Taming Singapore's property market

INITIAL reports of the property market's demise appear to have been slightly exaggerated.

After policymakers imposed strict curbs on consumer loans last June under total debt servicing ratio (TDSR) rules, analysts predicted that private home prices would plunge by up to 10 per cent this year.

Some warned that home sales could grind to a near halt, quipping that TDSR actually stood for "total destruction of Singapore real estate".

So far, however, the slowdown in prices has been far milder than expected.

Home values have slipped just 2.3 per cent overall from January to June this year, and the pace of the decline is expected to stay around the same for the rest of the year.

As a result, some market watchers have revised their forecasts to adjust for a slower slide in prices.

Maybank Kim Eng analyst Wilson Liew said in June that a 10 per cent drop this year was now "unlikely".

Analysts agree prices could fall just 5 to 8 per cent this year, with most hewing closer to the lower end of that range.

Barring a rude shock to the economy, the Government appears to have achieved every regulator's dream: a measured slowdown of a red-hot property market. How did it accomplish this? And is the gradual trend likely to continue?

Willing buyers, firm sellers PART of the reason for the moderate decline is simple market dynamics.

Continuing low interest rates have eased some of the pain of the property market curbs by keeping down the cost of both buying and holding a home.

Individual sellers are in no hurry to offload their units, since their mortgages are still fairly cheap.

Mr Eric Cheng, who runs real estate agency ECG, has noted fewer distressed sales in this period of price decline than in previous downturns.

Indeed, fewer sales of any kind are taking place.

The roughly 6,660 units sold in the first six months of this year were around half that in the same period last year.

But with some potential buyers removed from the pool due to the tighter loan curbs, prices have fallen enough for previously sidelined home seekers to step in. Buying demand has been further stoked by a prolonged period of undersupply in homes during 2004 to 2012, said OCBC Investment Research analysts.

Even the risks of a possible oversupply of homes or a looming spike in interest rates are proving of little deterrent, especially to investors who have few other suitable channels to park their money.

As many as 65,000 new private homes will be completed over the next three years, adding to rising vacancy rates amid fewer foreigners coming to work in Singapore.

And although interest rates are near zero, they are expected to creep up soon after the United States winds down its massive economic stimulus programme.

But Mr Alfred Chia, chief of financial advisory firm SingCapital, said many Singaporeans still prefer properties over other investments like stocks because of their tangibility and lower volatility.

"You may not be able to tell everyone that you own 10,000 lots of OCBC shares, for example, but you can tell everyone you own a unit at Ardmore Park," he said.

Apart from the brag factor, investors see property as a hedge against inflation, Mr Chia said.

Other economic factors - such as Singapore's steady growth, high employment and rising wages - may also give buyers confidence to make big-ticket purchases such as homes, said CIMB economist Song Seng Wun.

Mr Donald Han, managing director of property consultancy Chestertons, added that many buyers still have cash to spend and are just waiting for a bargain.

"If the developer were to provide a compelling discount, the crowd would come. It's like bees to honey."

Budging just a bit ONE such perceived sweet deal was Duo Residences in Bugis, where 87 per cent of the 540 units released were sold in just three days in November last year.

The units sold for an average of about $2,000 per sq ft (psf), about 10 per cent lower than the $2,200 psf that had been expected.

Property developers are generally seeing no reason to give steeper discounts than that.

They have built up ample buffers during the boom years and their balance sheets are strong.

"In 2007, 2008, I could see developers selling at a 20 to 30 per cent discount, or below book value. Today it's a 3 to 7 per cent discount," said ECG's Mr Cheng.

Developers have also teamed up to bid for land, thus lowering their individual financial risks - and reducing their need to cut their losses to move units.

Another reason the official property price index has registered only mild falls is because it is based on per sq ft (psf) prices.

Developers have begun building smaller units in order to keep the total price of the units affordable.

However, small units tend to have a higher price per sq ft (psf) than larger ones. This keeps the price index elevated.

Tight hand on the reins BUT much of the credit for the gentle price slide goes to the Government's measured approach in taming the market.

Departing from previous shock-and-awe tactics such as slapping capital gains taxes on home sales, the authorities decided to start loan curbs in 2009 followed by extra taxes in 2010.

They tightened the screw incrementally over the years, to weed out speculators and prevent home buyers from borrowing beyond their means.

This has given them the flexibility to respond to market movements and tweak the restraints as necessary.

The outcome is a happier one than in the late 1990s, when capital gains taxes coincided with the Asian financial crisis and caused home prices to nosedive 60 per cent in under two years.

Today, analysts expect the Government to step in - with economic cushions or loosened property curbs - if prices so much as threaten to fall 20 per cent in a year.

Such a scenario is possible in the event of war, health scares or an unexpected economic downturn, said Dr Chua Yang Liang, South-east Asia research head at property consultancy JLL.

What is far more likely, though, is for the gradual decline in home prices to continue.

Dr Chua estimated that if prices keep sliding 1 to 2 per cent every quarter, it could take until the end of 2016 for prices to lose 10 to 15 per cent off their 2013 peak.

That may be enough for policymakers to start relaxing some curbs - and the market to ease into a soft landing.

Uncertainties ahead?

THAT said, there is the ever-lurking possibility that government policies may not have their intended effect.

As Dr Chua put it: "The unknown factor is that you're dealing with sentiment, so you must take psychology into consideration."

For instance, when the additional buyer's stamp duty (ABSD) was introduced in 2011 to rein in surging prices, the subsequent dip in demand was short-lived. Fearing more measures to come, which could bump total prices even higher, buyers kept jumping into the market.

Policymakers raised the ABSD again early last year, but this did not stem the relentless price rise. Prices only really started to fall after the TDSR kicked in.

This was ironic, since the debt framework was ostensibly not meant as a property cooling move.

The worry now is whether the TDSR, designed to be a permanent prudential measure, unlike the other short-term property curbs, will continue to weigh on the market after policymakers have decided to loosen the restraints.

Having kept a firm hand on the property market in the last few years, regulators will have to ease their grip slowly - a considerable hurdle in its own right.


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