What gives, Singapore property prices?

So what does the experts think about the current status with the Singaporeproperty prices and when is the right time for our government to consider winding back some of the existing cooling measures? 

These are our main take-away from the round-table session organized by The Strait Times late last month, which was reported in the ST today. The panellists included Mr Donald Han (managing director of property consultancy Chestertons), Mr Song Seng Wun (regional economist at CIMB Bank), Mr Eric Cheng (group chief executive of real estate agency ECG Holdings) and Mr Li Jun (general manager of property developer Qingjian Realty):    
 

1. The market has seen a slow but sure decrease in pricing since 4Q’2013. While prices were expected to fall between 5 – 8% at the beginning of 2014, we will probably see prices falling 8 – 10% for the rest of the year. 

2. Barring any external shocks that may accelerate price decline, prices may fall 10 to 15% by the end of 2015. 

3. The current property downturn is likely to be different from previous ones, such as the Asian financial crisis and global financial crisis because

 

• Unlike previous times, Singapore currently still enjoy positive economic growth, very strong employment and very high liquidity. Given such, strong buying interests still remain as long as prices from developer is “right”. So those 30% (global financial crisis) or 60% (Asian financial crisis) drop are unlikely to happen this time around.

 

• Even if a rude shock were to happen, we can expect policy response to be much faster this time around. So any downturn or recession will be better cushioned and compressed.

 

• Fundamentally, our banks are also much stronger and amongst the most liquid in the world.

 

• Buyers are also more liquid and just waiting for the right opportunity to enter the market. Developers are also equally liquid these days. So we hardly see any distressed sales, both by home owners and developers, unlike during the global financial crisis. 

4. A 20% drop in home prices is probably the psychological threshold that policymaker will come in to ease off on cooling measures. If you purchase a property 3 to 4 years ago, your LTV (loan-to value) is about 80%. So banks will start asking for top-ups if home values drop 20%.  

5. As it stands, only a sharp drop in property prices within a short period, or a groundswell of unhappiness from a large number of home owners, could prompt the government to act faster to relax on cooling measures. 

6. Home buyers are advised to wait before taking the plunge as prices are likely to get more competitive.

 

So we have heard from the experts. The magical number is still 20.

 

After reading the ST article today, here are some thoughts from us “non experts” in line with the round-table discussion for anyone that wants our 2-cents:   
 

1)      Although the Singaporeeconomy remains somewhat positive, subtle signs of a slow-down are beginning to show – GDP is shrinking, economic growth rate forecasts are being cut and new job creation rate has hit new lows.  
 

2)      There have been increasing “sound bites” from banks about NPL (non-performing loans) on the home mortgage front. Despite the number being still low and “manageable” by the banks’ standards, this is certainly a cause for at least some concerns.  
 

3)      In addition, interest rates are moving up slowly but surely. This will put further pressure on existing home owners with significant amount of mortgages. 
 

4)      The current geopolitical situation around the world are not giving us much comfort either. Any of the “hotspots” may explode overnight and causes dire effects to global financial markets. While Singapore may be more resilient to deal with a financial crisis as compared to 1997 or 2007, there is probably little we can do to mitigate the damage if the rest of the financial world goes into a tail-spin. 
 

5)      If our memories served us right, things started unravelling fairly quickly during 1999 and 2007. The property markets were down in a matter of weeks and at astonishing pace. All the buyers simply disappeared! So any counter-actions to try and prop/revive the market at that point in time were more or less futile.  
 

6)      While a price drop of 20% in property prices tomorrow may benefit certain groups of people (the “cash rich” and “risk taker” as per our previous post), it may led to rather serious repercussions and even negative equity for some. Despite all the talks about high level of liquidity out there, the wife and I believe (rightly or wrongly) that this only resides in the hands of a small group of potential buyers. There are many people out there that are seeking to “upgrade” and are primarily dependent on the money that they are able to generate from selling their existing homes to do so. So a sudden and severe price drop may not necessarily benefit this group of buyers. 
 

7)      So what is the “right” time to enter the property market or “upgrade”? Our mantra has always been that one can almost never catch the highest (for sellers) or lowest (for buyers) price point. At least we have never managed to do over the past 5 or 6 properties that we have bought and sold. Our “right” time is a combination of “gut feel”, comfort level (especially if we are going to stay in it) and more importantly, affordability (are we stretching ourselves too thin in terms of the cash component and can we reasonably afford the mortgage payment over the course of the next 5 years?). And as long as you possess the “holding power” and given that the property market comes and goes in cycles, you wouldn’t go too wrong even if you enter the market now. This approach has served us rather well thus far (*fingers crossed*). 
 

8)      So where do we see the market in 6 months’ time? We have often been off the mark when comes to this question. But sticking our necks out (again), the wife and I reckon that private property prices will probably fall by some 10% by the end of the year. This is assuming that everything (government policies, global and local economic/political situation etc.) remains status quo.  

 

20’s the magic number when comes to easing of cooling measures?

According to an internet survey conducted by our Lianhe Zaobao, 70% of the 1,262 respondents said that it is still not time for our government to ease off on property cooling measures. 40% of them even go as far as saying that such considerations should only be made if property prices fall by at least another 20%. 

In addition, 18% of the respondents felt that more cooling measures should be imposed to curb rising private home prices, as current measures seemed to have insignificant effects. 

The Lianhe Zaobao survey seemed to suggest that a 20% price drop is the “physiological barrier” for most respondents when comes to easing of current cooling measures. Conversely, only 27% of those who responded felt that the existing measures should be relaxed now. 

 

The wife and I wonder if the survey conducted is really an accurate reflection of the current sentiments on the ground. To be fair, 1,200+ respondents is only a small proportion of those who read Lianhe Zaobao (even for their online version). The figure is even smaller if you consider the number of existing/potential participants in the private home market. 

But let us assume that the “20% price drop” is really what home buyers want before they deem it necessary for the government to ease off on the cooling measures. We wonder if those respondents that made this call have considered the repercussions of such a 20% drop carefully enough. One might ask at this juncture: if private home prices will to drop by 20%, surely this is a good thing especially for those who are waiting to enter the market. So what possible repercussions are there? 

The wife and I believe that those who are waiting to enter the private home market largely fall under 3 broad groups: 

The “Cash Rich”

They can jolly well enter the market yesterday already if they choose to, but are remaining on the sideline and waiting for the market to hit their “ideal” price before entering. You be surprised how many of our HDB dwellers actually belong to this group. 

The “Risk Taker”

Those who have sold their property earlier or are selling their existing property now (while the market is still lukewarm), and betting that prices will fall drastically in the near future so that they can re-enter the market again. Meantime, they will go on rental or move back to live with their parents. 

The “Upgraders” 

Those who want to move from HDB to private or a small private to a bigger private apartment, but need to sell their existing homes before they have enough cash to make the switch.

For the “Cash Rich” and “Risk Taker”, they will probably want cooling measures to stay till the property market crashes, if possible. The bigger the price drop, the better it is for them as it increases the potential upside in value of the property that they eventually buy. 

But for the “Upgraders”, a significant price drop in private home prices may not necessarily be a blessing. History do indicate that when prices of new private home fall significantly, it will bound to have a “knock on” effect on private resale and eventually HDB resale prices. Although the degree of price drop in the three housing sectors may not be proportional, the price gap that the “Upgrader” group needs to bridge may still remain too wide for them to upgrade. And to make things worse, they now find themselves in a double whammy whereby their existing properties have fallen in value and also become more difficult to sell in a bear market.

So depending on which group of potential market entrant you belong to, a 20% drop in private home prices may not spell tragedy for developers alone…

 

 

 

"Time to roll back on property cooling measures?" revisited

The Total Debt Servicing Ratio (TDSR) loans framework, which aims to deter borrowers from accumulating too much debt, hit its one-year mark last Sunday. The measure, together with the Additional Buyer’s Stamp Duty (ABSD), has hammered demand in the market. New home sales in the first five months of 2014 has plunged 52% to 3,894 units from the same period a year ago, according to fresh estimates from URA.

 

So is it an opportune time to review and make adjustments to the cooling measures that are currently in place?

 

No – says our Ministry of National Development, as it is too early, given that prices have remained relatively stable despite decreased home sales. MND noted that private home prices had surged 60% during the most recent market upswing that began in mid-2009. Any premature removal of cooling measures could result in a sharp increase in demand and housing prices.  And quoting from the research head of a local property agency, “mass market units were about $700 – $800psf four years ago. The more attractively priced units nowadays are already nearly $1,00psf. Upgraders from Housing Board flats in particular will still prefer a steeper price correction”.

 

Yes – says property developer Kwek Leng Beng, who fears that Singapore could lose its edge as an investment destination. Foreigners were choosing to plough their investment dollars into countries like Britain, Australia and the US over Singapore, while Singaporeans have been investing abroad. This is despite the higher risk profiles associated with these foreign properties. Mr Kwek had urged the Government during the earlier part of this year to consider lifting the hefty stamp duties imposed on foreigners and locals as the measures had cooled the market.

 

Yes – says PropNex chief executive Mohamed Ismail, as it is unlikely that more speculative buying will be encouraged with the removal of ABSD. This is because with the TDSR, buyers already cannot overstretch themselves financially. 

 

When we did our June 23 piece on the first anniversary of TDSR, the wife and I raised the question of whether there is now a case for our Government to review the ABSD and SSD, given the seemingly effectiveness of TDSR.  

 

Some has argued about the actual intention of TDSR. Whether the objective and implementation of TDSR is really a measure to cool the property market, or more of a move to discourage Singaporeans from overburdening themselves with more debt than they can actually afford, is (to us, at least) immaterial. The fact remains: TDSR has had the single largest impact in moderating property prices as compared to the previous seven rounds of cooling measures.

 

 

But as Mr Ong Kian Teck (* we were informed that the gentleman’s name is Ong Teck Hui. We stand corrected, and thank Gillian for pointing the error out to us) at Jones Lang LaSalle had pointed out, similar moves to cool the property market in 1996 did cause prices to ease gradually at first, but the market crashed when the Asian financial crisis hit in 1997. So the question becomes: are we at the point of “overkill” in terms of cooling measures being stacked on the market that we are becoming vulnerable to a major adverse event? The concern is especially valid when 50,000 or so new apartments are expected hit the market over the next 2 years.

 

We will leave this debate to the experts (which we are not) but the wife and I would like to offer the following food for thoughts: Are ABSD and SSD really the most appropriate measures to “compliment” TDSR in reining property prices going forward? We said “compliment” because prior to TDSR, both ABSD and SSD were not doing that good a job in curbing price increases. Yes, demand had fallen somewhat but prices continued to inch upwards until TDSR was implemented.

 

ABSD and SSD was based on the notion that “if you hit the buyers where it hurts most, aka their pockets, they will think twice about buying”. But given an environment where interest rate is low, market is flushed with liquidity and there are few in terms of investment alternatives with risks that the average investor can understand/stomach, people will continue to buy into the property market despite the lower returns and longer holding periods. There is also the pertinent question (we are probably opening a can of worms here) of whether ABSD/SSD actually did more good to increase the Government’s coffers than it did to cool the market.

 

The wife and I concur that TDSR is probably the way forward to curb escalating property prices (although the 60% ratio should not be set in stone). But instead of retaining ABSD/SSD and fiddling with these, are there any other measures that can be explored as a compliment to TDSR?

 

In this respect, the wife and I would like to offer two “tongue-in-cheek” recommendations as a compliment to TDSR:  

1.         Foreigners can only purchase private homes in the resale market that are above a certain size (e.g. 1,300sqft – arbitrary for the sake of this discussion), while those units that falls below can only be resold to locals/PRs. This will certainly provide a test on the resiliency of demand for small units (especially shoeboxes). It may even alter the developers’ dynamics and their current strategy of building primarily small units in an attempt to prop up psf prices.

2.         For new mass market projects (say, $1,200psf or below – again arbitrary just for this discussion), cap the number of units within each development that foreigners/PRs can purchase (say, 20% – arbitrary). This is not only in-line with the “Singaporeans first” call by a large majority of our locals, it will also appease those who complained that foreigners are jacking up prices. It may even help promote better integration of foreigners/PRs with our locals, given the smaller foreigners/PRs-to-locals ratio within each development.

Some may view the above as discriminatory but so is the 15% additional duty currently imposed on foreign buyers. And as someone once told us: “No one said life was fair, now get on with it!”.

(* The wife and I have been getting some flak from Netizens who branded us as “pro foreigners” and “developers’ lackeys” for saying that the 15% additional duty imposed on foreigners is discriminatory. But if one will to take that “offensive” statement in context with our “tongue-in-cheek” recommendations, he/she will probably be more forgiving to what we were REALLY trying to say: We are NOT discriminating against FOREIGNERS by asking to limit the unit size that foreigners can buy in the resale market or capping the number of units that foreigners/PRs can buy in new development, despite some may think so. These measures, in our opinion, are similar in spirit to the 15% duty imposed on foreign buyers. 

We do apologize if our poor command of English have caused grief to anyone. *)
 

Ok, enough of our pipe dream. So when will we finally see an easing of the current property cooling measures? According to an analyst on last night’s “News 5 Tonight”, this will be “probably sometime nearer to the end of 2015”.  The wife and I are waiting with bated breath…

Info sources: ST, BT

The wife and I also want to state for the record that we are NOT clamouring for the roll-back on property cooling measures. What we did (instead) was to ask the question of whether ABSD and SSD are really the most appropriate measures to “compliment” TDSR in reining property prices going forward.

But as we have always acknowledged, we cannot please everybody. And by revisiting this post, our intention is simply to clarify rather than defend.

Have a good evening, everyone!

 

TDSR one year on…

The Total Debt Servicing Ratio (TDSR) was introduced in June 2013 to ensure financial prudence among borrowers and strengthen credit underwriting practices among banks. The ratio determines how much an individual can borrow from the banks.

Under it, total monthly debt payments including home and car loans cannot exceed 60% of the property buyers’ income. These debt payments are wide-ranging and can include home and car loans, study loan, and even credit card debts.

In the private residential market, the impact of the TDSR on sales volume quickly became apparent. There were 482 new units bought in July 2013, a drop of 73.3% compared to 1,806 unit in June 2013.
In total, 9,115 new homes were bought since the TDSR was implemented – that’s half the amount bought in a year-on-year comparison from Jul 2012 to May 2013.

Analysts say the suburban homes were the hardest hit. Numbers compiled by Knight Frank Singapore showed that 63% fewer new homes in the suburbs were bought in the second half of 2013, compared to the first half of the year.

“The TDSR basically impacts on mortgage loan eligibility and affordability of private homes and the mass market segment typically caters to upgraders and middle-income home buyers,” explained Knight Frank’s Director of Consultancy and Research, Ms. Alice Tan.

She added that these buyers might have ended up forgoing their purchases when their loan requests were rejected.

“I think the strong performance of the Outside Central Region was one of the reasons why the TDSR was introduced. The Core Central Region was already affected by Additional Buyers’ Stamp Duty, where we saw a lot of foreigners opting out, because they have to pay 10 to 15% in terms of stamp duties,” said Mr. Desmond Sim, Head of CBRE Research in Singapore.

As for prices, the effect of TDSR was seen later that year. The Urban Redevelopment Authority’s residential property price index slipped 0.9% in the fourth quarter of 2013, the first decline in almost two years.

Prices dipped again in the next quarter – this time by 1.3%, making it the largest drop since the second quarter of 2009, when prices fell by 4.7%.

In boosting sales, some developers have turned to cutting prices. One of the latest to join the fray is the Panorama condominium in Ang Mo Kio, which re-launched in May at a median price of about $1,241psf.

That is about 8% lower than the median price when it was first launched in January this year. But property watchers say the discounts are typically for bigger or “less prime” units, and developers are unlikely to lower prices across their projects.

“Developers also have limited room to adjust their prices due to the high land prices they have committed to, earlier on,” said Ms. Tan. This is especially so for those who bought their land two to three years back.

Developers may also be creating smaller units, to balance between offering palatable prices for buyers, and maintaining their profit margins. According to figures from CBRE, the median size of units in the suburbs declined from 753sqft in the third quarter of 2013, to 732sqft in the first quarter of this year.

The impact of the TDSR was also felt in the private residential resale market. CBRE’s numbers showed that sales volume in the secondary market dropped by 50% in the first half of this year, compared to the same period last year.

“Fortunately enough, mortgage rates still remain relatively low, so home owners, or investors, can still put their units into the leasing pool,” said Mr. Sim. “But at the same time, low mortgage rates have not pressured them into putting the units back onto the market for sale.”

But it may be increasingly difficult to find tenants, as the Government tightens its foreign labor controls and more new homes enter the market in the coming months.

The Urban Redevelopment Authority estimates that a total of 18,350 units will be completed this year, while another 21,738 units, excluding executive condominiums, are expected to be completed in 2015.

Source: CNA

 

Given the seemingly effectiveness of TDSR, is there a case now for our Government to review the ABSD and SSD?