Home prices in the mass market segment have exceeded the previous 2008 peak.
However, property consultancy firm DTZ said that these homes are still considered affordable, as home loan interest rates remain at a record low.
According to Ms. Chua Chor Hoon, research head of DTZ in South-east Asia, the mass market affordability index showed that such homes were more affordable at the end of Q1 2010 compared with the period between Q1 2006 and Q3 2008.
But this does not mean that home buyers in the mass market segment, which includes HDB flat owners upgrading to private property, will continue to see such homes affordable for long, if interest rates or prices move up.
DTZ said that it is only a matter of time before the low interest rates will escalate.
The question is how much the rise will be and when that will happen, said Mr. Alvin Liew, an economist at Singapore’s Standard Chartered Bank.
Mr. Liew said that the three-month Singapore Interbank Offered Rate, which is now at 0.65 percent, is expected to be “very benign in 2010”.
Many home loans are nailed down to Sibor — the rate at which banks lend to one another.
“We see rates picking up slightly by 5 to 10 basis points from the first half of 2011, in anticipation of the United States Federal Reserve hiking its rates.”
“By the tail-end of 2011, it could rise to 0.8 percent. The year 2012 is when we expect to see a rapid hike.”
The three-month Sibor rate is expected to increase three percent that year, he added.
Ms. Chua also said that mass market housing may become less affordable if the interest rate increases by one percentage point with no change in price.
She said that this will also be the case if prices increase by more than 10 percent this year, or if prices increase by five percent with a 0.5 percentage point in the interest rates.
For Q1 2010, the flash estimate of URA showed that private home prices have increased by 5.1 percent, compared with 7.4 percent in the previous quarter.
Ms. Chua advised interested homebuyers to look beyond the current interest rates to assess their capacity of repaying their monthly mortgage obligations over the next 20 to 30 years, as interest rates will likely increase.
“Buyers also have to be cautious as there’s still a lot of economic uncertainty now, unlike in 2005 and 2006, when the outlook was very clear,” said Ms. Chua.
“If the recovery is not as strong as expected, any anticipated capital appreciation may not materialise.”
Mr. Justin Chiu, executive director of HK’s Cheung Kong (Holdings), said that interest rates are one of the key risks. “If the rates rise, they may rise very quickly.”