When, how will the measures be unwound?

/ The Edge Property |

January 20, 2016 10:00 AM SGT

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The year 2015 is projected to end with a total of 7,300 to 7,500 new homes sold, which is similar to the number of units sold in 2014. But next year could see transaction volume shrink a further 10%, which would see new home sales falling to 6,000 to 6,500 units, says Desmond Sim, head of research for Singapore and Southeast Asia at CBRE.

While the government has repeatedly said that it is engineering a soft landing and not a property market crash, developers feel like they have been dealt a blow as transactions have fallen so steeply — halving from 14,948 units in 2013 to just 7,316 last year.

The precipitous drop in house sales came after the government introduced its seventh round of property cooling measures, which saw a hike in additional buyer’s stamp duty (ABSD) and a further reduction in loan-to-value ratios for property investors in January 2013. This was followed just five months later by the total debt servicing ratio (TDSR) loan framework in June that dried up transactions across all sectors. “In a sense, it’s a self- inflicted wound as the market correction has been brought on by the cooling measures,” says Sim.

The Monetary Authority of Singapore has repeatedly said this year that it is too early for measures to be removed or even tweaked as prices have not corrected enough, compared with the more than 60% increase from the trough in 2Q2009 to the peak in 2Q2013.

Is it time yet? So, the guessing game of “When will the measures be removed?” has persisted. Top executives of leading property firms are in agreement with Kwek Leng Beng, executive chairman of Singapore’s leading property developer City Developments Ltd, who said “the property cooling measures need to be reviewed as soon as possible” in the release of the company’s 3QFY2015 results on Nov 12. “Timing is the most important factor to achieve a healthy and sustainable property market.”

If house prices were to correct by 12% to 15% from the peak, some of the cooling measures could be lifted in 2H2016, “which should see interest returning to this sector”, says RHB Research in a Dec 2 report. A 15% fall in the private property price index is the threshold that the government is looking at, say property consultants. “If prices were to fall by more than 15%, and mortgage rates rise further next year, there is a high chance many homeowners will sink into negative equity,” says CBRE’s Sim.

However, the government looks at several other market indicators apart from the property price index, says Nicholas Mak, executive director and head of research and consultancy at SLP International Property Consultants. Other considerations are economic health and unemployment rate. This year’s GDP growth is 2% and next year’s is projected to be equally lacklustre, at 1% to 3%. Preliminary estimates showed that in 3Q2015, the unemployment rate for residents rose to 3% from 2.8% in 2Q2015, while the jobless rate for citizens nudged up to 3.1% from the previous quarter’s 2.9%.

“Whether the measures will be eased is speculative,” says Mak. “However, people are getting used to them. Yes, demand has been restricted, but there’s nothing causing prices to slump or fall further than what has [happened] this year, unless we enter a recession.”

A recession could lead to a rise in unemployment, and that would have a more alarming effect than just weak GDP growth. “If unemployment rate rises, people will be afraid to commit to a home purchase because of the loss of job security. Even banks will pull back from their mortgage lending,” says CBRE’s Sim. “So, a weak job market is more detrimental.”

From the government’s point of view, it is hard to tweak or unwind any of the measures now because it took so long and so many rounds of cooling measures to curb the rise in the private property price index. “What they fear most is a knee-jerk reaction,” says Sim. “All the measures implemented over the years will go to waste if the property market rebounds sharply after the measures are lifted.”

In general, the ideal time to relax or remove the property cooling measures is when the market is already “over-cooled or chilling” as in the case of a market downturn or economic recession, says Mak. “When the property market curbs are removed during a downturn, the risk of prices and demand surging again is minimised.”

ABSD — developers’ bitter pill Property developers have been calling repeatedly for the ABSD to be removed or fine tuned, citing it as the main obstacle for foreign buyers and local investors. Besides individual investors, corporate investment deals have also been hit as companies buying residential property are also subject to a 15% ABSD and a loan-to-value ratio of just 20%.

However, the majority of Singaporeans buying their first home are unaffected by the ABSD. “In fact, they have benefited from it because home prices have fallen to an affordable level,” says Sim.

Some are mulling if the current status quo should be maintained in light of some property launches that have seen strong sales despite the generally weak market. Examples include Poiz Residences @ Potong Pasir, where 280 units were sold over one weekend at an average price of $1,380 psf last month; High Park Residences in Seletar, which sold 1,100 units over two days in July; and North Park Residences in Yishun, where 411 units were snapped up on the first weekend of sales in April.

And despite the drop in transaction volume, unsold stock has also shrunk over the past quarter. According to URA data, the number of uncompleted and unsold residential stock stood at 22,456 units in 3Q2015, an 8.1% drop from 24,435 units in the previous quarter. Even completed and unsold units dropped from 2,470 in 2Q2015 to 1,693 in 3Q2015, a fall of 31.5%.

While some property developers have lowered their selling prices to move units, others have incentivised agents with higher commission rates of 2% to even 4% to secure higher sales. “By incentivising agents, the net price to the buyer remains unchanged, so it’s not reflected in the overall property price index,” says Ong Choon Fah, CEO of DTZ. “How ever, for developers, margins have diminished.”

Many developers, especially those in the luxury segment, would rather hold on to their units than sell at a discount

‘Outlived its purpose’ According to SLP International’s Mak, some of the property cooling measures have outlived their purpose and should be among the first to be removed.

One of these is the measure requiring executive condominium developers to wait at least 15 months from the date of land acquisition or until completion of the foundation works, before they can launch the EC project for sale. “This policy is obsolete,” he says. “It did little to cool the EC market. It simply distorts the supply dynamics. The EC market has already cooled, not owing to this policy, but because of the current large supply of unsold ECs.”

The other is the Mortgage Servicing Ratio of 30% for EC buyers introduced in December 2013. “This policy is unnecessary and too conservative,” Mak adds. “EC buyers are already subject to the TDSR framework when they apply for housing loans. The MSR was designed to prevent some lower-income HDB buyers from overstretching their financial resources by buying bigger HDB flats than they can afford.”

In August, the government also raised the monthly household income ceiling for EC and HDB BTO (built-to-order) buyers by $2,000 to $14,000, and $12,000 respectively. Therefore, Singaporeans in the higher income group can now qualify for an EC or HDB BTO flat. “ Gen e rally, EC buyers are better educated and should be able to make better-informed choices about their housing purchases,” says Mak.

The ABSD for Singaporeans buying their second, third or subsequent properties should also be removed, he adds, because the TDSR framework will already ensure that buyers do not overcommit in property purchases.

The ABSD for Singapore permanent residents buying their first home in Singapore should also be removed “if the government really wants PRs to feel that they have a stake in Singapore” adds Mak. “After all, the government has always claimed that the reason they encourage high home ownership among Singaporeans is to let them feel that they have a stake in this country.”

And most developers believe that the government should also review the 15% ABSD for foreigners buying residential property. “It’s a major barrier to entry,” concedes CBRE’s Sim. One of the main reasons the barrier was introduced in the first place was the widely held perception that foreign buyers were stoking up house prices across all market segments, making it unaffordable for the average Singaporean homebuyer. And that has largely been addressed by the series of property cooling measures.

Perhaps now, the government could unwind the measures in reverse, adds Sim. “For Singapore to remain investor-friendly, the ABSD for foreigners could be reduced, but the barrier to exit like the Seller’s Stamp Duty could remain.”

Besides tweaking the cooling measures, the government could also shift gears through the HDB Built-to-Order launches and Government Land Sales programme, as it has done, says DTZ’s Ong. “The ABSD would, of course, be the most effective in reviving the market. A lot of people are watching from the sidelines.”

Start browsing for listings at The Poiz Residences and North Park Residences.

This article appeared in the City & Country of Issue 7089 (Dec 2, 2015) of The Edge Singapore.

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