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A New US President, A Vaccine, And Interest Rate

2020 has been a lost year for most.  And as we are about to begin 2021, a new and unifying Biden Presidency, and a new vaccine from Pfizer with over 90% efficacy augers well for the new year.

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So, is interest rate about to shoot up over 2% in 2021 and everyone should quickly lock down fixed rate mortgages?

That’s surely the question and immediate knee-jerk response from homeowners looking to refinance or those taking up a new purchase home loan.  “Play safe”.  After all, that’s the typical “kia-su” thing to do here in Singapore.  Here at MortgageWise, we tend to take a contrarian approach to things.  Before you jump head first to sign on the dotted line for the lowest fixed rates, read on.

We think that’s hardly the case.  In fact, we will be dishing out our new interest rate forecast as we are about to begin 2021 in less than 2 months.  And at the moment, we are maintaining our view that interest rates will stay down for a good several years.  And if history is anything to go by, it could be as long as 6 years or beyond.  That’s a rather bold statement to make actually.  Those who have been following this blog will know that at MortgageWise, we stick our neck out with forecasts to help homeowners better plan on mortgage strategies all through the interest rate cycles – up or down.

To give you some heads up, this is what we think will happen.  The new covid-19 vaccine, in fact there seems to be more than a few including one of our very own made in Singapore, is a game-changer.  It takes time to vaccinate the world’s population but there’s now finally light at end of the tunnel.  Barring virus mutation risks, I think there’s a good chance we can get the pandemic under control globally by 2H of 2021.

Still, the US economy will take a long time to rebuild.  It’s hard to tell what structural change will happen to demand across many sectors in US and for the global economy.  Most analysts agree that some form of WFH (work from home) will become entrenched, along with the heightened pace of digitalisation across many sectors.  Many SMEs who are unable to re-invent themselves in the new digitial economy will fail when government support is withdrawn, leading to massive job losses.  As US is still very much a consumer-driven economy, severely-crippled consumer spending power will lead to dampened demand in many sectors.  No matter who is the new US President (for those who are still unsure) or if there is a new Fed Chair, he or she will have to keep monetary policy extremely accommodative for a considerable time.

So, here’s what will likely happen.

The Fed has to keep interest rates at zero for the next three years 2021-2023, which the current Fed has already said so.  This is to aid in the rebuilding process for the US economy and any attempt to hike rates prematurely will likely be thwarted by White House, Congress or the stock market!  This is what we have already witnessed in recent years.

For the next three years 2024-2026, the Fed will continue to struggle with the issue of inflation or should I say the non-existence of it.  The flattening of the Phillips curve has puzzled Fed economists so much so as to warrant a paradigm shift in thinking – and the Fed has already laid out in its statement that it will allow inflation to go above 2% for period of time, if that happens at all.  We have covered this in our blog.

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Let me put forth 3 rationales why we think rates will continue to languish for a considerable time.  Hence, we are of the view that the best thing to do for homeowners is to opt for floating rate home loans.  But first, I like to clarify that we have nothing against fixed rates at the current levels of 1.15-1.30% depending on your outstanding loan amount.  

Prior to this we were dead set against fixed rates – when it was slowly coming off from its highs of 1.80-1.90% at the start of this year.  Those who signed on fixed rates too quickly learnt a painful lesson when fixed rates would drop immediately the following month.  It keeps dropping over the course of 2020 until we hit our projected floor for fixed rates at 1.25-1.35%.  In fact, it has now gone slightly below that floor for the bigger loans.  At such levels, it is unlikely to go down much further.

With fixed rates this low, whether one takes up a fixed rate or a floating rate home loan depends a lot on three things: the loan quantum, your outlook on interest rate, and the need to stay nimble.  We will cover all that in greater details in our next article.

For now, the case for a “lower-for-longer” interest rate environment:

1. QE Unlimited

Many people underestimated and continue to underestimate the impact of liquidity to global markets and interest rate trajectory. 

That’s the reason why the stock market stays so resilient and the DOW hardly retrace back all the way even at the height of the pandemic in March this year.  

History has already given a preview of what would happen with QEs during the Great Recession of 2008 when the then Fed Chair Ben Bernanke pump-primed the economy via three rounds of QE (Quantitative Easing) that ballooned the Fed’s balance sheet from US$1t to US$4.5t (see chart below).  That huge slosh of funds in the financial system caused massive asset inflation all over the world be it in real estate or stock market.  Interest rates stayed depressed for long periods from 2009 to 2014.  Investors chase after yields as fixed deposits pay almost nothing if you had put money with the banks.

Let’s take a closer look at the Fed’s balance sheet since 2008.

Source: US Federal Reserve Website

The Fed tried to roll off its balance sheet with a series of programmed asset sales from 2017-2018 but not by a lot – reducing its balance sheet only to US$3.8t (the longer-term target for Fed’s balance sheet is to reduce it to US$2.5t).  But when the pandemic hit this year, it promised unlimited QE.  And by now, not only has it purchased back all its asset sales in 2017-2018, it has almost doubled the balance sheet to US$7.15t!  And with more stimulus expected in 2021, most analysts are predicting that the Fed’s balance sheet will balloon to US$10t in 2021.

No one can tell you for sure how all this liquidity is ever going to get mopped up one day, if ever.  QE, in itself, is a new and a contentious monetary tool deployed in 2009 when the Fed can no longer cut interest rates which was at zero.  It has now become a centrepiece for all central banks.  Like I said, history is the best teacher.  Expect rates to languish for a long time.

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2. Inflation Is Simply Not Happening

Whilst QE cause asset inflation globally, it did not trigger CPI price inflation feared and touted by most critics of QE.  In fact, it confounded top economists in Fed so much so that they have given up on inflation ever rising even with unemployment rate at a 50-year low of 3.50% in the US pre-covid.   

Many has attributed the demise of inflation to a globally-connected world.  The advent of the internet age has given pricing power to consumers and businesses across many sectors are finding it extremely hard to raise prices.  Oil and energy prices, an important component in CPI, have also tanked with the ongoing search for renewable energies precipitated by ESG movements globally.

Without inflation, the Fed has no mandate to hike interest rates.

Going forward, the only indicator we need to watch to ascertain the trajectory of interest rate would be – that’s right, inflation.

3. Double-Dip Recession?

There are talks of double-dip recession with the second wave of covid-19 that’s hitting the northen hemisphere fast and furious.  I think with the new vaccines that second dip will not come so soon.  But there’s every likelihood of another recession further down the road, perhaps just when interest rates are about to rise up after another 6 years?

You see, covid-19 is not a typical recession caused by a build up of excesses or oversupply after many years of rapid expansion and exuberance.  Rather, it’s brought about by a sudden collapse in demand with global population in lockdowns and restricted activities.  Of course, that’s still a global recession leading to hardships as all these excesses must now be “reset” to cater to a markedly reduced demand in a new world.  Many businesses will fail and people lose their jobs.

Still, it is not inconceivable that there might be another day of reckoning for all the asset inflations, debts and budget deficits built up since 2008 which have now exploded with the pandemic crisis of 2020.  

I am no economist.  But we have seen enough events in the last few decades to know that when it comes to interest rates or cost of funds, there’s no need to get ahead of oneself and plan too far into the future.  You simply do not know what we will get hit with next, whether that’s another global financial crisis or disease X.   

Since 2014, has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loanbuy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.

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