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HOCK LOCK SIEW

Property cooling measures: Why cautionary stance still needed

Despite signs of the market bottoming out, any policy easing now could send wrong signal that all is well

By Lynette Khoo

[email protected]

@LynetteKhooBT

Jul 26, 2016


WITH the latest residential data showing signs of a bottoming out in prices in the second quarter, it comes as no surprise that the Monetary Authority of Singapore (MAS) has reiterated that it is too early to unwind property cooling measures.

The MAS move is understandable if one looks at it this way: it is better to err on the side of caution and let the soft landing process takes its course than to risk sending a wrong market signal and reverse the needed price correction that has been painstakingly achieved through many rounds of cooling measures.

The signs of firming in the property market could be a combination of various factors including pent-up demand and speculation of easing of cooling measures. But without any clear signs of an economic upturn - not just at home but globally as well - a continued cautionary stance is still necessary.

Data from the Urban Redevelopment Authority (URA) last Friday showed a 0.4 per cent fall in private residential prices in the second quarter, the smallest quarterly decline in the past 11 straight quarters. More notably, sales transactions rose 10.9 per cent from a year ago to 4,550 units in the second quarter, with resale transactions jumping by 17.1 per cent to 2,140 units.

Such recovery in transactions may set the stage for prices to stabilise. A MAS study last year found Singapore's housing cycle to be volume-driven, with changes in sales volumes of new and resale homes leading price changes around the turning points.

While a turning point in property market transactions could well be nearing, the fact remains that economic indicators have weakened and household debts have not come down enough. And that is the worrying part.

Singapore's economic growth remains sluggish, prompting the government to review its GDP growth forecast of 1-3 per cent for this year. The labour market has also seen slowing jobs growth, and rising long-term unemployment in the first quarter.

In this "lower for longer" interest rate environment, more central banks around the world are dipping their toes in negative interest rates. This not only keeps cost of borrowing low, but also prods investors into a deeper search for yields.

Ironically, Singapore residential yields are at historical lows, and their fall may accelerate in the weak leasing market. For instance, market yield for luxury residential units in the most prime locations in districts 9, 10, 11 has fallen to a low 1.7 per cent from above 2 per cent in 2013, according to estimates by property consultancy JLL.

But property market watchers point out that Singapore's residential market has traditionally not been yield driven, with investors typically banking on longer term capital appreciation.

Moreover, in a highly volatile global environment facing black-swan events such as Brexit, one can't rule out wild swings in financial markets becoming the new norm. In highly uncertain times, investors still prefer to park their money in the brick and mortar. Singapore's residential market - supported by high home ownership, political stability, and a relatively stable Singapore dollar - is no doubt a safe haven market. On that note, it would hence be prudent for the government to leave cooling measures as they are.

This will clearly be disappointing to developers. Many have been lobbying for a relaxation of cooling measures, citing rising vacancies and large unsold stock that will incur hefty penalties under the qualifying certificate rules and the additional buyer's stamp duty (ABSD). They argued that there is room for a calibrated approach, such as lifting the ABSD for Singaporeans' residential purchases, since they are already facing the total debt servicing ratio (TDSR) curb.

While vacancy rate for private residential units surged to a 16-year high at 8.9 per cent in the second quarter, this is not so alarming in view of the record quarterly completion of 8,425 private residential units during the quarter. While vacancy rate will get worse before it gets better, the tapering off in completions after this year will provide some breathing space for the market to absorb the current unsold inventory, which stood at a historical low of 23,282 units in the second quarter.

According to CBRE, some 73 per cent of developers' sales in the first half of this year were from projects that were launched more than six months ago. This signals that the unsold stock inventory is slowly being absorbed.

At the end of the day, how well developers can move their stock still boils down to location, product attributes, and most importantly pricing. Meaningful price discounts and high agent commissions are seen to be effective in moving sales.

Huge turnouts in the showflats of some new launches also seem to be suggesting that many potential buyers remain on the look-out. But these level-headed buyers are reserving their dry powder for a good deal since their borrowing capacity is capped by the TDSR.

Maybank Kim Eng estimates that Singapore households are sitting on a cash pile of S$374 billion, which has surged since property curbs were rolled out in 2009.

After 11 quarters of decline, private home prices are now 9.4 per cent below the peak of Q3 2013. On a broader context, however, prices had surged 60 per cent between 2009 and 2013 when nominal incomes had increased by only 30 per cent.

With early signs of a bottoming out gleaned from URA's Q2 data, "green shoots" of recovery in the private residential transactions could well remain in the second half.

As more people start to buy into the belief that prices are headed towards a trough, this may become a self-fulfilling prophecy as more people think they can time the market. Easing of cooling measures now will only send the wrong signal and cause that to happen sooner.