Property fever: Band-Aid not the cure

This story was first published in The Straits Times on April 9, 2013

Seven rounds of property cooling measures later, the market is still lively. There's a need for holistic measures that go beyond loan limits and stamp duty hikes.

JANUARY blew cold air on the red-hot property market - but this latest, seventh round of measures to cool the market led to an unusual anomaly.

In the six previous rounds of cooling measures from September 2009, which slapped on additional stamp duty for buyers and tightened loan restrictions, home sales dipped immediately after each round. Some buyers even forfeited options to buy, in anticipation of price falls.

After Round 6, for example, volumes of new home sales fell 26 per cent last October from the month before.

After Round 5, sales volumes fell 66 per cent in December 2011 compared with November's sales.

But in January, after Round 7, the property market rebounded despite the introduction of tighter loan limits and a hike in the additional buyer's stamp duty (ABSD).

New private home sales were up 43 per cent in January from December, propelling home sales to more than 2,000 units. This was in part due to buyers rushing to beat the clock before the measures kicked in on Jan 12. Last year, the monthly average was 1,858 units in a record year with 22,290 new homes sold.

In February, sales figures slowed to fewer than 800 units on the back of a Chinese New Year lull and a dearth of new launches. Last month, however, they looked set to go up to more than 2,000 units again, with strong sales at a string of suburban projects. This has prompted talk of a possible eighth set of curbs.

What accounts for the uptick in home sales this time round?

Are the cooling measures ineffective? Or do they signal a more fundamental shift in the behaviour of both home buyers and property investors?

Signs of slowing market

IN FACT, there are clear signs that the property market is cooling, if you look beyond new home sales volumes.

The resale market took a breather in the first quarter, with 42 per cent fewer homes sold than in the three-month period before, according to data from the Singapore Real Estate Exchange (SRX).

That is 8 per cent down from the same period last year, when the ABSD was first introduced.

The picture is cooler if you look at prices.

Prices are still going up, but much more slowly: at 0.5 per cent in the first three months of the year, compared with a 1.8 per cent rise in the final quarter of last year, according to Urban Redevelopment Authority (URA) flash estimates released last week.

Price gains slowed in all non-landed segments. Prices were stagnant in the city fringe.

Seven rounds of cooling measures have also nearly killed speculation. Subsale activity - covering buyers who resell a unit before completion - fell to 5.9 per cent of all sales in the first three months of the year, well down from the record of 16.3 per cent in the fourth quarter of 2008.

Looking ahead, the Government has even said it would consider offering multiple sites around the same vicinity for development, to temper developers' bids.

Mr Nicholas Mak, head of research at SLP International, said that permanent residents and investors have retreated from the market on the back of the hike in ABSD.

The overall picture, therefore, is of a government determined to cool the market, and succeeding to some extent.

This ironically creates incentives for investors to rush in to buy when prices dip or just plateau - before more punitive measures kick in.

Owner-occupiers meanwhile might be lured by developers' price cuts and incentives to alleviate the measures' sting. CapitaLand, for instance, slashed prices by up to 15 per cent at d'Leedon and The Interlace after the January measures were introduced.

Some analysts say the underlying demand for property remains strong, explaining the uptick in sales volumes in the last quarter.

HSR Property Group special adviser Donald Han noted that "the confidence in the market is so strong that it doesn't really matter if prices move up or down now as the long-term trend for prices is still upwards".

What accounts for this super-confidence?

Macroeconomic environment

THE biggest factor fuelling property demand is a healthy economy and low interest rates.

Many households have amassed cash reserves which can be put down as a deposit for a property. Low interest rates make servicing mortgages more affordable.

The shallow capital markets here also make property investments the easiest and most accessible avenue for an investor to park his cash to generate returns.

Second, a cultural preference for property has evolved, as many Singaporeans have profited personally or have seen people they know profit from property purchases in recent years, as the economy boomed and a ballooning population drove up demand and prices.

Third, the fear of runaway prices. As the market defies cooling measures, more people fear that prices will not drop, and start to venture into the market. Anecdotally, agents have also reported that parents are helping their children buy homes for fear that prices might run away further, putting them entirely out of reach for the next generation.

Then there are lifestyle changes. More single professionals are now moving out of their parents' homes before they are married, creating more demand for homes.

Some analysts think the strong buying interest comes from genuine demand, in part from these young people leaving the parental nest.

This would explain the demand for smaller, more affordable units. Despite sales of more than 22,000 units last year, the estimated value of total sales was $25.56 billion, property consultancy CBRE's analysis found. While that is 27 per cent higher than in 2011, it is still a shade below 2010's total of $25.65 billion when 16,292 units were sold.

Of the more than 22,000 units sold last year, about 20 per cent of homes were compact-sized - or 50 sq m or less.

Smaller homes are also more affordable, making it easier for investors to buy into the market.

What's next?

BUT while prices are at a plateau, they are still at an all-time high, after recovering 60 per cent from the global financial crisis in the second quarter of 2009.

Deputy Prime Minister Tharman Shanmugaratnam said in an interview with Bloomberg in February that "some correction in prices will not be out of order".

National Development Minister Khaw Boon Wan also created waves when he said last month that he wanted to bring down the prices of new Housing Board flats significantly.

Given that prices have not fallen by much, there is widespread expectation of even more measures to dampen the market.

But rather than more of the same kind of measures - loan curbs or more stamp duties - analysts say there is a need for a new approach.

The talk these days is of the Monetary Authority of Singapore doing what Hong Kong did recently: introduce a risk weighting floor, or regulating the amount of capital that must be held by banks against residential mortgage books.

Banks will find it costlier to give out housing loans, and are likely to hike mortgage rates as a result, raising the cost of borrowing. This essentially limits the flow of cheap mortgages, a key factor fuelling demand and price gains in property.

The MAS does not currently regulate this mortgage risk weighting. It leaves this to banks. But introducing this is a potential tool in the future to limit mortgage credit to cool housing prices, some analysts have suggested.

Other related policies that can affect prices are also being reviewed. These include altering the land tender system, requiring developers to declare the price discounts they give and a study on the robustness of the URA property price index.

Meanwhile, the supply of both private property and public housing is at an all-time high. Introducing mortgage risk weighting and raising housing supply are more holistic measures to create a more balanced property market.

Without these longer-term reviews, more rounds of cooling measures centred on loan limits and stamp duties can, at best, be just a short-term Band-Aid. They have the advantage of course of being easy to remove when the market does cool. But they do not fundamentally shift the underlying demand for property.

A buoyant property market is a sign of confidence in the economy and the future. But the line between confidence and over-exuberance is a thin one. When demand and prices streak ahead of growth fundamentals and defy repeated cooling measures, it may be time for more fundamental action.

This story was first published in The Straits Times on April 9, 2013

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