Will CCR see clearer skies?

"Someone told me long ago there's a calm before the storm, I know; It's been comin' for some time." - Lyrics from the song Have You Ever Seen The Rain, by 1960s American rock band Creedence Clearwater Revival

WITH effect from July 6, 2018, Singaporeans and permanent residents (PRs) buying their second or subsequent residential property have to face a 5 percentage point increase in additional buyer's stamp duty (ABSD), while loan-to-value (LTV) limits have been lowered by 5 percentage points for all housing loans granted by financial institutions.

This is the first set of major cooling measures since June 2013, when the total debt servicing ratio (TDSR) framework was introduced. Overall private home prices have risen 9.1 per cent from their trough in just four quarters and are just 3.6 per cent below the previous peak in 2013.

Given this rapid recovery, the government has warned that such sharp price increases could potentially lead to a destabilising correction if left unchecked. Post measures, the strong private new home sales for July (1,724 units) was the result of developers of several projects bringing forward their launches to the evening of July 5 before the cooling measures kicked in the following day. This was to attract buyers who wished to avoid the measures. Subsequently, several other projects reported decent take-up, indicating healthy demand.

These measures are expected to have the most impact on luxury and prime residential properties, or those located in the Core Central Region (CCR). However, this article seeks to explain why the CCR could still present opportunities for those who are keen on this segment.

Prime district homes are not out of reach

A private property in the CCR has traditionally been regarded as a luxury item beyond the reach of the masses. However, market transactions for non-landed homes have proved otherwise; one can still find value buys in the CCR, especially for the "price-sensitive" buyer. Median prices from 2013 to the first half of 2018 ranged between S$1.5 million and S$2.4 million for new homes, and between S$2.0 million and S$2.4 million for the resale market.

Notably, buyers with HDB addresses accounted for around 20 per cent of all purchasers in the CCR for the past five years - evidence that CCR homes have become a viable option for upgraders.

Lower ABSD for lower quantum purchases

The range of relatively affordable options in the CCR would mean that buyers are neither penalised too heavily by ABSD nor saddled by high total interest payments if they choose wisely. Naturally, the impact of the additional 5 per cent in ABSD will be heavier on larger purchases.

This means that for every incremental S$1 million in property value, the buyer would have to fork out an additional S$50,000 in stamp duties. If the property price is below S$2.5 million, the additional stamp duties will be capped at S$125,000.

Tighter LTV limits are not a bad thing

Although the buyer has to contend with a lower loan amount with the new LTV limits in place, this would mean that he will not be paying as much in interest payments over the lifetime of the loan. This amounts to savings of S$26,765 for an average interest rate of 2 per cent, and up to S$41,379 for an average interest rate of 3 per cent.

The savings would be even more substantial with a higher property value. The net impact of the ABSD to the buyer is also cushioned after factoring in the potential savings from interest payments. This works out to a net outlay (ABSD less interest savings) of S$98,235 or 3.9 per cent of purchase price, a notable reduction from the headline ABSD of S$125,000.

An emerging two-tier market in the CCR

CBRE Research has also observed a two-tier market emerging in the CCR segment: new projects with higher per square foot (psf) prices but smaller areas, and older projects which offer more space at lower psf prices.

As seen from the tables on the right, while median absolute prices for new sales and resales are about the same, median unit sizes for resale transactions are 49.4 per cent larger while psf prices are 25.8 per cent lower.

Increasing psf prices are inevitable on the back of higher land and construction costs; in fact, some of the recent record land prices have yet to be reflected in current prices of end units.

To keep the absolute price affordable, the trade-off in newer projects is smaller unit sizes. This means that buyers have a choice between these two tiers of CCR properties depending on whether it is the size or the age of the apartment units that matters more to them. This latest round of cooling measures was introduced predominantly to ensure the sustainability of the Singapore property market, as well as to safeguard the overall financial health of property buyers.

Developers will have to adjust their pricing expectations, marketing strategies and timing of their launches. Buyers, on the other hand, can now be more selective as they recalibrate their budgets and study their options. Nonetheless, CBRE Research expects property prices to hold up until year-end as they are propped up by higher land costs.

With sound economic fundamentals and long-term prospects, Singapore still presents a compelling proposition as a home or to invest in.

Based on the Global Living 2017 report by CBRE, where prices for non-landed prime properties were compared around the world, Singapore's prime real estate prices are not exorbitant.

Finally, given their limited supply and prime locations, private residential homes in the CCR will always remain exclusive and sought after.

Catherine He is associate director, research at CBRE; and Goh Jia Ling is manager, research, CBRE.

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