Have property cooling measures lost their punch?

OVER the past 25 years, Singapore has had at least 10 sets of property cooling measures. These interventions were rolled out not only to curb speculation and rein in runaway home prices, but also to foster financial prudence among buyers and discourage over- investment in the private housing market here, especially by foreigners during periods of liquidity surges to avert a bubble. But are property cooling measures losing their efficacy, resulting in the authorities having to come up with successive rounds of measures?

Take, for example, the introduction in late-June 2013 of the Total Debt Servicing Ratio (TDSR) framework, which led to Singapore's private home prices easing a total of 11.6 per cent over a period of 15 quarters. In contrast, the most recent cooling measures in July 2018 caused only a blip - with two quarters of decline of a combined 0.7 per cent (in Q4 2018 and Q1 2019). Following that, the index rose a total of 3.4 per cent in the following three quarters up to Q4 2019.

And this was despite the July 2018 measuresraising the additional buyer's stamp duty (ABSD) rate to 12 per cent for Singaporeans buying a second residential property, which had been seen by some agents as an "almost insurmountable hurdle" for investors, as Savills Singapore executive director Alan Cheong puts it.

Why do cooling measures lose their potency?

"Buyers tend to adapt to each measure. So the more measures there are, the more the market learns and then expects measures to be part of the property landscape," says Mr Cheong.

In similar vein, JLL Singapore's senior director of research and consultancy Ong Teck Hui says: "Measures lose their efficacy partly because the market adjusts to them psychologically and accepts them as the new norm over time.

"A major factor causing cooling measures to lose their effect is the continued income and wealth growth of buyers."

Mr Ong highlights that from the high of Q3 2013 to Q2 2017, Urban Redevelopment Authority's (URA) private home price index softened 11.6 per cent. But the average income of employed resident households grew 14.9 per cent between 2013 and 2017. "This is a positive double whammy resulting in private homes becoming much more affordable in 2017 than in 2013. By 2017, pent-up demand had built up, leading to a recovery in the market. "This creates a challenge for policy makers as the measures which are intended to moderate the market at one point in time, will unwittingly lead to the market's resurgence subsequently - prompting further tightening of measures," he says.

Han Huan Mei, research director at List Sotheby's International Realty (List SIR), says that prospects of wealth preservation and price appreciation are important motivations for people continuing to invest in property even in the face of cooling measures.

Hedge against inflation

There is an enduring appeal about real estate that outweighs interventions aimed at deterring property investment. Edmund Tie & Co chief executive Ong Choon Fah notes that real estate is widely favoured by locals and foreigners, being a hedge against inflation and perceived to be a "safer" asset and less volatile - compared with stocks and financial instruments. Moreover, Singapore's standing as a gateway city and safe investment haven, and its political stability are all strong pull factors for foreigners to buy property here.

"Buyers have come to terms with the cooling measures and some of those who adopt a 'wait-and-see' approach may eventually enter the market as they are tired of waiting for the time when the cooling measures will be removed, which remains uncertain.

"If and when the measures are removed, this will lead to a wall of demand which will lead to price increase. So some, especially owner occupiers, have decided to buy well-located and conceptualised properties notwithstanding the measures, so they can have the opportunity to select their property - which is often challenging in a heated market," says Ms Ong.

Just how long does it take before cooling measures lose their punch?

Says Ms Han: "It depends on the larger scheme of things such as economic fundamentals, major events and the geopolitical situation on the global front. There had been times when the forceful impact of such events corrected the property market without any help from the cooling measures, for example, the dotcom bust and the Global Financial Crisis (GFC)."

Observers note that back in the 1990s, a period marked by a speculative buying frenzy reflected in a surge in subsale transactions in 1995 and 1996 - or "flipping" uncompleted properties - URA's price index for private homes shot up 184.4 per cent over the five-year period to Q2 1996. In May that year, the government unleashed a package of anti-speculation measures (see table on facing page) that caused the URA index to shed 8.9 per cent over four quarters.

It was the Asian Financial Crisis (AFC) that dragged prices down by a further 39.5 per cent over six quarters to Q4 1998.

Grim situation

The situation became so grim that the authorities reversed most of the 1996 cooling measures. Prices bottomed in Q4 1998 before staging a recovery during the dotcom boom. The party came to an end with the Nasdaq peaking in March 2000 (URA's index peaked the following quarter). With the dotcom bust in 2001, Singapore's economy contracted for the full year.

Prices languished for the next few years until 2005. In that year, the government announced that Singapore would have two integrated resorts with casinos. This was part of a confluence of factors that put Singapore back on the radars of overseas property investors. The Republic was on an expansion path again and immigration was relaxed. The property boom continued until the GFC struck 2008, which sent prices slumping over four quarters to Q2 2009.

The massive fiscal and monetary stimulus by the major economies post-crisis boosted liquidity, and foreign buying of Singapore property surged again, recalls Ms Han.

To slow investment demand and moderate rising prices, the government rolled out seven rounds of cooling measures from September 2009 to January 2013.

"The authorities intensified the measures one after another when they observed that the market remained heated in terms of rising sales volume and prices," says Ms Han.

In late June-2013, the TDSR was rolled out, along with some refinements to prevent circumvention of earlier cooling measures relating to tighter loan-to-value limits on second and subsequent housing loans. This produced the desired effect. But prices started to pick up again in Q3 2017. In just five quarters, URA's price index rose 9.6 per cent, nearly wiping out the 11.6 per cent decline in 15 quarters from the peak in Q3 2013. Thus came the July 2018 intervention.

Will the Covid-19 outbreak, which has led to the ongoing circuit-breaker lockdown during which developers have had to shut their showflats, "finish the job" started by the July 2018 cooling measures? After all, Singapore's economy is expected to contract this year.

Robust financial infrastructure

Says Ms Ong of ET & Co: "We have learnt many lessons since the AFC and GFC. Various measures have been put in place over the years to ensure a more robust financial infrastructure. This time around, central banks and governments are all stepping up to avoid an economic/financial collapse. As such, impact on the property market will likely be more measured."

List SIR's executive director Lewis Cha says: "Even if the circuit breaker is lifted after June 1, home buyers' sentiments towards real estate will remain cautious as the focus will be on the economy and job security. The flip side is that there could be some pent-up demand after two to three months of low private home sales volume."

This assumes "normal" activities resume with developers being allowed to reopen showflats with social distancing.

JLL's Mr Ong thinks that while Covid-19 and the expected recession will weaken sentiment, it's a good thing that price increases in the recent past have been muted due to the cooling measures. Over the nine years from Q4 2010 to Q4 2019, URA's private home price index rose 10.3 per cent.

"Without an asset bubble, we expect a more moderate price correction rather than a crash or a sharp correction as in the AFC and GFC."

However, this assumes that the ongoing crisis could be over by end-2020, followed by an economic recovery in 2021. "On the other hand, a prolonged crisis and a very severe recession would cause a loss of market confidence resulting in a more pronounced impact on demand and prices."

Will cooling measures disappear from the Singapore scene? Market watchers generally think that short of a catastrophe, this is unlikely.

Says Ms Ong of ET & Co: "The real estate market is often driven by greed and fear as the stakes are high, given the large capital outlay. The aspiration to own a private residential property and the fear that this aspiration will be out of reach are also high. It becomes a self-fulfilling prophecy."

Even against the more cautious backdrop now, there is a lot of liquidity out there. "People have a lot of dry powder and they're on the prowl for attractive bargains and fire sales, supported by the low interest rate environment," she adds.

Mr Ong of JLL says: "Cooling measures are likely to become permanent or semi-permanent features of the residential market, given the backdrop of rising income and wealth, perceived land scarcity and the preference for real estate to be included in the portfolios of many investors."

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