Interest rates & mortgage demand
The Economist’s leader article this week is about the Fed’s tardy response to rein in inflation in the US. In March inflation rates surged 8.5% in the US. Most people expect US interest rates might rise by 2.5% this year.
In Malaysia, many commentators expect inflation to reach 2.5% in 2022. (Our CPI basket has many price controlled items eg cooking oil and rice. Petrol is heavily subsidised) But what about interest rates? Most expect Bank Negara to increase interest rates twice this year. If interest rates (see 20 year chart on BLR below) ever go back to 5-6 % from the current 3.5% I wonder how many property investors can still afford to pay their loan installments? Recent calls from Putrajaya to Bank Negara Malaysia to help B40 home buyers access mortgages will come to nought if they cannot pay higher loan installments when interest rates increase.
In the past, Bank Negara Malaysia has pursued an accommodative policy, keeping interest rates low to stimulate economic activity but at the expense of a weaker Ringgit. As a long term high end property investor, I think this has been a policy mistake by the central bank. A weaker Ringgit makes properties a less attractive investment. It particularly affects overseas buyers in countries with stronger currencies than the Ringgit. Take for example, my 3000+ sf 5* luxury condominium at Jalan Pinang, just 100 metres away from the epicentre of KLCC. In Ringgit, my luxury condominium has appreciated by just 50% since I purchased it direct from the developer at a 10% discount in 2000. But over the same period, the Ringgit has depreciated by around 30% against the SGD. So a hypothetical buyer from Red Dot Island in 2000 will have seen a 50% gain pared down by the adverse movement of the Ringgit against the SGD to just 20% over 20 years. Hardly a stellar ROI then.
Post Script & Notes
Effective January 2015, the Base Rate (BR) replaced the Bank Lending Rate (BLR) as a reference rate . The BR reflects more accurately each bank's funding costs, according to an article in Iproperty. So now each bank's BLR is different depending on its profit margin etc. That means banks can offer individual borrowers different effective lending rates for housing loans, tailored to the quantum of borrowing and customer profile.
In the US, over the past year, benchmark 30 year fixed rate mortgages have increased by 2% to 5.2%. Demand for refinancing has as as result dropped by 14% YoY according to CNBC.
