As Sora dips below 3%, what’s in store for mortgage rates in 2023?

Many are unaware that spot Sora, or the daily overnight rate, has been trending down below 3 per cent in recent weeks. On some days, it even dropped below 2 per cent.

While daily Sora, which stands for Singapore Overnight Rate Average, is known to swing wildly from day to day, the general trend line is still going down. If this trend continues into January, we will soon see the 3-month compounded Sora value drop back to near-2 per cent range by the middle of March 2023 (compounded Sora is backward-looking, where it averages the daily Sora values for the past 90 days).

As mortgages in Singapore are mostly pegged to the 3-month compounded Sora, this means we will start to see prevailing floating rates roll back to 2.00-2.50 per cent soon, with 2-year fixed rates almost halving to 2.50 per cent from a recent high of 4.50 per cent.

Before you get all excited, this could well be just a temporary blip which falls away once we get through the December lull month, when not much business activity takes place. Daily Sora could well snap back up and stay persistently above 3 per cent by January.

No one can say for sure, and we do not presume to know how the dynamics in the interbank market works.

Sora is the rate that banks lend to one another in the interbank market overnight. It is defined as “the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6.15 pm”.

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In what could be the first sign of trouble for Singapore’s economy in 2023, the only plausible explanation for this sudden drop in Sora from its peak of over 4.00 per cent is that banks are unable to lend out the excess funds in the interbank market.

For example, we had already seen that Singapore’s factory output shrank by a worse-than-expected 3.2 per cent in November, deepening from the 0.9 per cent contraction in the previous month. And that trend is likely to continue with final demand for electronics and semiconductors weakening in major economies such as Europe, the United Kingdom, and more.

The tech slump, high interest rates and high prices will dampen global demand severely – at least in the first half of 2023. At the same time, expect China’s economy to slow down significantly in the first half as it battles a huge pandemic wave, with millions staying home. It will not be surprising to hear of more corporate actions in 2023, from hiring freezes to layoffs.

I suspect banks are also lending out less than what they like on mortgages, which form approximately 25-30 per cent of their loan books. This is because with homeowners receiving notices on their mortgage rate going to 4 per cent in 2023, many may have opted to do lump sum prepayments. I cannot, however, ascertain the scale of this deleveraging in the consumer segment.

The bottom line is: expect continued volatility going into 2023 as all three major economies of the world slow, from Europe to China, to a more than 50 per cent chance of a Federal Reserve-triggered recession in the United States.

How then should homeowners prepare themselves for 2023?

Over the years we see this as the single biggest regret among homeowners who fell “behind the curve” when it came to interest rates – that is, those who waited too long for lock-ins to end when rates had already gone up, or got stuck with a high fixed rate when rates were crashing down.

As we had repeatedly advocated since the second half of 2022, the best thing you can do for yourself is not to sign your rights away for anything more than 12 months, in a year when the interest rate cycle is turning.

The volatility of the daily Sora attests to the wisdom of that action. As events unfold in 2023, you’ll want to be able to freely negotiate for the best terms, be it on floating or fixed rates.

If you just stare hard at the interest rate cycle over the last 30 years, it will not take long for you to realise we are almost at the next peak. That tells you the only direction for it to go from here is sideways or downwards. Unless, of course, we are going back to the Great Inflation era of the early 1980s, where inflation in the US skyrocketed to 15 per cent and interest rates went over 20 per cent.

But that is not happening now, with many components in the consumer price index (CPI) already showing signs of softening. The last piece to come down will be wages, and the Fed might just need to trigger a recession, mild or otherwise, for that to finally roll over in 2023.

As interest rates are likely to peak, pause and come down from here, the obvious choice will be to opt for your mortgages to be pegged to a market-based index such as compounded Sora, which allows you to enjoy the ride down.

The latest year-on-year core US CPI (stripped of energy and food prices) has softened somewhat from 6.6 per cent (September), 6.3 per cent (October) to 6.0 per cent (November). Even though inflation remains undesirably high and is way above the Fed’s target of 2 per cent, it augurs well if we should see a sustained downtrend in the next few months until it gets below 5 per cent.

Inflation in the US becomes the single most important piece of data to watch in 2023, more so than the noise and distraction from the Fed’s rhetoric or stock market gyrations.

The writer is executive director of MortgageWise.sg