Is the market overreacting to the new property cooling measures?

By EdgeProp Singapore / EdgeProp | July 12, 2018 2:30 PM SGT
The new property cooling measures announced on July 5 came as a surprise, arriving just as property developers have replenished their land banks over the past 18 months in anticipation of blockbuster sales this year.
The cooling measures, which include higher Additional Buyer’s Stamp Duty (ABSD) rates and tighter loan limits, affect housing affordability from investors to first-time homebuyers – primarily because the loan-to-value (LTV) limit has been slashed to 75% from 80%.
The surprise move sparked an immediate frenzy among developers and buyers, as the former rushed to bring forward their launches, while buyers under panic attack from fear-of-missing-out flocked to various showflats for last-minute shopping before the new measures took effect the next day.
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Singapore developer and bank stocks also took a hit. They led declines on the benchmark stock index on July 6 (Friday) after the government unexpectedly rolled out new property curbs to cool a market the central bank described as euphoric. Stocks of local real estate agencies also fell following the announcement.
With the new measures, near term sales volume is expected to fall as buying demand takes a hit. The en bloc market is also expected to dampen as developers become wary of end-demand, which will have impact on their offer prices.
But while the new policies will inevitably curb the exuberance of the housing market, the long-term impact is likely to be minimal. Here’s why:
1) Majority of homebuyers are not subject to ABSD
With the latest round of cooling measures, Singaporeans buying a second residential property must pay an additional 12% on the property value in ABSD, up from the previous 7%. Permanent Residents (PRs) buying a second home will now pay 15% compared to the previous 10%. Meanwhile, foreign buyers without permanent residency status must fork out 20%, instead of 15%.
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Based on the latest statistics from IRAS, over 60% of homebuyers between the years 2013 and 2016 were not subjected to ABSD, which suggests that first-time buyers who are Singaporeans or PRs have been the primary drivers of private home sales. These first-timers will not be affected by the new ABSD adjustments.
2) Percentage of foreign buyers remain low
Foreign property investors who are Non-Permanent Residents (NPR) will now have to cope with the double whammy of a 5% increase in ABSD (from 15% to 20%), and a LTV limit that is reduced by 5% (from 80% to 75%). This results in a heftier cash outlay of 45% from the previous 35% of the purchase price.
Still, while there are signs that foreign interest has returned to the private housing market, the overall percentage of home sales involving foreigners who are Non-Permanent Residents (NPR) has actually remained relatively low.
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Between 1Q2017 and 2Q2018, foreign buyers made up less than 8% of new home sales, and only about 6% of sales in the resale segment. Given these figures, the impact from these buyers is expected to be minimal.
Further, many foreign property investors are known to be high-net-worth individuals who favour locations in the prime districts or close to the Central Business District (CBD), and an increase in ABSD is unlikely to cause these deep-pocketed investors to budge.
3) Home prices expected to hold steady despite cooling measures
According to Colliers, new private home sales (excluding executive condominiums) for the whole of 2018 are expected to hover around 8,500 to 9,000 units – about 15 to 20% lower than the 10,566 units shifted in 2017. From January to May 2018, developers have sold 3,434 new units based on caveats lodged.
Developers are also expected to delay launches as they re-strategise after the new measures were implemented. With the increased ABSD on investors and foreign buyers, the demand base will likely shift towards first-time buyers. As such, offerings may need to be recalibrated to match their needs.
But while inventory may take a longer time to sell, developers are unlikely to reduce prices in the near term given the land costs they have already committed.
Further, the flurry of last minute deals done – estimated at 1,000 units from three project launches – The Stirling Residences, Park Colonial and Riverfront Residences on the evening of July 5 – suggests that there is both liquidity and pent-up demand for units in the market.
4) There is no oversupply in the market
Collective sales deals that have been concluded since 2016 could generate an estimated 25,000 new homes from 2021 onwards, says Tricia Song, Colliers International head of research for Singapore.
Coupled with the moderate Government land sales sites over the past two years, the upcoming supply of new units in the medium term does not look excessive as long as economic fundamentals remain sound.
Based on Colliers’ research, home supply completions will taper off sharply from 2018 - 2021 to an annual average of 8,104 units from the 2014 – 2017 annual average of 18,731 units, and the 10-year average of 12,948 units.
“While this number could rise sharply beyond 2022 due to the recent collective sale fever, it does not appear excessive if spread over a longer term. We expect annual average completions of 10,318 units over 2018 – 2022,” says Colliers’ Song.
Source: URA
Source: URA
She concludes that given that developers have exercised more restraint in bidding for collective sale sites in recent months, the launch pipeline should remain fairly sustainable over the next three to four years, and developers will not necessarily need to embark on deep price cuts to sell units especially if the new launches are paced out evenly.
5) Economic outlook remains positive
The housing market is largely influenced by demand-side factors such as the state of the economy, interest rates and real income growth. And with healthy economic prospects for the year ahead, property prices are expected to stay resilient in spite of the latest policy measures.
For a start, Singapore’s economy is tipped to grow at between 2.5% and 3.5% in 2018, in what market observers said was a rare revision so early in the year from an earlier estimate of 1.5% to 3.5%. The improved outlook came as the Ministry of Trade and Industry (MTI) announced on May 25 that Singapore’s gross domestic product (GDP) rose 4.4% in 1Q2018, even better than the 4.3% advance estimate announced earlier. Growth was supported by both manufacturing and services.
Further, the local employment outlook for 3Q2018 was also projected to be the brightest in nearly three years. Of the 670 Singapore employers polled by the US-based recruitment firm, ManpowerGroup, 17% said they plan to hire, while 5% intended to cut staff. This yielded a net employment outlook of 12%, after adjusting for seasonal variations - the highest since 4Q2015.
According to the latest quarterly ManpowerGroup Employment Outlook Survey, the projected increase in recruitment activities in 3Q2018 is tipped to cut across all sectors. However, the finance, insurance and real estate sectors are likely to see the most aggressive hiring, with a +26% outlook. Steady recruitment activity is also expected for the transportation and utilities sectors (+13%), manufacturing (+12%), public administration and education (+12%) and services (+10%) sectors.
Given these strong economic fundamentals, property prices are expected to hold steady in the long term. In the meantime, some buyers may adopt a wait-and-see approach, while investors may divert their attention to industrial properties, commercial buildings and shop houses.
Some investors may also choose to park their money overseas. However, those who intend to do so may face some challenges, especially in countries such as Hong Kong and Australia, as these countries have increased their taxes on foreign investors.