The 7th Round of Cooling Measures: Will raising ABSD lead to falling prices?

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We’ve been expecting the government to trot out another round of cooling measures, as I mused on Facebook just hours before the official announcements came out. Prices have continued to defy gravity despite the 6 earlier rounds of cooling, and the recent ruckus over $2M Executive Condos had also alerted Minister Khaw to the need to bring developers back in line with the original mission statement behind Executive Condos.

Still, the 7th round of cooling measures does stand out amongst its predecessors as the broadest spectrum of cooling measures we have seen, affecting both private and public housing, as well as the industrial property market. The measures have drawn a mixed response, ranging from fiery profanities from property agents concerned about their rice bowl, to mild jubilation from Singaporean first-home buyers (and more cursing and swearing from PR buyers yet to secure a home.)

On the whole, I agree with the government’s decisive move this round. The market, jaded by countless rounds of “cooling” measures, has reached a stage where anything less than draconian simply won’t cut it. However, I question whether the ABSD measures introduced will truly serve the interests of those they are seeking to protect -the Singaporean first-time home buyer. Today’s post shall be focused mostly on the ABSD hike and its repercussions.

Firstly, let’s look at the global economic situation at the moment. A lot of people assume that poor global economic outlook automatically translates to falling property prices. That’s not necessarily the case, especially when we look at how the major world banks are dealing with the situation. The US Federal Reserve, the European Central Bank, and more recently, the Bank of Japan, are all determined to keep interest rates as close to zero for as long as it takes to get their economies back on track – which evidently isn’t going to happen overnight. In the mean time, this central bank-created liquidity will have to flow somewhere. And Asia (ex Japan) is where most signs of life are. Singapore is uniquely placed to leverage on this, having a stable government, a legal system that affords robust protection of property rights to both locals and foreigners alike, and a safe haven currency (Singapore is pipped to be the new Switzerland of the private and offshore banking world given her exponential growth in funds under management.)

The initial introduction of 10% ABSD on foreign buyers on 8 December 2011 has already drastically reduced foreign buyers’ share of transactions, so what purpose does raising ABSD on foreigners to 15% serve? If it’s being implemented as a preemptive measure against the swelling tide of foreign liquidity that may find its way to Singapore, then the additional 5% hardly makes a dent. Foreign buyers in Singapore are looking for mid to long-term investments, and see the ABSD as a one-time entrance fee to buying in. The government’s “shock and awe” tactics in the 7th round of cooling measures could in fact push prospective foreign investors into bringing forward their purchasing decisions, to avoid the increasingly real possibility of Singapore placing a total ban on foreign investment into all residential property if current measures fail. (Since 1974, foreigners have been restricted from purchasing residential land and homes not accorded “condominium” status.)

Besides its uncertain effect on reining in foreign buyers, my reluctance to embrace the ABSD hikes as a means of improving market conditions is 1) ABSD represents an additional cost, which will be factored in when owners eventually look to sell their property later down the road. That is, we have introduced an additional factor of cost inflation, exacerbating the trend for rising property prices. 2) the prospect of having to pay ABSD on their replacement property has caused many sellers to pull their homes off the market or increase their asking prices to factor in their increased replacement cost, reducing the supply of resale homes available on the market, and making those available pricier. This leaves first-time home buyers with fewer resale options, which are generally the cheaper alternative as opposed to new launches within the same locality. Neither prospect seems to favour the first-time home buyer struggling to keep up with escalating prices.

I suppose the punitive stamp duty method is attractive to the authorities given that even in the event it fails, it goes a good way towards lining the country’s coffers (If you recall, the Straits Times reported on 24 September 2012 that cooling measures introduced on 8 December 2011 raked in a cool half billion dollars in revenue within 9 months!) But if the aim is to improve the situation for Singaporean first-time home buyers, I’m doubtful as to the efficacy of this trend of introducing increasingly onerous seller stamp duties and additional buyer stamp duties.

When money continues to pour into property despite 6 rounds of punitive stamp duties and tightening loan restrictions, one questions whether a different tact should be adopted instead. My proposition is that the growing rift between affordability and rising property prices is caused by a growing wealth gap. The wealthy who can afford to will continue to park funds into property, much in the same way that a millionaire will continue to strive for higher earnings despite facing a higher income tax rate than his more lowly paid compatriot. Those who cannot afford to will be forced to rent, further enhancing a wealthy landlord’s holding power. My concern is that these monetary barriers (ABSD/SSD/tighter financing) are further polarizing the divergence between those who can and those who cannot afford property in Singapore.

If we are sincere about keeping things affordable for the first-time home buyer, rather than tax those that can afford to pay (who will subsequently seek to pass on their additional costs to the next buyer), we should look into giving priority to the ones we seek to help. In Australia, this is done by stipulating that foreigners are only allowed to buy direct from developers, and can only sell on to Australian citizens.

As to the all-important question on people’s minds, will property prices drop in 2013 in the face of these new measures? My take is no, while the volume of transactions will drop significantly, prices will remain firm barring a major catastrophe of Lehman-crisis proportions. I also expect to see slight improvement in rental figures given that some home buyers will be putting off their purchases, and PRs are no longer permitted to rent out their whole HDB flats.

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