Many are unaware – spot SORA, or the daily overnight rate, has been trending down below 3% in recent weeks (see screenshot below).  On some days it even dropped below 2%!  While daily SORA is known to swing wildly from day to day, the general trend line is still going down and if this trend continues into January, we will soon see the 3-month compounded SORA value drop back to near 2% range by middle of March 2023 (compounded SORA is backward-looking where it averages the daily SORA values for the past 90 days).  As mortgages in Singapore are mostly pegged to the 3-month compounded SORA, this means we will start to see prevailing floating rates roll back to 2.00-2.50% soon with 2-year fixed rates almost halving to 2.50% from a recent high of 4.50%!

Before you get all excited, this could well be just a temporary blip which falls away once we get through the December lull month where not much business activities take place.  Daily SORA could well snap back up and stay persistently above 3% by January.  No one can say for sure and we do not presume to know how the dynamics in the interbank market works.

SORA which stands for Singapore Overnight Rate Average is the rate that banks lend to one another in the interbank market overnight.  It’s defined as “the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8am and 6.15pm.”

In what could be the first sign of trouble for Singapore’s economy in 2023, the only plausible explanation for this sudden drop in SORA from its peak of over 4.00% is that banks are unable to lend out the excess funds in the interbank market.  

For example, we had already seen Singapore’s factory output shrunk by worse-than-expected 3.2% in November, deepening from 0.9% contraction in the previous month.  And that trend is likely to continue with final demand for electronics and semi-conductors weakening in all the major economies like Euro, UK, etc.  The tech slump, high interest rate and high prices will dampen global demand severely at least in the first half of 2023.  At the same time expect China’s economy to slow down significantly in the first half as it battles a huge pandemic wave with millions staying home.  It will not be surprising to hear of more corporate actions from hiring freeze to layoffs in 2023.

I suspect banks are also lending out less than what they like on mortgages which forms approximately 25-30% of their loan books.  This is because with homeowners receiving notices on their mortgage rate going to 4% in 2023, many may have opted to do lumpsum prepayment.  Though I cannot ascertain the scale of this deleveraging in the consumer segment.

As mortgages in Singapore are mostly pegged to the 3-month compounded SORA, this means we will start to see prevailing floating rates roll back to 2.00-2.50% soon with 2-year fixed rates almost halving to 2.50% from a recent high of 4.50%!

Bottomline is – expect continued volatility going into 2023 as all three major economies of the world slows from Europe, China, to a more than 50% chance Fed-triggered recession in the U.S.  How then should homeowners prepare themselves in 2023? 

1. Do not overcommit on lock-in periods.

Over the years we see this as the single biggest regret amongst homeowners who fell “behind the curve” when it comes to interest rates, i.e. waited too long for lock-ins to end when rates had already gone up, or got stuck with a high fixed rate when rates are crashing down.

As what we had repeatedly advocated to our clients since 2^nd half of 2022 – the best thing you can do for yourself is not to sign your rights away for anything more than 12 months in a year (2023) where the interest rate cycle is turning.  The volatility of the daily SORA just attested to that wisdom.  As events unfold in the year, you’ll want to be able to freely negotiate for the best terms be it on floating or fixed rates.

2. We are much closer to the peak (and pause).

If you just stare hard at the interest rate cycle over the last 30 years, it won’t take long for you to realize we are almost at the next peak.  That tells you the only direction for it to go from here is sideways or downwards.  Unless of course we are going back to the Great Inflation era of the early 1980s where inflation in U.S. skyrocketed to 15% and interest rate went over 20%!  But that’s not happening now with many components in the CPI already showing signs of softening. The last piece to come down will be wages and Fed might just need to trigger a recession, mild or otherwise, for that to finally roll over in 2023.

As interest rate is likely to peak, pause and come down from here, the obvious choice will be to opt for your mortgages to be pegged to a market-based index like compounded SORA which allows you to enjoy the ride down.

3. Watch inflation print in the U.S. closely

The latest year-on-year core U.S. CPI (stripped off energy and food prices) has softened somewhat from 6.6% (Sep), 6.3% (Oct) to 6.0% (Nov).  Even though it remains undesirably high and is way above Fed’s target of 2%, it augers well if we should see a sustained down trend in the next few months until it gets below 5%.

Inflation in the U.S. becomes the single most important piece of data to watch in 2023, more so than the noise and distraction from Fed’s rhetoric or stock market gyration.

The best thing you can do for yourself is not to sign your rights away for anything more than 12 months in a year (2023) where the interest rate cycle is turning. 

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his article first appeared in The Business Times on 29 Dec 2022.