RESIDENTIAL PROPERTY | Krisana Gallezo-Estaura, Singapore

Is 2016 the right time to ease property cooling measures?

Check out what could be possibly fine-tuned.

The property market was very downbeat in 2014-2015, particularly in terms of volume. Only 5,555 new units were sold in the first nine months of 2015 (6,910 in 2014), less than half of the numbers recorded in 2012-2013 and representing the lowest point since 2008.
Here’s analysts’ views on how the government may possibly respond to boost the property sector next year:

Gerald Wong, analyst, Credit Suisse

Achieving a stable and sustainable property market has been the key objective of the government, as eight rounds of property cooling measures have been implemented since 2009. We believe that the time is now ripe for an easing of some of the measures, given that the specific policy intents of the measures have been achieved on various fronts: (1) speculative activity has fallen significantly, with monthly sub-sales now at a negligible 2- 4% of total volumes, (2) foreign demand has been curbed significantly with overall foreigner buying at 4% of total volumes, (3) housing affordability has improved substantially with incomes having risen faster than home prices on both a short-term and long-term perspective.

Against a backdrop of a rising interest rate environment, a weakening labour market and an oversupply situation that is expected to persist in the next few years, we think a preemptive re-calibration of measures rather than ex-post corrective actions would be a better way to go in achieving a stable and sustainable property market. This is especially so given the context of a home ownership rate of 90%, with residential property representing a dominant majority at 46% of household assets; we believe that a large correction in property prices is neither desirable and/or tolerated.

BMI Research
It remains our assertion that the Singaporean government is comfortable with the pace of the property market's correction so far, and prefers to see affordability improve further before it begins to ease up on its wide-ranging macro-prudential measures aimed at keeping a lid on prices.

These measures include additional buyer stamp duties (ABSDs, up to 15% of the property value for foreigners and 10% for citizens), loan-to-valuation ratios capped at 80.0% for owner-occupied properties (dropping to 50.0% for second properties, and 40.0% for third), and total debt servicing ratio (TDSR) limitations. However, given the propensity for a deeper correction in property prices once the US Federal Reserve begins to normalise its interest rate policy heading into 2016, there is small chance that the government may see fit to ease up slightly on its cooling measures over the coming months, most likely by adjusting the ABSD.

To be sure, we do not believe that the government will choose to adjust its policies just yet (and that it will wait for a deeper correction to play out before This mate rial is prote cted by inte rnational copyrig ht laws , and use of this is subje ct to our Te rms & Conditions . © 2015 Bus ine s s Monitor Inte rnational Ltd doing so), but note that if policymakers do surprise with an easing of the cooling measures, the property market could experience a transitory pick-up in activity and price levels.

Ong Kian Lin, analyst, RHB

The number of units that will be completed – and the rising vacancy rates – would be issues that the property sector may have to contend with. Prices, on the other hand, were down only 8% from its peak in 3Q13. The Monetary Authority of Singapore’s Oct 2015 Macroeconomic Review explained this very well. The housing cycle in Singapore appears to be one that is characterised by volume and not a price In a price cycle, the standard demandsupply model of the housing market prevails. This suggests that, when faced with a weakness in demand, house prices will fall and volumes will tend to be maintained by price cuts. However, the inefficient price discovery process in the housing market may create a mismatch of expectations on prices between buyers and sellers.

In addition to informational inefficiencies, price adjustments are hindered by high transaction costs, infrequent trades, locational fixity and the indivisibility of housing. This, in turn, leads to larger changes to sales volumes. Accordingly, a volume-led housing cycle implies a relatively larger adjustment in sales transactions compared to price changes during turning points in the cycle.

In Singapore, the larger-thanexpected volume adjustments likely reflect the active role of the developers in managing their available-for-sale inventories over the property cycle. Typically, developers would hold back on releasing new units for sale during cyclical downswings so as to preserve their profit margins.

We saw this happening this year, with the volume of new home sales plunging by 84% in 1Q15 from a peak in 2Q12, as developers withheld new launches. Factoring in resales and subsales, total sales were also down 79% over the same period.

What could possibly be fine-tuned? The TDSR is here to stay, given that it is a structural measure. MAS had earlier clarified that TDSR was not specifically aimed at addressing current conditions in the property market. Instead, it was put in place more for the long term, intended to encourage financial prudence among borrowers and strengthen credit underwriting practices by financial institutions. Going into 2016, we believe the Government may tweak some of the measures introduced prior to TDSR.

For instance:

i. Tweaking down the additional buyer’s stamp duty (ABSD) for foreigners and companies to 10% from 15%. For second home and subsequent home purchases, ABSDs for citizens and permanent residents (PRs) would decrease to 5% and 7% from 7% and 10% respectively. For first home purchase, PRs can pay 3% ABSD instead of the current 5%.

ii. Moderating the seller’s stamp duty (SSD) to 12%, 9%, 6% and 3% instead of the current 16%,12%,8% and 4% within the holding period of 1/2/3/4 years holding period.

iii. Relaxing the extension charges for breaching the qualifying certificate (QC) time condition to 4%, 8% and 12% pa for the first/second/third and subsequent years of extensions from 8%, 16%/ and 24% at present respectively. Strategy - Singapore 1 December 2015 See important disclosures at the end of this report Powered by EFATM Platform 23

iv. The conditions in the undertaking for remission of ABSD for developers appear more stringent than the QC conditions. Since 2011, developers have to complete and sell all dwelling units in the proposed housing development within five years from the date of contract for purchase (or five years from the date of the collective sale order in the event of a collective sale under the Land Titles (Strata) Act). If the housing developer fails to comply with any of the conditions of the undertaking, then the ABSD amount shall be repaid in full with interest. Instead, we suggest harmonising this to the likes of QC: o Developers to complete development and obtain temporary occupation permits (TOP) within five years of the date of contract or agreement to purchase the site. o Developers to sell all dwelling units in the housing project within two years of issue of the TOP. o The ABSD amount on residential land can be pro-rated based on unsold units over the total number of units in the housing development in the event that the developer is unable to fulfil the abovementioned condition.

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