The spider-like nature of the property market

Some developers are calling for property curbs to be eased. There is no compelling reason to do so now, but the Government does have to monitor sentiments closely.

By Dennis Chan, The Straits Times, 20 Feb 2014

AT A recent lunch, the conversation turned to crabs.

No, the popular dining crustacean wasn't on the menu. But that didn't stop my host, who is a developer, from comparing the state of the residential property market to a trussed- up crab that has had all its eight legs bound up.

"Seven rounds of cooling measure and one TDSR. The property market is well and truly tied up. No matter where we turn, we can't move," he lamented.

The TDSR, or total debt servicing ratio, is not regarded by the Government as a property market cooling measure. But it is nevertheless widely seen as an effective curb. The TDSR stipulates that banks must take into account a borrower's total debt obligations, including other mortgages and car loans, before a new home loan can be granted.

The total obligation was set at a maximum of 60 per cent of a buyer's gross monthly income.

Industry people say the combined weight of the TDSR framework and cooling measures that include lower loan-to-value limits, shorter loan duration, additional buyer's stamp duty (ABSD) and seller's stamp duty (SSD) has finally stopped the residential market dead in its tracks.

Transaction volumes down

THE question is whether this weight acts as an anchor of stability or a dead weight which drags the property market under.

The measures have already led to sharply curtailed transaction volumes and a softening in home prices.

New home sales across the board, including those in the suburbs which have been the bulwark to the crimped property market, are down significantly since the TDSR framework was introduced.

As TDSR was implemented almost precisely in the middle of last year, its effect can be easily seen.

Developers shifted 9,950 private homes in the first half of 2013. In the following six months they sold about half the number, or 5,065 units.

The mass market segment bore the brunt of the decline.

Industry leaders' reaction

WITH the entire residential market from the low to the high end affected, some respected captains in the banking and property industry have taken to public musing over the state of the market.

At a lunch organised by the Real Estate Developers' Association of Singapore (Redas) two weeks ago, City Developments executive chairman Kwek Leng Beng suggested that the time may be ripe for the Government to consider easing or rescinding some of the cooling measures - designed to achieve a soft landing in the private and public housing markets - in the light of concern over the global economy.

Last week, DBS Bank chief executive Piyush Gupta predicted that home prices this year would fall by 10 to 15 per cent.

However, shrinking volumes and prices alone will not prompt the Government to roll back the cooling measures.

In fact, a gradual deflation in prices may be a desired outcome.

After all, much of the unhappiness among Singaporeans over housing in the last few years was due to the rapid price appreciation in real estate.

Prices almost unchanged

SO FAR, the fall in private home prices has been nascent and shallow, with Urban Redevelopment Authority data showing private home prices dipping 0.9 per cent in the fourth quarter of last year.

This was the first time that overall prices had fallen since the first quarter of 2012.

"There is some merit in Kwek's call but I personally don't see the authorities stepping in if they don't see a fall of 10 per cent in prices," said the director of a listed developer.

She noted that the key drivers that fuelled the property buying binge - strong liquidity, low interest rates, high or full employment, inflationary pressure and rising income among the more affluent - have not abated.

So while some developers are hurting, the evidence does not support an imminent lifting of cooling measures.

Monitoring the market

BUT the Government needs to keep a close watch to avoid being wrong-footed should there be a drastic change in market conditions. It may also want to take stock of the various measures to see if there is unnecessary duplication.

Mr Donald Han, managing director of property consultancy Chesterton Singapore, believes that the ABSD and SSD have achieved their objectives of keeping over-exuberant property buying among investors and property speculators at bay.

For example, the punitive stamp duty rates of up to 16 per cent faced by home owners who resell their property within four years have driven speculators out of the market.

He noted that the TDSR framework has been a most effective measure. It has curbed the capacity of individuals to speculate or invest in properties, thus "replicating some of the desired effects of ABSD and SSD".

He supports tweaking the ABSD and possibly replacing the SSD with a more equitable scheme like a capital gains tax. "Else it's like a double or triple whammy - using a sledgehammer to drive the nail in instead of a small hammer."

Mr Han reckons the Government may take two to three quarters to monitor the situation before easing some restrictions.

HSBC senior property analyst Pratik Ray, however, does not expect any meaningful policy reversal until late next year when short- term interest rates are expected to start to rise to their historical norms.

Massive supply looming

SOME analysts caution the authorities against staying their hand too long, as there is also the matter of a looming massive supply of public and private homes.

From 2014 to 2016, more than 97,000 new Housing Board flats will be completed. The private home segment, including executive condominiums, will contribute another 77,000 units.

"It is not going to be easy calibrating the property market for a soft landing because the real estate market is imperfect on both the supply and demand side," said Savills research head Alan Cheong.

"The best one can do is to ensure that the macro variables like interest rates and policies are not either overly restrictive or loose. Within that framework, the Government should accept some degree of volatility."

A 10 per cent drop in prices over the next 12 months is generally accepted as not too excessive, given the run-up over the past five years.

Political dimension

SOME pundits have offered a political dimension to the timing in the easing of curbs.

It premises on the Government calling a snap election late this year or early next year to seek a mandate from the electorate to show its approval of the various policies that have been implemented since the 2011 General Elections.

The next general election has to be held by January 2017 and few market watchers reckon the Government will run the full term.

Community grassroots members say that property is no longer the hot-button issue that it once was. The HDB has mostly met the demand of first-time buyers by ramping up the supply of Build- To-Order flats that are sold to them at highly subsidised prices to address an affordability issue.

For other buyers, a loosening- up may be overdue, particularly private home buyers who have had to put up with various restrictions while the Government addressed the public housing shortage.

Exempting Singaporeans from paying ABS on their second residential property, which stands at 7 per cent, would be a popular move, according to this narrative.

And by the year end, prices would likely have eased sufficiently for policymakers to reconsider their position. In short, the period between the last quarter of this year and first quarter of next year may be the sweet spot where the conditions for easing curbs are most benign.

But managing the property market is not an exact science.

"Property is a sentiment-driven game. When nobody is buying, nobody wants to buy," said a senior director of a major property group at another lunch.

When confidence is lost, a trickle of selling can easily lead to a deluge that may be hard to stem even if the levers were to be reversed.

"I think the year end will be a good time to shop for houses," he said, with a knowing nod.

Crab or spider?

THAT brought me back to the crab remarks made by his rival a few days earlier.

On second thoughts, I thought the metaphor was off the mark.

Crabs move best sideways. If home prices had been moving sideways, there would be no need for cooling measures.

A better analogy of an eight-legged creature may be the spider. The arachnid spins yarn to make a web. If you are not careful, you will be caught in its trap.

That sounds like the property market all right.