Rate cuts may support local private home transactions, but ABSD curbs could limit volume growth

With expectations of interest rate cuts by the US Federal Reserve this year, local mortgage rates are likely to trend lower. Analysts believe that rate cuts will improve affordability for private home buyers and encourage more to return to the market. However, due to other factors such as the Additional Buyer's Stamp Duty (ABSD), transaction volumes may not see a sharp surge.

The Fed paused interest rate hikes for the third consecutive time at its policy meeting last December, signalling that rates could be lowered this year. Market watchers anticipate that the first rate cut could arrive as early as March.

Rate cuts are expected to have a positive impact on local private home sales. Home loan rates have already retreated from their peak of over 4% for fixed rates the year before last to around 3.2% by the end of last year. Lower borrowing costs may bring more buyers back into the market. Nevertheless, as ABSD remains a key consideration, transaction volumes might not experience an immediate surge.

Taking a $2 million private property with a 75% loan-to-value (LTV) ratio and a 25-year tenure as an example, the difference in monthly mortgage repayments between a 4% and a 3% interest rate comes to nearly $800.

Previously, some buyers may have put their purchase plans on hold due to high monthly instalments or an inability to secure a sufficient loan quantum under elevated interest rates. A drop in rates allows them access to higher loan amounts and more property choices, which is expected to draw more buyers into the market. However, beyond interest rates, buyers will also weigh prevailing economic conditions and cooling measures.

Based on trends over the past five years, transaction volumes tend to rise when interest rates decline. Although headwinds such as geopolitical tensions persist, an expected improvement in the local economy will bolster homebuyer confidence. More buyers are anticipated in the second half of the year, predominantly owner-occupiers.

Declining Rental Yields Diminish Appeal of Private Residential Investments

The current dip in buyer activity is largely driven by increases in ABSD, and lower mortgage rates may not necessarily entice investors back to the market. Furthermore, while property prices continue to rise, rental growth has stalled, leading to compressed rental yields and making private residential purchases less compelling than in the past.

Regarding mortgage rate expectations, local banks have likely already priced in some of the prospective cuts, so the reduction in home loan rates may not mirror the full extent of the Fed's cuts. If the Fed trims rates by a total of 75 basis points this year, local home loan rates might only decline by around 25 basis points.

Analysts: Floating Mortgage Rates May Ease to 3.3% - 3.6%

Floating mortgage rates could potentially moderate to between 3.3% and 3.6%, while two-year fixed rates could ease to 2.5% to 2.7%.

In terms of which private housing segments stand to benefit most from rate cuts, luxury properties involve larger loan quanta, meaning lower rates offer significant dollar-for-dollar savings to these buyers.

On the other hand, the mass-market private housing segment could see the greatest boost, as buyers in this segment are generally more reliant on mortgage financing.

Given that buyers of resale private homes have to service the full monthly mortgage repayment immediately upon completion, rate cuts could exert the most pronounced impact on the resale market.

Excluding Executive Condominiums (ECs), private home resale volume this year could climb from around 10,850 units last year to between 13,000 and 14,000 units. Concurrently, new private home sales may rise from over 6,400 units last year to between 7,000 and 7,500 units.