Let’s be clear. We’re not saying we always get it right 100%. Nobody can. But we seek to be as close to the actual outcome most of the time. This may be a lengthy article. But for those wondering which way interest rate will go in 2021, I am hoping this article might be your best read on the topic.
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It’s also good time to do a mid-year review of our current forecast. But first let’s list out some of the past forecasts we’ve given recently, along with the links ponting back to the original post. That way, you can be the judge.
Before I start, let me just say that forecasting is hard business. But it’s not all that impossible in our trade, as long as one follows the financial market news closely.
And for those who cannot (allow me a little marketing), the best thing to do is to work with a trusted mortgage partner who not only share with you the insights, but who also prompt you to review your mortgage on time. That means alerting you 3-4 months before your lock-in expiry. Your own bank is unlikely to do that for you.
Here’s the list of recommendations and forecast from MortgageWise from the start of 2019, all found in our blog. We also summarize here the thinking behind those views so you can better assess how we go about our advisory.
2019 Jan: Switch To Recommending Floating Rate On SIBOR Only
This is the point where we changed our stance and started recommending floating rate home loan over fixed, but only those pegged to SIBOR. For those who still remember, this was the time after a spate of rate hikes in 2018 by all banks in Singapore. FHR mortgage pegs, or what we refer to collectively as FDR home loans (fixed deposit rate), were raised like 3 times within the same year. There were some panic as everybody scrambled to lock down the lowest fixed rate which kept rising by the month. By Q1 of 2019, 2-year fixed rates have shot up to the highest level of 2.38-2.58%.
We started 2019 forecasting that SIBOR would trade sideways in the 1.80-2.00% range bound for up to at least 1st half of the year. And we stopped recommending fixed rate when it went above 2.10% sometime during Q1 of 2019. What underpinned the change in our stance were two sound arguments we put forth to clients at that time:
- First, understand that it took US Fed three years and over nine rounds of rate hikes from Dec 2015 to Dec 2018 to raise the Fed funds rate from near zero to 2.50%. That pace cannot be sustained going forward as that would mean Fed funds going over the roof to hit 5% in the next three years! That does not look any bit likely based on the chart and macro factors (trade war already started brewing at this time). The reasoning is very simple – it’s much better to take a chance and bet on a slow cimb in interest rates and let floating rates rise up gradually from 1.80% and assume it goes up to 3.50% over two years (we don’t even think it will surpass the last peak at 3.56% back in 2006!). This means an average interest cost of around 2.50-2.60% over time. Doing that is better than paying fixed rate at 2.48% right from day one of the loan tenure. It’s just a calculated bet that you are unlikely to lose out. At its worst, it will be a break-even.
- Second, this super mega bull-run which started in 2009 was already 11 years in the making at that time! It may not be the longest in history but certainly one of the longest in most of our lifetime so far. No one knows when the party will finally be over, but one thing for sure – we are nearer to a cycle end than 5 years ago. It is better to tread with caution and go floating on SIBOR as that will be the first mortgage peg to come down in a recession.
Shortly after, US Fed made a reversal in its policy stance by March 2019 due to worsening tariffs war between US and China, and eventually did three rounds of “insurance cuts” from July to Oct that year.
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2019 May: Yield Curve First Inverted 22 March 2019 – Recession Looming
To be fair, this is more of a warning than a forecast. In an eerie way it turns out to be true again on hindsight. In our May update last year, we shared the theory in financial markets of an inverted yield curve (10-year Treasury Note yield going below that of 3-month) signalling a recession looming usually around a year later. The exact time frame is not important here but Covid-19 did explode exactly one year later. This is interest rate trajectory 3 (in our chart shown, see link below) or a down cycle which we deemed as a probable outcome at that time.
No one can foretell the black swan event of covid-19 but this is probability the closest one could get to. When Fed started insurance rate cuts two months later, it vindicated our recommendation to go floating, and only on SIBOR as that’s the only interest rate that would come down fast in a down cycle.
2020 Jan: Before Covid-19, We Think Rates Will Go Sideways In 2020 With Downward Bias
So, we got it wrong here. Rates crashed by March. But if there were no pandemic, we think every body will just be paying mortgages right through 2020 at 1.60-1.80% range bound. With some downward pressure on rates.
We know what happened by March and the rest is history now
2020 Mar: US Fed Crashed Fed Funds Rate Overnight – SIBOR Set To Tumble
US Fed took aggressively actions this time by first dropping Fed funds rate in an emergency rate cut on a Sunday evening by 50 basis points from 1.75% to 1.25% on 3 March. When that proved to be too little to avoid a meltdown in credit and financial markets, it followed up with a “throwing the kitchen sink” move two weeks later by slashing rates down to zero in one fell swoop!
Our immediate response was to call on all homeowners to quickly seize the “once-in-a-decade” opportunity to lock down the low spreads offered on SIBOR loans as we expect 3-month SIBOR to hurl towards 0.50-0.70% in the next few months.
3-month SIBOR did slip to 0.50% range by middle of May some two months after our forecast. We were still trying to be conservative in our forecast in March as we won’t sure if SIBOR would dip back to 0.40% like in the 08 crisis. We were inches away by May.
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2020 Apr: Banks Would Adjust Spreads Up Until It Settles At 0.80%
As SIBOR tumbles in the following month, we saw our predictions came true that banks were quickly adjusting their spreads up on SIBOR home loans. We called on more homeowners to take action quickly as those who had acted on our advice since 2019 were already receiving letters from banks informing them of interest rates dropping to ridiculous levels of 0.60-1.08%. We expect banks will continue to adjust the spreads up (from the low of 0.20% in March) until it hits 0.80% eventually.
After 3 months of mad action, we are now seeing spreads on 3-month SIBOR hovering in the 0.80-0.85% range for most banks. Those with bigger home loans above $1m might still get in at 0.75% now, but that’s the smaller group.
2020 May: Our Forecast On 1-month and 3-month SIBOR
In a revised forecast for SIBOR, after observing how Fed funds rate itself had now hit new lows of 0.05% which went even below the 0.10-0.15% range back in last 08 crisis, we think 1-month SIBOR might settle this time at 0.15-0.20% range and 3-month SIBOR at 0.25-0.40%. With that, we also predict that eventually banks will adjust their spreads up for the final equilibrium floating rate to settle at 1.20-1.40%. Even though we argue that at this level, it is still much higher than what we would like to see. Back in 2009-2014 – prevailing rates were at 1.00-1.20%.
True enough, prevailing SIBOR floating rate home loans are now at 1.20-1.40% mostly. Typical loan of at least $500,000 could now get deviated (or unofficial rates which we cannot publish) spreads of 0.85% which means the final rate on 3-month SIBOR is 1.29% today. However, SIBOR has not yet hit our forecasted range but we are very close. Which means there’s a chance SIBOR may still drop further before the year is over. 1-month SIBOR is now at 0.25% (as of 20-July) vs our forecast of 0.15-0.20%. And 3-month SIBOR is at 0.43675 vs our forecast of 0.25-0.40%. We are just about 50 basis points away, but the year is not over yet.
2020 May: Our Forecast On Fixed Rate
In the same revised forecast, we also made our call on how low we think fixed rate would eventually settle at. Throughout the covid crisis, repricing banks were dangling and urging homeowners to quickly commit to fixed rates by offering lower headline interest rate figures. The problem is – in a falling interest rate cycle, that’s not a good idea. Those who signed on the dotted line quickly realized that fixed rate gets even lower the following month, exactly what we have warned. We are not favouring fixed rates until it reaches our equilibrium level which we put at 1.25-1.35%.
The lowest deviated 2-year fixed rate for a typical loan in the $500,000-800,000 is now at 1.35%. For loans above $1m, we could get you 1.28%. We are somewhere in the forecast range now, with more banks expected to join in the range of 1.25-1.35% for 2-year fixed rate.
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What Next From Here?
As I have said earlier. Forecasting is hard business. I am proud that we are the few, if not the only mortgage consultant in town, who will stick our neck out to give our forecast every year. Now that we are getting very close to this equilibrium range, let me share with you 3 key thoughts that shapes our view on the path of interest rate going forward:
1. US Fed’s Unlimited QE & The 6-year Doldrums
In the last 2008 recession when US Fed engaged in aggressively pump-priming through three rounds of QE (Quantitative Easing), it caused asset inflation not just in US but all over the world as investors went searching for yield. This largely explained why stock markets rallied ever since and interest rates stayed down for sustained periods of 6 years from 2009 to 2014. This time around, the QE has gone on steroids!
2. Uncertainties Looming
In uncertain macro environment, it is best not to lock yourself for anything more than 2 or 3 years. Plans might change in life. You may suddenly decide to sell your property. Or do a decoupling, in order to buy another property. And there are plenty of uncertainties looming in the horizon this time: How massive will retrenchment waves be in 2021, when “life support” from governments are eventually removed? Will Trump be re-elected and what does a Biden Presidency means? Will US-China relationship lead to another crisis? Will the debt crisis finally implode?
3. Kicking The Can Down The Road
Remember the super mega bull run (more stock market) I was sharing which is now into its 12th year? If you believe in the market cycles of boom and bust where excesses must be reset or put right, then brace yourself. It’s getting nearer. All the massive stimulus action from US Fed and central banks around the world in the past decade has not only delayed the eventuality, but it will most likely set off a “mother of all crashes” at some point. No one knows when or what that would be. Whether covid-19 is that event to reset the market – that’s still unfolding. We will only know by 2021. Always tread with caution.
Finally, this is our view on interest rates going forward – SIBOR (or whatever new benchmarks like SORA) will stay down for a sustained period of time of more than a few years. It is also our view that banks could still be very profitable at mortgage rates of 1%. We are not quite there yet and we think free market forces will kick in at some point to drive prevailing floating rates down.
Since 2014, MortgageWise.sg 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 loan, buy 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.