SINGAPORE (Oct 4): At its last meeting in September, the US Federal Reserve hiked rates by 25bps and warned that rate increases are likely to persist well into next year.

With US headline inflation hovering above 2.5%, unemployment rate at below 4% and oil prices creeping up, the Fed has sufficient reasons to take its funds rate higher to fend off overheating risks.

This means USD rates are poised to drift higher as monetary policy turns restrictive over the coming quarters.

According to a Thursday report, DBS Group Research says in Asia, rates in Singapore and Hong Kong generally follow the Fed’s due to their currency policies.

Since 2017, Singapore’s interbank rate has risen by 95bps. In comparison, major banks in Hong Kong raised the prime rate by 12.5bps, which though small, is the first time in a decade.

As for most other countries in the region, DBS says they do not necessarily follow the US in the rate hikes but depend on their own growth inflation outlook and external balance sheet strengths.

So far this year, most Asean countries have stood pat on their monetary policies, except for Indonesia and Philippines which suffered from weakening currencies when the EM crisis escalated, triggering outflows. To defend their currencies, the central banks had little choice but to hike interest rates.

Furthermore, inflation is running high in the Philippines and would need further tightening would to keep it in check.

Meanwhile, Thailand and Malaysia are not expected to raise rates this year.

In general, DBS says Asean banks do benefit from rising interest rates – as loans re-price ahead of deposits, but earnings impact will lag by three to six months. As interest rates are still low compared to historical levels, impact on loan growth is minimal.

In this cycle, Singapore and Philippines banks tend to benefit more from interest rate hikes. Earnings of Indonesian banks will be negatively impacted as deposit rates tend to rise first.

As for the impact of rate hikes on housing, DBS says affordability is one of the most important factors driving home demand.

Some other important considerations include regulatory policies, economic conditions such as unemployment rates and supply situations.

“Higher interest rates affecting affordability is thus only one out of the many issues facing the property sectors in Asean,” says DBS.

As interest rates are likely to rise from a low base, DBS says they have yet to hit the tipping point dramatically.

Based on an analysis of price-to-income ratio, DBS says current home price levels are still affordable for Singapore residents and there is still room for this to expand.

A 100-bp interest rate rise for a $1 million mortgage will increase monthly payments by $504, or make a 3.6% impact to the households in the 80th percentile household income earning $14,000 per month.

Moreover, tighter property credit and regulatory policies such as Total Debt Servicing Ratio (TDSR) framework implemented in the last round of cooling measures and lower loan to value (LTV) from the recent round of cooling measures, have further reduced the threat of households over-extending themselves and from the potential impact of interest rate hikes.

As for Malaysia, the new Pakatan Harapan government is scheduled to unveil a new National Housing Policy by year-end which may address affordability and oversupply issues.

While the government could ease home ownership for first-time homebuyers via financing initiatives, the property sector would require a “comprehensive review to the existing housing development policy to rectify the structural problems,” says DBS.