3 factors you never knew could cut Singapore home prices by 40%

Mortgage rates must rise to 3.5%.

According to CIMB, assuming 1) mortgage rates rise to normalised levels of 3.5%, 2) a benign housing rental growth, and 3) rental yield spreads over mortgage rates are kept at around 100bp (currently achieved), we estimate that residential property prices could fall by 30-40% from current levels with all else remaining constant.

Here's more:

In previous upcycles (e.g. 1995-1997 and 2006-2008), house prices and rents were still rising despite housing rental yields being in negative carry territories.

At the start of these upcycles, supply was tight, house prices were depressed and investment demand was on the rise. But the current upcycle appears to have the opposite attributes. House prices and rents are currently at historical highs.

Supply completions, both in the private and HDB segments, are expected to swell to new highs in 2013-16. Population growth, once driven by liberal immigration policies, is also expected to normalise with the recent population White Paper projecting a population of 6.9m by 2030, implying 80k-90k population growth per year.

This is about 40% lower than Singapore’s average population growth per year of 150k in the last seven years. At current house prices, we estimate rents would need to rise by 25% for rental yields to rise by 50bp.

We see limited scope for this to happen given the impending rise in supply completions and lower immigration growth. The current cooling measures put in place should also cap physical price growth from hereon, especially for the investment property market.

All these point to one conclusion – when mortgage rates rise, house prices are likely to fall.