Should property cooling measures be relaxed?

It has been seven years since the government first introduced cooling measures for the property market.
PHOTO: The Straits Times

It has been seven years since the government first introduced cooling measures for the property market.

The latest property market data for Q4 2016 shows 13 straight quarters of decline.

From the peak in Q3 2013, prices have fallen over 11 per cent (down 3 per cent in 2016 and 3.7 per cent for 2015).

Some property industry insiders and analysts are now calling for the government to relax the cooling measures.

But it is important not to look at these measures as purely "property cooling" but to view them from a more macroprudential perspective.

As Monetary Authority of Singapore (MAS) managing director Ravi Menon had said at the 39th Federal Reserve Bank of New York seminar in Oct 2015, the measures were "a coordinated approach across the MAS, the Ministry of Finance and the Ministry of National Development to address financial stability and inflation concerns".

After the global financial crisis of 2007, the US Federal Reserve's zero-interest rate policy as well as large central government stimulus packages (especially in the US and China) led to a massive fund to emerging markets.

Risks of buying property in Singapore

  • Investing in real estate can be very profitable. However, like every other profitable endeavor it comes with several risks.
  • Here are the things you need to consider while investing in real estate in Singapore.
  • 1. Fluctuating prices

    In Singapore, the market was previously saturated with people wanting to buy property due to the stable environment. Demand was higher than supply, which led to higher property prices.

  • 1. Fluctuating prices

    The high demand and low competition trend in real estate is however reversing. Many developers are releasing new projects and supply has outstripped demand. Property prices has been slowly declining.

  • 2. Tedious bureaucratic processes

    Singapore has strict bureaucratic processes for real estate projects. These processes are necessary in order to obtain approval for projects and fulfilling the pre-requisites before the property can be sold.

  • 2. Tedious bureaucratic processes

    Some developers tend to overlook these processes. 7 such projects with a total of 574 homes have recently been identified, including City Development's and IOI's South Beach project.

  • 3. Turnaround time

    There was a time when developers took about 43 months to complete a project due to the uncertainty in the real estate market. Now, you can now expect a project to be completed within five months.

  • 4. Legal risks

    Legal work is yet another factor you need to keep in mind. You need to follow the rules and regulations to stay clear of charges and penalties. Make sure you know the rules of property transfer and purchase.

  • 5. Mortgage eligibility and suitability

    HDB provides housing loans at concessionary interest rates to flat buyers. However, to prove your eligibility, you need to go through a credit assessment and mortgage loan eligibility process.

  • 5. Mortgage eligibility and suitability

    If you don't meet the criteria set by the HDB, you can always take the loan from private banks and other financial institutions.

  • 6. Illiquidity in the real estate market

    The price of real estate in Singapore is rising due to its high demand. So, illiquidity is only a minor risk. But it's always a good idea to be careful and do your research before you invest in a particular property.

Singapore's exchange rate-based monetary policy meant interest rates - tied to US Fed Fund rates - remained very low, leading to a large increase in bank credit, especially mortgage and car loans.

This raised risks for both inflation and financial stability.

Low interest rates boosted asset collateral values, which provided a larger incentive for both borrowers and lenders to take more risks.

Excessive credit in turn raised the risk of asset price bubbles, whose eventual burst could damage financial instability.

While Singapore's monetary policy in the form an appreciating exchange rate was able to reduce imported inflation, this was not effective in curbing asset price increases, especially for housing and cars.

Regulations can be more effective than monetary policy in "targeting the cracks" where specific vulnerabilities are concentrated.

And when used for macroprudential purposes, the scope and calibration can be larger.

So Singapore took an innovative and integrated approach in targeting different aspects of systemic risk:

- Tighter loan-to-value (LTV) ratios moderated credit-fuelled investor demand;

- Caps on housing loan tenures curtailed the stretching out of loans in order to meet tighter LTV ratios; and

- Higher transaction taxes/stamp duties constrained demand from investors who did not need to take out loans.

As Mr Menon put it, an LTV ratio of 80 per cent for property loans, applied through the cycles, is a microprudential tool.

But when the ratio is tightened to as low as 20 per cent for a third property loan, it became a macroprudential tool.

What type of property in Singapore should you buy

  • Buying property is a long term investment. When you're thinking of diving into real estate investment, it's better gather as much information on it as possible.
  • Just like in any part of the world, having a private property is a good decision as there are many benefits. For instance, the property cycle in Singapore over the last years indicates that there is a steady rise in real estate's value.
  • Alternatively, real estate investment can be a source of passive income. You can purchase a property and rent it out.
  • Hougang Capeview BTO flats

    BTO comes under the Housing and Development Board (HDB), Singapore. It's a responsive system, which allows Singaporean citizens to apply for flats at a location of their choice.

  • BTO flats at Sky Terrace@Dawson

    Once 65-70 per cent of the flats are booked, the construction work begins.

  • Tampines GreenLace BTO flats

    After the construction is completed, you will have to wait for some time before you can move in.

  • Pasir Ris One DBSS project

    Design, Build, and Sell Scheme (DBSS) is an incentive of the HDB system. DBSS is public housing scheme developed by private developers.

  • City View @ Boon Keng DBSS project

    The DBSS scheme offers more comfortable designs and better locations.

  • Executive Condominium

    Executive Condos (ECs) caters to young graduates and professionals who wants a property in between public and private housing.

  • Executive Condominium

    ECs are comparable in design and facilities to private condominiums as they are developed and sold by the private developers.

  • When it comes to investing in real estate, you should ask whether there is easy access to MRT stations, schools, and other essential facilities; the property can be easily resold; and affordability.
  • What are the costs involved in buying a property in Singapore? First, you have to check your stamp duty rate. Based on the market value of the property, you can compute for your Buyer's Stamp Duty (BSD).

So what was the outcome of MAS's actions?

Against both inflation and housing prices, the results have been successful. Property prices, after rising over 60 per cent between Q2 2009 and Q3 2013, have since fallen 11 per cent.

But risks remain. In the long run, property prices are still substantially higher than their pre-2010/2011 run-up levels. And although the US Federal Reserve has increased interest rates for the first time since 2006, the increase has been marginal and future rate increases are expected to be moderate.

While some relaxation of policies may be expected in future, it would be realistic to assume these will be done in a calibrated and gradual manner. The relaxation would also be in line with broader goals and objectives.

But policies on prudent mortgage criteria to prevent borrowers from overextending themselves (such as LTV limits, maximum loan tenures and total debt-servicing ratio) can be expected to remain.

Ditto for tighter rules on the ownership of HDB properties for permanent residents versus citizens.

However, there may be an opportunity for the relaxation of LTV limits for multiple properties as well as additional stamp duties.

This article was first published on February 20, 2017.
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