Finding the right temperature for Singapore's private residential market

ON July 5, 2018, the Singapore government increased additional buyer stamp duties (ABSD) and lowered loan-to-value (LTV) limits for residential properties, to temper home price growth. This is the first material policy move in over five years.

Many market commentators argue that intervention was premature, because:

More important to reset expectations to predict future policy moves

First, let's consider the government's perspective to better predict future policy changes. Their first concern was a sharp 34 per cent year-on-year increase in new home loans, exceeding the increase in primary home sales.

In particular, new home loans for investment rose 45 per cent year-on-year to a level similar to Q2 2013, when a total debt servicing ratio (TDSR) cap for mortgages was introduced. Mortgage growth is important as an indicator of the formation of a bubble, where owners increase leverage to invest further in the asset class.

Secondly, home prices rose faster than income growth in the first half of 2018, for the first time in eight years. The government has repeatedly used June 2009 as a reference point for affordability: from June 2009 to June 2018, prices rose 55 per cent cumulatively while average incomes grew 51 per cent. If prices outpace incomes from here, we can expect some intervention.

ABSD helps owner occupiers but tighter debt controls may be more sustainable

Based on ABSD revenues collected, we estimate that private residential prices could have been at least 4 to 6 per cent higher in 2012 to 2017 if they had not been introduced. Thus, ABSD improved affordability for owner occupiers.

However, we think such taxes may be blunt and may not be sustainable in the long run if prices are suppressed well below affordability ranges. Instead, debt inhibitors, such as loan-to-value (LTV) and TDSR limits, create less friction and reduce the overall risk in the property market. These could be tightened further to remove the burden of increasing ABSD.

Policing land purchases by developers seems to make less sense

The ABSD for developers acquiring residential land for development was raised to 25 per cent, but this is remittable if all units are completed and sold within five years.

At 15 per cent, the tax was already effective in preventing land hoarding.

Raising the tax will further deter the development of large projects, which seems counter-intuitive as larger condominiums provide conducive environments with more shared facilities.

A new non-remittable tax of 5 per cent is introduced on all residential land acquisitions. We think this is likely to have minimal impact on market behaviour other than changing the 'sticker price' of land.

The pace of land acquisitions is already slowing without intervention. Singapore's well-structured en-bloc redevelopment process has enabled urban rejuvenation, a rare achievement.

JLL believes that we could be at the start of a new cooling cycle where polices will be adjusted to keep home prices within a tight range, rising in line with income growth of 3 to 4 per cent annually over the next five years. The changes confirm the government's stance to prioritise housing affordability - including that of private housing.

Close intervention deters developers and investors from participation in the property market. In the medium term, this may impact the government's ability to deliver adequate private housing supply.

After Singapore cooled its residential market from 2010 in response to falling interest rates globally, other countries followed suit to rein in disproportionate residential price escalations. With these measures introduced in Singapore in July, other cities may adjust policies to ensure housing affordability going forward.