SINGAPORE (July 16): Linda Chan, an office administrator, had been considering buying a second property for investment. But those plans are now on hold after the government introduced a new wave of property cooling measures.
On July 5, the government raised the additional buyer’s stamp duty (ABSD) and tightened mortgage terms, increasing the amount of cash that buyers have to fork out for their properties. The new terms do not apply to first-time buyers who are Singaporeans and permanent residents, and buyers of public housing taking out mortgage loans from HDB.
The latest round of ABSD hikes took the market by surprise, even as private residential property prices have risen more than 9% over the past year.
One could argue that the government, which says it had been monitoring the property market closely before hiking the duties, had telegraphed its intentions.
For one, the Monetary Authority of Singapore had noted last November that there was “excessive exuberance” in the property market. On July 4, the day before the measures were announced, MAS managing director Ravi Menon called for buyers, developers and banks to stay “sober” amid rising prices. The concern is that the rise in prices would outpace income growth, and households would have to take on more debt than they are able to manage in order to keep up. The risks in such cases are compounded as interest rates rise globally.
“We are very concerned that prices are running ahead of economic fundamentals. There is a large supply of units coming onstream and interest rates are going up. We want to avoid a severe correction later, which can have more destabilising consequences. Hence we are acting now to maintain a stable and sustainable property market,” said Minister for National Development Lawrence Wong in a statement on July 5.
Property prices started to rise in the middle of last year after falling for four years. This is despite vacancy rates increasing to 8.4% as at 3Q2017. After years of inactivity, property developers had started to scramble for landbank, resulting in a surge of en bloc deals as government land sales were still limited. Some 23 en bloc deals were announced in the first six months of this year. Indeed, the new measures include an additional, non-remittable, 5% ABSD for developers that are buying residential property.
“[The latest measures are] really targeted primarily at developers, with them squarely in the crosshairs [of policymakers],” says Song Seng Wun, regional economist at CIMB Private Banking. He adds that foreign buyers have not been part of the recent upswing in prices.
In response, the Real Estate Developers’ Association of Singapore (Redas) issued a statement on July 6, saying there was “no rationale” for the new round of cooling measures, which it called “harsh”. It also argued that the property market was only just starting to recover and was in line with “economic fundamentals”.
Redas’s view is echoed by several industry players and analysts. Christine Li, senior director of research at Cushman & Wakefield, describes the measures as possibly “the most draconian since the late 1990s”. In comments disseminated to the press on July 6, she also notes that they impact affordability for just about everyone, including first-time buyers, who could struggle with tighter loan-to-value ratios. “The upfront acquisition cost for residential property could be one of the highest, after the revision, across major markets around the world.
“The government is perhaps of the view that the best way to safeguard the health of our property market and prevent it overheating is to ‘nip the exuberance in the bud’,” she adds.
Will that work? Who really benefits from these ‘cooling measures’?
‘Coffin’ homes
The real estate industry argues that, while property prices are higher than the year before, they still have some way to go before returning to the record highs seen in the third quarter of 2013. But clearly, the government has no intention of allowing the market to reach such levels or approach the situation in Hong Kong.
The city is commonly compared with Singapore but is notorious for sky-high prices as well as a housing shortage that have forced a large part of the population into tiny, so-called “coffin” homes. Indeed, United Overseas Bank (UOB) economist Ho Woei Chen notes that Singapore is still 3.6% off its peak in 3Q2013, while Hong Kong prices have surged 55% since then.
“The fundamentals in terms of supply that is coming online, against the backdrop of risk starting to materialise [in the form of rising interest rates], gave policymakers the confidence to show its hand much earlier than [in] prior cycles of tightening, to ensure prices that go up don’t come off too quickly,” CIMB’s Song says.
“The pick-up in en bloc activities had also seen the government increasing the development charge rates sharply over the last few rounds,” UOB’s Ho adds in a July 6 note.
Certainly, the latest round of measures is expected to be a stumbling block for a number of collective sales that are in the pipeline. According to reports, owners at Horizon Towers and Dalvey Estate are being advised to extend the closing date of their tenders by a month. “If you had been one of the greedier ones hanging on in anticipation of higher prices, you might just have to wait. It’s a 10-year cycle and the 2017-2018 cycle has peaked,” says Song.
Analysts also point out that the cooling measures have wider repercussions for the Singapore market, given the dominance of the property sector. While real estate developers and brokers may be the primary beneficiaries of a rising property market, banks have also been riding the “exuberance” in the market and would likely be affected by the changes.
The three local banks, DBS Group Holdings, Oversea-Chinese Banking Corp and UOB, have 42% to 50% of their loan portfolio exposed to the property sector, including housing loans, notes Simon Chan, a senior analyst at Moody’s Investor Services Singapore. But while the volume of loans might be lower, he expects the moves to improve newly originated housing loans asset quality amid Singapore’s rising interest rate environment and a strong supply pipeline.
Indeed, Chan does not actually see a problem with the debt position of Singapore households, given the introduction of the total debt-service ratio cap of 60% in June 2013. “Singapore households as a whole have a very strong net asset position, which, at least for asset-owning households, will provide an extra buffer to service their debt. At the end of 2017, total household financial assets were more than 3.5 times household liabilities,” he says.
“[The property market] is funded by liquidity, and if the banks are able to easily lend, it gets in the way of the [measures] as well. [It’s] not just curbing prices. Pushing up costs and the ability to finance will be closing the loophole,” adds CIMB’s Song.
Risks and rentiers
While most of the industry is lamenting the curbs, the measures are timed to bring rationality back to the market and avoid sharp fluctuations in prices caused by external factors. That would have left everyone worse off.
“This time round, the risk to growth and risk to the market coming from the trade war or interest rates are starting to materialise,” says CIMB’s Song. “People had discussed the [measures] being early, pointing to the fact that the Property Price Index is still below the peak, but I suppose we know where it is heading, and it is just a matter of time before the peak of the index is crossed.”
Importantly, the housing market is unlike other markets in that it has a speculative element. There is a risk of an asset bubble fuelled by leverage as people borrow to buy property in the expectation that prices will rise.
At the same time, buyers of multiple properties are expecting to make a passive income through rents. This could in turn create a rentier class detrimental to broader society, in that it exacerbates inequality: People with means become richer from owning, and renting out, multiple properties. Their demand for property pushes up prices and, therefore, pushes the properties out of reach of those with lesser means.
Ideally, property price movements should not stray too far from what an economy and its citizens can sustainably support. Singapore’s economic growth has averaged 4.1% annually over the last four years, while average wage growth has been range-bound at 1.9%.
Ever-higher property prices translate into homes that are shrinking in size as developers try to maximise profits while ensuring prices are still palatable for buyers. Against this backdrop, the property price curbs should be welcome.
