Limited scope for reversal of property measures for now

Limited scope for reversal of property measures for now

With the US Federal Reserve signalling a faster pace of interest rate hikes next year, should Singapore continue to stand pat on property cooling measures?

Whether these measures should be tweaked has been a perennial question bogging the industry. Now with the prospect of swifter rate hikes looking more certain, it is rekindling hopes among those who have been lobbying for policy relaxation.

Citing stronger economic headwinds ahead, some industry players also argue that it is better to tweak the measures earlier than to try reviving the market when the economy is in a more dire state.

But while there may be greater justification for property curb reversals towards the later half of 2017 if economic conditions deteriorate rapidly from here, it probably is premature to unwind any policy now.

After all, the cycle of Fed rate hikes has just begun and most central banks are on wait-and-see mode.

Prevailing market interest rates here are still below the 3.5 per cent medium-term interest rate that is used to compute housing loans under the total debt servicing ratio (TDSR) framework.

Any form of policy relaxation may embolden investors to pile in before full interest rates normalisation to lock in mortgage at lower rates first.

Prior to the Fed's move to raise its benchmark interest rate by 25 basis points this month, the Singapore central bank has maintained the government's stance of keeping property cooling measures in their current form when it unveiled its November Financial Stability Report.

While acknowledging that growth in housing loans has eased considerably and the overall risk profile of housing loans is strong, the Monetary Authority of Singapore (MAS) flagged that property demand could see upside surprises on the back of current low interest rates and as investors search for yield, as evidenced by the strong take-up at some recent launches.

It would seem that the private residential market is not in need of any propping up at this point, having marked a recovery in sales momentum and more moderate price declines compared to a year ago.

The 11,573 private residential and executive condominium (EC) units sold by developers in the first 11 months this year already exceeded the 9,990 units sold for the whole of last year, marking the highest in three years.

Graphic: The Business Times

Resale volumes also improved as the price-expectation gap between buyers and sellers narrowed, with 27 per cent more transactions clocked in the first three quarters than in the same period last year.

Such improvement in transactions is setting the stage for a sustainable sector recovery in a volumes-led housing cycle.

Private home prices have slipped 2.6 per cent over three quarters this year, compared to 3.2 per cent in the same period last year.

Under the borrowing constraint of TDSR, investment appetite for residential properties has not diminished.

This is reflected in the brisk sales in some project launches this year, especially those that have incorporated many smaller units with palatable quantums.

Based on The Business Times' study of project launches with at least 100 dwelling units, the average take-up rate (based on all units in the project) in the first month of launch was 41 per cent, up from 25 per cent for last year's launches.

About half of these projects moved at least 50 per cent of all units within the first month. By dangling price discounts, some developers have also managed to pare down unsold inventory in older projects.

Notably, the supply pipeline of housing units to be completed is steadily declining from the peak of Q1 2013, in line with slower government land sales in recent years.

Of the 43,693 private residential units (excluding ECs) in the pipeline as of end-Q3, more than half have already been sold, leaving unsold units at a historical low of 20,577.

The 47 per cent share of pipeline units left unsold is also below the historical average of 58.7 per cent since 2001.

How new launches fare - Projects with at least 100 units in Singapore.
Graphic: The Business Times

Using the trailing one-year primary sales volume as a gauge, it will probably take 3.1 years to clear the 22,502 unsold private residential units (both completed and uncompleted as of end-Q3), in line with the 3.2 years average for the past 10 years.

There is also strong prospect of developers clearing their unsold EC stock of about 3,000 units and three upcoming projects housing some 1,600 units next year, going by the sales pace for ECs in the past 12 months when nearly 4,200 EC units were moved.

Clearly, most developers are not in dire straits; a majority of owner-occupied households are able to stomach a gradual rise in mortgage cost as long as their jobs are secure.

But investors relying on rentals to service their loans will have to contend with further falls in rents and the risk of leaving their units vacant if they cannot find a tenant.

Some signs of strain have surfaced. In September, the share of mortgage loans that were more than 30 days in arrears increased to nearly one per cent, up from 0.9 per cent a year ago, according to MAS.

Non-performing housing loans also inched up slightly over the past year to 0.4 per cent in Q3, though still much lower than the peak of one per cent recorded during the global financial crisis.

But amid a highly uncertain economic climate, views on cooling measures remain split. OCBC Bank analyst Eli Lee sees significant scope of curb reversals going forward.

He noted that since 1985, the government reversed into loosening stance in three instances in 1997, 2001 and 2008 after price declines of 8.3-16.4 per cent; these were also times when significant economic stresses were anticipated.

Private home prices in the third quarter were 10.8 per cent below the peak of Q3 2013.

Maybank Kim Eng analyst Derrick Heng, however, believes that with recent policy tightening in Hong Kong, Singapore will be wary of fund flows from overseas market if it loosens.

There are yet other industry players who opine that the additional buyer's stamp duty (ABSD) on foreigners' residential purchases can be tweaked to support the prime segment without affecting the mass-market segment - though such argument may be misguided.

It was only after the ABSD was introduced in December 2011 that foreigners' share of total residential purchases in the city-fringe and suburban regions dropped from 17.5 per cent in Q4 2011 to about 5.5 per cent in Q4 2016, in line with their overall reduction in home purchases here.

Based on caveats lodged, the suburban region still accounts for more than 40 per cent of the home purchases by foreigners in recent quarters.

To sum it up, the government's hands are clipped until interest rate normalisation runs its full course to rein in on property investment demand.

The outlook for the residential market will still remain highly dependent on economic conditions.

As liquidity remains ample for now, any reversal of property cooling measures would be premature.

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