called “price leadership” where there is a leader setting prices and others simply follow. According to the article, DBS has been a price leader for several years. And since they have maintained low interest rates of 1.68%, it is likely for the rest to follow suit. In the study of Oligopoly we also understand that price war can result.

What it means for property owners?

The demand for loans is unlikely to pick up in the near future. The Oligopolistic nature of the banking system will exhibit price rigidity and unlikely to increase. Since the 2 main factors affecting the rate of interest in Singapore continues to exhibit a downtrend, bearing any unforeseen price hikes from the Federal Reserves, it is safe to say that interest rates will continue to be subdued for the next few years.


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