Dice showing home loan interest rate can go either way up or down

Interest Rate Up or Down In 2020?

Happy New Year to all readers of this blog!

As we start a new decade of the 2020s, let me wish everyone all the best in this decade and let’s make it the best 10 years yet (no matter what age you’re at!).  For inspiration, I like to borrow the words uttered most recently by UK prime minister Boris Johnson in his election victory speech – “No ifs, no buts, and no maybes”.  A “slogan” that will never be too cliché or become out of fashion. Of course, he is referring to get Brexit done.  For the rest of us, just what do you want to get done in the next 10 years?

I shall leave that as food for thought and come back to what we do best here – tracking interest rate movements.  3-month SIBOR ended 2019 at around 1.77% – a drop of nearly 25 basis points (or the equivalent of one Fed rate cut of quarter percentage point).  But nothing near to what we like to see, as Fed has cut thrice in 2019 – in July, August and finally in October, before pressing the pause button.

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We forecasted that SIBOR ought to give back at least half of the total drop of 75 basis points in the US fed funds rate (due to the strong correlation between the two) by end of 2019.  That means it should drop from 2% at its peak down to somewhere in the 1.65% range.  But we were wrong.  It stopped dropping after hitting a low of  1.76% back in mid-November. In fact, it rebounded very slightly as we end the year.

Why are we telling you all that?  Certainly that’s no track record to boast of when we are about to discuss interest rate movements and forecast again for 2020.  Well, we do that to show you that we don’t just talk about spot-ons in our forecast, but also the misses. Just like how we do our work here in mortgage advisory, we always give you the full picture. Which is why most clients choose to work long-term with us.

When it comes to forecasting interest rate, we are no genius and we are only human.  In the past 6 years we have gotten some predictions right, but this time we only came close (1.60%+ vs 1.77%).  Unless the liquidity strain in the repo market (US Fed has injected cash via multiple repo market actions in the final few months of 2019) eases up, who knows SIBOR may still trend down slightly in Q1.  But that’s largely a US short-term funding situation due to banks’ year-end capital requirements, which I don’t think will affect SIBOR here.

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So where do we go from here for interest rates in Singapore be it for fixed or floating? In the Trump era, it has become very difficult to forecast beyond 6 months. Even the Fed couldn’t see that it would be hiking rates four times in 2018, only to undo those rate increases immediately the following year.

The biggest question the financial markets have yet to figure out in 2020-2021 is this:  Are the three rate cuts in 2019 part of a mid-cycle adjustment like how the Fed has put it – as “insurance cuts”?  Or are these signal of an end-cycle reversal, in other words, a recession looming typically a year after the Fed pauses.

There is no easy answer as the views are very much polarised. The stock market has priced in a recovery this year with US indices at all-time high. The market is saying full-blown trade war will be averted and there will not be a recession in 2020. Yet we also hear of hedge funds taking huge bets (or short positions) for a recession sooner than expected, though that view has now diminished.

I think with a bull run well into its 12th year, and with so much exuberance (or greed) going around, it is always wise to stay prudent. As Warren Buffet famously taught “Be fearful when others are greedy, and be greedy when others are fearful.” I think with each added year into this longest bull run in US history, and with each record closing for DOW and S&P, it just increases the risk of a big fall at some point. So our general view on interest rates goes like this – the bias is still downwards, it can trade sideways or even edge up slightly from here. But no one is going to bet on the same kind of rate increases we’ve seen in the last 3 years (from 0.25% to 2.50%).

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With recovery still hazy, it is better not to forecast for an absolute number this year.  Rather, we see both 1-month and 3-month SIBOR trading in a narrow band of 1.60%-1.80% very much for the rest of the year, and ending the year as such.

The lower end is where we see SIBOR ought to head towards given the steep drop in fed funds rate last year. US Fed has voted for no cuts in 2020 and their dot plots suggested one hike in 2021.  That’s the basis of our forecasted range – there is no pressure for SIBOR to trend up this year, only down.  But it has shown much resilience in recent months.  We will review our forecast every 6 months come June’s FOMC – to see if things shifted and Fed adopts a more hawkish tone.  But I sense the undercurrents still a weaker global growth story in 2020 despite a record stock market.  Incidentally, the stock market might become the best barometer for interest rate directions in the next two years.

If we were right in our forecasted range for 2020 and SIBOR ends up pretty much trading range-bound 1.60-1.80%, then the question of taking fixed or floating home loan becomes less important.  In other words, low rates is here to stay for longer periods and interest rate is not going to runaway to 3-4% over the next few years.  What’s more important is to stay nimble and flexible and focus on salient features of home loans which might bring more benefit to homeowners than that few percentage points difference overall.  For example, those waiting patiently on the sidelines for a major stock market correction before taking up positions might want to make use of interest offset mortgage loans. For quick overview, take a look at what are some of these features for DBS home loans, OCBC home loans and UOB home loans.

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, or to buy your next Singapore property, speak to our dedicated team of mortgage consultants here for the best home loan rates.

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