Feb 21, 2014

    The eight-legged property market

    AT A recent lunch, the conversation turned to crabs.

    My host, a developer, compared 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 measures and one TDSR. The property market is well and truly tied up," 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 seen widely as an effective curb. It stipulates that a borrower's total debt obligations must not exceed 60 per cent of his gross monthly income.

    Industry people say that this, along with 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 are down. Home prices have softened.

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

    Developers moved 9,950 private homes in the first half of last year. 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.

    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.

    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.

    Private home prices dipped 0.9 per cent in the fourth quarter of last year.

    But the Government needs to keep a close watch to avoid being wrong-footed should there be a drastic change in market conditions.

    Mr Donald Han, managing director of property consultancy Chesterton Singapore, believes that the ABSD and SSD have achieved their objectives.

    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 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."

    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 this year 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.

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

    Meanwhile, 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.

    The HDB has mostly met the demand of first-time buyers by ramping up the supply of Build- To-Order flats, while private home buyers have had to put up with various restrictions.

    Exempting Singaporeans from paying ABSD 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.

    "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.

    Back, then, to the crab analogy, which may be 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 involving an eight-legged creature may be that of 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.