It is the new year! 2017 is the year of the rooster on the Chinese Zodiac and for most superstitious Chinese, we would be hoping for some golden eggs in the new year. While it would be biologically and literally impossible for roosters to lay eggs, let alone golden ones, it is a superstition for a reason, right?
Anyway, the US Federal Reserve (Fed) raised interest rates for the second time since 2006 and depending on which side of the fence we’re on, this might actually be a golden egg (or a rotten one) for us. Suffice to say, the Federal fund rates are one of the many things we should look at this year.
But in this article, we’ll look at some ways rising interest rates affects different groups of Singaporeans – home buyers and homeowners, vacation-goers, and investors.
Borrowing costs are bound to rise
This is probably a no-brainer but it’s so important to emphasise. All loans will become harder to finance, especially so for mortgage loans. Now, a 0.25-percent rise in the target Fed fund rate might not seem like much.
But if we were to take 0.25 percent of a large amount, say $280,000, that would amount to $7,000. For condominiums that cost about $800,000, 0.25 percent is $20,000. Of course, this is considering the three-month Singapore interbank offered rate (SIBOR) – used to price home loans – increases by the same absolute percentage.
Let’s not forget, though, that the interest rates for our mortgage loans are compounded. That means we are effectively paying more than 0.25 percent (or more, depending on the increase of SIBOR) at the end of our 10-year, 15-year or any duration of mortgage loans. A lot more.
So, should we still buy a house now that interest rates are raised? The real question is whether we can afford the instalments because the interest rates do not affect the house’s value. But rather, interest rates affect the borrowing costs. Therefore, if one is able to pay in full without any loans, an increase in SIBOR or Fed fund rate shouldn’t matter.
Overseas spending (especially in the US) will be expensive
Whenever the Fed raises rates, the US Dollar will strengthen. This is only natural because as rates are raised, money will flow back into the US. Reasons include paying up loans, bond buying as yields rise to match the Fed fund rate or even just increased investor confidence.
When the US Dollar strengthens, purchases from US-based companies such as Amazon will become more expensive for Singaporeans. Other currencies pegged to the US Dollar such as the Hong Kong Dollar will strengthen too.
Because Singapore’s currency is free-floating and we do have quite a number of US companies based here, it is only natural for our currency to weaken as well. With that in mind, we might not want to travel overseas or make online purchases from Amazon. At least not for the time being.
Gold investors should expect gold prices to drop
Gold prices rose by almost 20 percent last year within the first six to seven months, only to fall back down to current levels now. The Fed fund rate hike just sent prices down even lower. Which brings us to this point: gold prices are going to continue dropping if the Fed really does intend to hike rates a few more times in 2017.
With that in mind, where else can we place our money to gain some returns in the new year of the rooster? Our research team did a summary of 2016 and a short outlook on some potential opportunities for 2017. Also, here’s a list of other 2017 outlooks from all the research houses out there. We’ve narrowed down the scope of the extremely long research reports to condensed articles.
Last but not least, we’re releasing a compilation of five research houses’ stock ideas for 2017 in the form of an eBook. Please stay tuned! We wish everyone a prosperous year of the rooster and here’s hoping that 2017 will be a better year than 2016!