Published September 15, 2009


Excess liquidity at the heart of the problem

With interest rates at a low, investors have few options other than property


CALIBRATION seems to be the operative word in the set of measures announced by the government yesterday to ensure a 'stable and sustainable property market'.

'The measures are pretty measured, actually,' a developer said.

That may be fitting. After all, as National Development Minister Mah Bow Tan noted, while the level of speculation is not yet extreme, the package will help pre-empt excesssive price swings.

The government has taken relatively small steps to try and cool the buying frenzy now, which if left unchecked could develop into a full-blown property bubble that will take more draconian measures to prick - as we saw in the historic May 1996 anti-speculation curbs.

These included taxing as income the gains from selling properties within three years of their purchase, slapping stamp duty on those who sell their residential properties within three years of purchase, limiting permanent residents to just one Singapore dollar housing loan each and banning such loans to non-PR foreigners.

Yesterday's measures are a warning, a signal to the market of more things the government could do if the market gets out of hand. The authorities were mindful of being moderate with any measures for now. After all, if they overdo it, it may kill the recovery in private residential transactions and put a brake on a sector of the economy that is doing well amid the recession.

And that will have knock-on effects - on banks who have been enjoying brisk business dishing out housing loans this year; on the construction sector and related trades.

The supply-side measures in yesterday's package - reintroducing confirmed list land sales in first half 2010 and enhancing the supply in the reserve list in the same period - will help meet developers' ravenous appetite for land.

By sending a strong signal to the market that there is enough supply, hopefully home buyers will not panic and start forming long queues at project launches, for fear of missing the boat again.

The key demand-side measure in yesterday's package is scrapping the interest absorption scheme (IAS) and interest-only loans for the purchase of private residential properties.

Under these schemes, a property buyer will not have to make any significant payment, aside from the initial 10-20 per cent downpayment, until the project is completed.

During the early stages of the latest recovery in private home buying - around the February/March period - the interest absorption scheme was important in luring home buyers from the sidelines. Right now, it is much less important.

CB Richard Ellis says that most buyers in recent residential launches chose the normal progress payment scheme with only about 30 per cent opting for the interest absorption scheme. After all, buyers have to pay a price premium, usually 2 to 3 per cent, for IAS.

Scrapping IAS will help lessen some of the speculative demand, but it may not address the root cause of the exuberance in the property market - excessive liquidity.

'This isn't a Singapore-centric problem. We're seeing it in other major gateway cities, especially Asia, where housing transactions and prices have increased,' as DTZ executive director Ong Choon Fah notes.

The whole world is flush with funds. And with the distaste for structured financial products in the post-Lehman era, investors are turning to 'real assets' - like property and commodities - as a hedge against inflation.

'The reason there's so much exuberance (in the Singapore property market) is interest rates are low. The public does not trust banks to give them alternative investment products. That's why people are piling in property,' says Wheelock Properties (Singapore) CEO David Lawrence.

Excess liquidity is also the reason 'banks are giving speculators so much money to invest in property when six months ago they didn't lend for property'.

The challenge for governments and financial institutions is to offer alternative investment options or platforms to regain the trust of investors.