Frozen high-end market should be thawed

By
/ The Edge Property
|
July 6, 2015 9:00 AM SGT
Affordability ratio has returned to 2005 and 2009 levels
Cooling measures were introduced to maintain a stable and sustainable property market, at the same time to ensure housing remains affordable for Singaporeans. Fuelled in part by speculative activities and rock-bottom interest rates, prices of non-landed private homes escalated 56% between 2Q2009’s trough and 3Q2013’s peak, rallying ahead of household income which rose by just 28% from 2009 to 2013.
The Total Debt Servicing Ratio (TDSR), which was introduced in June 2013 reversed the uptrend in prices. We seek to analyse whether prices have fallen sufficiently to a stable, sustainable and affordable level to warrant a moderation in cooling measures, especially with looming supply and higher interest rates posing further downside risk to prices.
A key measure of housing affordability and sustainability is the mortgage-to-income ratio (MTI), which is the proportion of income needed to service housing mortgage. Prices of private non-landed homes have corrected by about 5% from 3Q2013 to 1Q2015, while the average monthly household income has risen 5.3% from $9,481 per month in 2013 to $9,982 in 2014. As a result, the MTI has been on a downtrend and has reached more affordable levels where cooling measures may no longer be needed.
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Towers Watson’s Data Services Practice projects that wages will grow by 4.5% in 2015. This means the average monthly household income is expected to grow to $10,431 in 2015.
To illustrate, the median prices for private non-landed homes in the high-end segment has fallen by 7% from its peak of $1,545 psf in 1Q2013 to $1,438 psf in 1Q2015. Using the example of a 1,000 sq ft home, the price would amount to $1,545,000 in 1Q2013, which translates to monthly mortgage payments of $5,534 based on 80% loan-to-value ratio (LTV) and interest rate of 3.5% per annum over 30 years. This mortgage payment would have taken up 58% of the average household of $9,481 in 2013 (See Chart 1).
Meanwhile, a buyer who bought a similar sized property in 1Q2015 would have needed to pay only $1,438,000 leading to a corresponding fall in mortgage payments to $5,150 per month and the MTI to 49% based on a higher income of $10,431 in 2015. The MTI is similar to 2005 and 2009’s post-financial crises levels, before the run up in prices due to population growth, low interest rates and spike in speculative activities. It is also significantly below the past decade’s median MTI of 58% for the high-end segment.
Average household income was used for the purpose of trend analysis across time. The MTI should not be interpreted as the actual housing debt to income ratio. Buyers’ profile for high-end homes might be those that earn above the 80th percentile. In 2013, the 80th household income percentile stood at $13,807 per month and the MTI would be around 40%. This MTI would have fallen to 34% in 1Q2015. Again, the MTI similar to the 2005 and 2009 level.
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The study defined high-end homes as those located in the Core Central Region. City fringe homes referred to projects in Rest of Central Region while mass-market homes were located in Outside Central Region. Median prices were taken from the URA timeseries for non-landed residential properties.
Chart 1: Mortgage to income ratio by market segment*

* Average household income was used for the purpose of trend analysis across time. The MTI should not be interpreted as the actual housing debt to income ratio

Source: URA, Singapore Department of Statistics, Towers Watson’s Data Services Practice, The Edge Property

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In the city fringe, prices have fallen by 7% from its peak of $1,012 psf in 2Q2013 to $937 psf in 1Q2015. Using similar example of a 1,000 sq ft home, the MTI would have fallen from 38% to 32% in the same period. This is 6 percentage points below the past decade’s median MTI of 38%. It is also equivalent to 1H2009 level and even lower than the 2005-2006 level. A quick check using the 60th and 70th income percentiles showed a similar trend.
Comparing the mortgage servicing ratios across time, high-end and city fringe prices have hit affordable levels of 2005 and 2009 levels from the perspective of first-time buyers aspiring for condo living. If this is true, more buyers would enter the market and put a brake on falling prices and there is no need to review the existing cooling measures.
The question is whether the local market is big enough to absorb the upcoming supply that will enter the market over the next three years given the stringent policies on immigration and foreign purchasers in place, aggravated by rising interest rates. In addition, a proportion of homes was bought for rental purposes. The impact of higher interest rate would therefore be more pronounced on these home owners. A cut in expat budgets, slower population growth and competition from upcoming supply would trim rental yields and in turn, prices. Against this backdrop, it might be timely to consider a review of the existing cooling measures.
Which measures likely to be relaxed
The price decline in the mass market has been more gradual compared to the other market segments, with the median price falling by just 4% from its peak of $944 psf in 3Q2013 to $905 psf in 1Q2015.
A 1,000 sq ft home would have cost $944,000 in 3Q2013, which works out to monthly mortgage payments of $3,381. This would have taken up 36% of the average monthly income of $9,481. A buyer who bought a similar property in 1Q2015 would have needed to pay only $905,000, resulting in mortgage payments of $3,242 and a corresponding fall in MTI to 31%.
With the MTI in the mass-market touching just the past decade’s median level, any changes to existing regulations could send mass-market prices back to unsustainable levels.
The TDSR has just crossed its second anniversary as at end of June. Many have questioned the relevance of the Additional Buyer’s Stamp Duty (ABSD) and Seller’s Stamp Duty (SSD) with TDSR and LTV in place, especially with huge pipeline supply and higher interest rates weighing on the market. TDSR and LTV act as a macro-prudential measure that is unlikely to be lifted. The government has stated, however, that the ABSD is a temporary measure that will be reviewed depending on market conditions.
With the MTI in the mass market touching just the past decade's median level, any changes to existing regulations could send mass-market prices back to unsustainable levels
Relaxing measures affecting foreign purchasers would not be favourable among locals. There has been calls to ease ABSD among local buyers. It is risky, however, to ease the ABSD uniformly as prices have declined by different rates across market segments. Given that mass-market is the segment most affordable to locals, with the largest pool of potential buyers, demand in this segment would be extremely sensitive and elastic to a relaxation of the ABSD. An easing of ABSD across the board could lead to a disproportionate surge in demand in the mass-market or shoebox homes that could in turn cause prices to rise once again beyond a sustainable level.
A regressive ABSD rate for Singaporean purchasers might therefore be a more ideal solution. Smaller tax rates on pricier properties could whet buyers’ appetite for high-end and city fringe homes while shifting some demand away from the mass-market segment.
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This article appeared in The Edge Property Pullout of Issue 684 (July 6) of The Edge Singapore.