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Business Times - 23 Sep 2010

Too hot to handle?

WENDY TANG and PNG POH SOON examine the impact of cooling measures on HDB, mass, mid- and high-end residential properties

MUCH has been said about the government's recent cooling measures and their likely impact on the residential property market. While some think the latest measures have enough bite to cool the entire market, others expect that only the mass market and public housing (HDB flats) segments will be affected.

In the aftermath of the financial crisis, China, Hong Kong, Singapore, and Australia have seen their property markets performing strongly in tandem with the recovering economies. Prices had risen so rapidly that there were worries about a property bubble. China has tried to cool its property market as has Singapore, with three rounds of cooling measures.

The property market generally turns cautious when the government changes the demand and supply levers. The market is still digesting the new measures and market watchers are anxiously monitoring response to new project launches.

How will the new measures affect the HDB, mass, mid- and high-end residential properties? Prior to the new measures, HDB buyers typically comprised locals, PRs, upgraders, downgraders or even private property owners.

The wide range of buyers was due to the relaxation of rules by the Housing and Development Board in the late 1980s. This allowed permanent residents (PRs) to buy HDB flats and HDB owners to invest in private property, with certain conditions. Later on, private property owners were allowed to buy HDB flats from the resale market as these units were deemed not to be subsidised. Collectively, this group forms the base of HDB buyers.

Over the past 10 years, Singapore's population (residents and non-residents) grew by 26 per cent. The number of Singapore residents (citizens and PRs) rose by 15.6 per cent, and non-residents (foreigners) by a hefty 72 per cent. The number of new completed HDB flats, however, has dropped significantly since 2006 while the overall population has increased. HDB resale prices escalated in response and have risen by some 45 per cent since 2000.

The new measures are likely to affect the HDB segment most since demand will be crimped as those owning private property here and overseas will no longer be allowed to buy HDB flats unless they sell the private property within six months of getting the HDB flat.

Existing HDB owners upgrading or downgrading to another HDB flat are also affected. To qualify for 80 per cent financing, they have to show proof of sale of their existing unit within two weeks of the first sales appointment. Hence, arrangements with the buyer of their existing flat and the seller of the flat have to be well planned. Otherwise, buyers are limited to borrowing no more than 70 per cent of the purchase price of their new flat. In addition, the cash downpayment will be doubled to at least 10 per cent.

The seller's stamp duty, which used to apply to properties sold within a year, has now been extended to those sold within three years. But this should not affect the HDB segment as buyers have to occupy the new flat for at least five years before they can sell it.

On the supply side, 16,000 new flats will be offered in 2010 which is more than 3.5 times the average number of new HDB flats completed between 2006 and 2008. Going forward, the HDB is prepared to launch up to 22,000 new flats in 2011 should demand continue to be strong. The new supply will eventually ease demand pressure on existing stock.

The introduction of the new measures is in line with the government's view that HDB flats are homes to live in rather than investments. The restrictive measures which crimp demand, in addition to the looming supply, will dampen any capital appreciation of HDB flats. This will happen even when the private property market recovers in the future.

In fact, in the HDB resale market, anecdotal evidence points to early signs of price moderation, in particular the cash over valuation (COV) component, as buyers' and sellers' expectations change. However, any decline in HDB prices should not be drastic in the near term due to the limited completed stock. In the medium term, prices will remain stable with limited price appreciation.

The private mass market segment will also be significantly affected as those with HDB addresses typically form the bulk of such buyers. This group of buyers are usually price-sensitive and have been motivated by the current low interest rates.

A lower loan to value quantum raises the hurdle for HDB owners looking to make their first private property investment. Assuming a purchase price of $1 million, a total of $300,000 is payable, of which $100,000 must be in cash. The latter is double what was required in the past. Buyers without the additional funds will have to wait longer before they can enter the market.

Previously, buyers whose monthly household income ranged from $8,000 to $10,000 a month were not able to buy new HDB flats. Some opted to buy smaller private residential units in order to keep the absolute price affordable. This was a more appealing option than paying high COV for older HDB resale flats.

The new measures now allow these buyers to purchase new flats under the Design, Build, and Sell Scheme (DBSS). If the response to DBSS flats is good, more of them may be released. As such, some demand for private homes may be diverted to public housing.

Buyers now have more housing options, including executive condominiums (EC) which were introduced in 1995 for buyers whose household income was too high to qualify for a new HDB flat but who might not have found private property affordable. ECs are sold with eligibility and ownership restrictions similar to public housing, but are fully converted to private housing after 10 years. Going forward, the government will be launching three EC sites in Pasir Ris, Bukit Panjang, and Tampines that are expected to yield 1,415 units.

Developers seem more cautious of late judging from recent results of government land sales (GLS) tenders. The highest tender price of $340 per sq ft per plot ratio at Hougang Avenue 7 was 25 per cent lower than that of another site sold at Hougang Avenue 2 in May. The premium between the top and second bidder narrowed to 2.5 per cent.

In the second half of 2010, land that can potentially yield about 13,900 new private homes will be up for tender. It is the highest in the history of the GLS programme. Of the upcoming supply, about 8,100 units are confirmed for sale without the need for prior developer interest. If demand remains strong, the government is prepared to increase supply in the first half of 2011.

In light of this, prices of mass market properties may ease by 10 per cent in a year's time. This is not to say all mass market prices will follow suit as developments in better locations, near MRT stations or which offer good value should hold up.

Mid- to high-end properties are less likely to be adversely affected by the cooling measures as buyers are not as price-sensitive as those in the mass market. As such, the lower loan to value ratio for an investment property is unlikely to affect them as much as buyers of mass market and HDB properties. Sellers' stamp duties will also not affect investors so long as they do not sell within three years. In any case, the amount is not significant in relation to the overall value of the property.

Interest in prime property remains strong. However, buyers are cautious as the global economy is still fragile. Buying activity remains selective. Assuming there isn't another crisis, mid- to high-end properties are likely to remain fairly stable with prices down by 5-10 per cent over the next 12 months.

To sum up, the property market is unlikely to crash as the government monitors the market closely. In the past, measures have been taken to revive the property market if prices are depressed and vice versa. While the new policies benefit some people, they adversely affect many others. Time will tell whether this round of measures is well-calibrated or excessive. The authorities are equally anxious to monitor the impact and may well ease up should it hurt more deeply than intended.

No one benefits if the residential market is badly destabilised, particularly in a country where property is viewed as a valuable investment. Hopefully, the latest round of cooling measures will bring Singapore closer to a stable and sustainable property market.

Wendy Tang is director, residential services, Knight Frank and Png Poh Soon is senior manager, consultancy & research, Knight Frank