It is Singapore government's dilemma.
Let's do a simple math.
HDB median sublet rental for 5RM (Ang Mo Kio): $2,700 (Q2,2012, HDB website)
HDB median resale price for 5RM (Ang Mo Kio): $620,000 (Q2 2012, HDB website)
Private bank interest rate: 1.50% p.a.
Assuming loan of 80% of valuation for 30 years, using PMT function which I discussed before.
At current state, if you buy a 5RM flat. The monthly installment is $1,711.80 (parameter for PMT function is as shown below).
| Interest Rate |
| 1.50% |
| Year |
| 30 |
| Flat Price |
| $620,000 |
| Loan (80% of price) |
| $496,000 |
| Monthly Installment |
| $1,711.80 |
So, if you are a foreigner, you are paying about $1,000 more than your installment if you rent a flat. Well, do you want to pay installment or rent? If you have no problem with your job in Singapore, you have to rent anyway (especially you have family).
When rental is equal (more or less) to installment, you will stop thinking to purchase a flat. Two scenarios for rental equals installment:
(1) Flat price increases
(2) Interest rate increases
If interest rate stays, the flat price will only increase to the point rental is equaled installment.
| Interest Rate |
| 1.50% |
| Year |
| 30 |
| Flat Price |
| $1,000,000 |
| Loan (80% of price) |
| $800,000 |
| Monthly Installment |
| $2,760.96 |
Tada! One million dollar HDB flat.
This is hard mathematics. If consider supply vs demand curve from external, the price won't be hitting $1M but perhaps we discount 20% which is $800,000.
So, the scary part. What if interest rate increases? The most certain is cashing out money from HDB flat (property) which triggers economic spiraling downwards. Price of property will be hit because no one (or perhaps local Singaporean) can withstand this installment.
| Interest Rate |
| 5.10% |
| Year |
| 30 |
| Flat Price |
| $620,000 |
| Loan (80% of price) |
| $496,000 |
| Monthly Installment |
| $2,693.03 |
As a result, more and more HDB flats will be transferred from hand of locals to foreigners. Compare apple to apple, local Singaporean is no way up to the level of how foreigner controls their expenses.
In general the scenario of rising interest rate is not favourable to both local and foreigner. So what can the government does it cool down property market and manage interest rate. Yes, typical interest rate is very sensitive to global interest rate. In order for the government to maintain such interest rate, it is not easy. It will creates more and more inflation which hits residents (especially those who can't control their expenses).
The most effective way out of this issue is increasing productivity which government is emphasising now. Well, it is not what we want to discuss today. :-)
