Is the Singapore Property Market in Trouble? Part 1

Recently, I’ve been hearing a lot of speculation in the newspapers, blogs and forums about new cooling measures for the property market and how domestic lending has gone through the roof and may precipitate in property crash etc. The common thread in all the rumours and commentaries is that the property sector is not going to be good. I’d like to list out some of these topics to just discuss how bad the situation is, or if the speculation is unfounded.

It looks like it’s going to be quite a long discussion, so I’m going to break it up into a few posts to make it more readable.

Risk 1: More cooling measures

With housing prices continuing to rise, are we going to need new property market cooling measures? Before I try to answer that, here is a quick overview of the 5 rounds of property market cooling measures that the government has already implemented over the last few years:

Round 1 (14 Sep 09):
a. Reinstated confirmed list for Government Land Sales program in 1H 2010;
b. Removed Interest Absorption Scheme and Interest-Only Loans

Round 2 (19 Feb 10):
a. Introduced the Seller’s Stamp Duty (SSD) for properties sold within one year. 1% for first $180k, 2% for next $180k and 3% for the rest;
b. Lowered Loan-To-Value (LTV) ratio from 90% to 80%

Round 3 (30 Aug 10):
a. HDB owners within the Minimum Occupancy Period (MOP) cannot own private property;
b. MOP for non-subsidised HDB flats increased to 5 years from 3 years;
c. SSD extended to 3 years, with full SSD rate (as above) payable in 1st year, 2/3 payable if property sold in the 2nd year and 1/3 payable if property sold in the 3rd year;
d. Increased minimum cash payment from 5% to 10% and decreased LTV from 80% to 70% for buyers with outstanding housing loans;
e. Increased the income ceiling for subsidised HDB flats from $8,000 to $10,000 and increased supply of new flats

Round 4 (13 Jan 11):
a. Increased SSD rate and period to 16% for property sold in the 1st year, 12% in the 2nd year, 8% in the 3rd year and 4% in the 4th year;
b. Lowered LTV to 60% for buyers with outstanding housing loans and 50% for companies

Round 5 (8 Dec 11):
a. Implemented the Additional Buyer’s Stamp Duty (ABSD). 10% for foreigners and companies, 3% for PRs already holding one property and 3% for citizens already holding two properties

Wow, that’s a long list. To summarise, the government took 2 years and 4 rounds of measures to come to the conclusion that rich foreigners with holding power were driving up the market, leading to the final measure of levying of the very punishing 10% ABSD on that group. I’d say the SSD also played a big part in reducing speculation in the market by extending the holding period of each property and hence reducing its liquidity. The rest of the measures didn’t really affect this particular group since they didn’t need the loans anyway, and they were able and willing to hold on to the property.

I actually think that this group was unfairly targeted, and I’ll tell you why. It’s true that they were buying up many pieces of property, and driving up the prices for those properties, but they generally operate in the luxury segment, buying up properties like The Marq, Scotts Square, Paterson Suites, Sentosa Cove etc. They weren’t actually competing with the masses for property. However, they were ostentatious and highly visible, which made them easy targets for populist policies.

If we simply look at the chart below, it would seem that despite the measures, prices continued to climb.

NUS Singapore Residential Price Index (SRPI)
Dec 2001 – May 2012

But if you zoom in closer to the end, you can see that the pricing index for the central region has clearly under-performed the non-central region. This is most likely due to the reduced demand by foreigners caused by the ABSD. Certainly, it seems like the ABSD has done what it’s supposed to do.

The clear out-performer from the SRPI is the non-central region. You would undoubtedly have heard of projects outside the CCR regions like Katong Regency, Sky Habitat and Watertown which sold at prime area prices. According to data from Square Foot Research, the vast majority of units here were bought by Singapore citizens and PRs. I imagine that most of them were either buying for their own stay, or as a first investment property, and therefore would not be affected by the ABSD. Even if they were affected by the 3% ABSD, the developers would be able to reimburse them via rebates or discounts. The problem, therefore, is that the cooling measures were not effective against the real cause of the price increases: Mass market demand.

People generally want to upgrade. It’s what this meritocratic society has taught us. People hope to live a better life, gain prestige, look better by upgrading their home. People want to go from ordinary HDB to ECs to private condos or even landed properties. With interest rates this low and expected to remain low for the next few years, it’s the perfect time to buy!

The million-dollar question is: Will the government come out with another round of cooling measures to stem the rising prices? My feeling is that they won’t. The difficulty is that this is the mass market. Too many people will be implicated, leading to unhappiness. In today’s Singapore, with a rising mob of angry young voters, this will almost be political suicide. I kinda feel sorry for the government, trapped between a rock and a hard place. Offering up more land for sale under the GLS isn’t really working either. The developers just hype it up and sell it dear. All they can really do is build more HDBs and hope the increased supply will ease the prices somehow.

(To be continued with Part 2: risk of default from falling prices and interest rate risk)


3 thoughts on “Is the Singapore Property Market in Trouble? Part 1

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