Friday, November 9, 2012

Taming the market with targeted cooling


by Tan Chin Keong 
04:45 AM Nov 09, 2012


The Government's new measures to further cool the residential property market, announced last month, add to the long list of such curbs it has introduced since September 2009. By my count, there are now at least 20 significant and not-so-significant residential cooling measures in place and it can be a major mental exercise trying to recall the different ones.

But if one takes a more in-depth look, one will find that they follow a well thought-out pattern. Examining the sequence of the past and the recent measures and the conditions surrounding them, one can see that the Government has been very methodical in its approach, cooling only speculative and investment demand for housing while leaving genuine first-time home buyers unaffected.


Cooling with a set purpose
  
The Government introduced the seller's stamp duty (SSD) in early 2010 and enhanced it early last year. The SSD was mainly targeted at speculative demand, which was a significant driver of residential property prices at the time. The punitive duty, which ranges from 4 to 16 per cent, is imposed if a buyer sells his or her home within four years of purchase.

But while speculative demand had been tamed, foreign investment purchases of Singapore residential property picked up last year. And unlike in the past when demand was concentrated on the prime private housing segment, foreign investors appeared to be going for the red-hot mass-market segment.

This likely triggered the introduction of the additional buyer's stamp duty (ABSD) last December. At 10 per cent for foreign buyers, the ABSD was ostensibly designed to curb foreign investment demand for Singapore housing. Though it has not totally removed such demand, the ABSD has nevertheless reduced interest from this segment significantly.

For example, purchases of new private housing by foreigners (excluding Permanent Residents) and corporations declined from 20 per cent of the total last year to 7 per cent in the first half of this year.

While the SSD and ABSD did result in a slight decline in the overall private residential property price index in the first quarter of this year - down 0.1 per cent from the last quarter of last year - it was later reversed and negated by the 0.4 per cent and 0.6 per cent sequential increases in the second and third quarters, respectively.

What has likely supported the Singapore residential market this year is the still-robust demand from both local investors - those looking to buy a second or subsequent home with the intention of holding it for more than four years - and first-time home buyers.

UBS believes the latest cooling measures - specifically those which limit mortgages to 60 per cent of the property value for loan tenures that exceed 30 years or extend beyond the borrower's retirement age of 65 - were introduced to cool this demand.


Narrowing down to genuine demand

Given that the median age of marriage in Singapore is around 30 for men and 28 for women, the average couple likely bought their first home in their late twenties or early thirties. With a prudent lifestyle, some of these couples would have been able to pay off their first home loan some time in their late thirties or early forties.

Once they reach that age, they may be saving to buy that second home for investment purposes. However, the latest measure will make it harder for them to do so by forcing them to pay a higher down payment or to borrow with a shorter loan maturity.

In my view, this should help curb some of the local investment demand, and once this goal is achieved, what would be left in Singapore's residential property market is largely demand from first-time homebuyers, which is generally viewed as genuine housing demand.

This demand will likely be addressed by an expected ramp-up in housing supply from both the public and private sectors starting next year. If this plays out according to the script, the Government stands a good chance of taming the market.



Tan Chin Keong is an analyst at UBS CIO Wealth Management Research.



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