A SERIES of cooling measures progressively introduced in the last six years has led to a patchwork quilt covering the property market that is now uncomfortably scratchy and somewhat suffocating. Calls to relax the cooling measures began to ring out two years ago. In recent months, developers, property agents and industry associations have repeated their calls, with some predicting that measures may be lifted or amended by the end of 2016.
Firstly, the executive condominium (EC) segment provides a clear illustration of the extent of oversupply in the residential market. The term “sandwiched class” households implies a small market segment, sandwiched between the families who are eligible to buy new HDB flats and the wealthier families that can afford private properties.
Since ECs were relaunched for sale in November 2010, and up till February 2016, developers have managed to satisfy the needs of just over 14,700 sandwiched households. Upcoming executive condo include Treasure Crest and Northwave EC while existing ones include The Terrace EC, Brownstone EC, The Visionaire EC, Parc Life EC , Waterwoods EC, Signature at Yishun, Skypark Residences, Wandervale EC, The Vales EC, The Criterion EC, Bellewaters EC, Bellewoods EC.
With recent Government Land Sales still seeing strong responses at eight to 10 bids per land tender, and with developers and property agents recording commendable profits for 2015, I do not think that cooling measures will be relaxed until such profits turn negative.
Since 2010, the cooling measures have added to a list of “defects” in our property market that may culminate in a significant deterioration of property values over the next few decades. We examine here six issues that will further widen the cracks.
During that period, the household monthly income cap for EC buyers was raised from S$10,000 to S$12,000 in 2011 to widen the buyer pool. Amid softening demand, the household income ceiling was further revised upwards to S$14,000 a month in August 2015. Notwithstanding that families with S$14,000 monthly household income stand at the 77th percentile of households ranked by income levels, these families who can well afford ECs are further funded by generous subsidies of taxpayers. Yet, sales of ECs continued to be lethargic.
The number of EC units launched but left unsold climbed rapidly in 2015, allowing us to conclude that (1) we have already exhausted most of the demand for ECs and (2) raising the income ceiling did not lead to significant additional demand. Add the fact that as at Dec 31, 2015, there were 1,540 completed EC units that remained vacant (yes, vacant despite a Minimum Occupation Period rule), it means that even the category of “EC investors” has been exhausted.
IMPACT OF POLICIES & DUTIES
Secondly, Singapore has relatively few economic policies and taxes that positively discriminate against foreigners and PRs (permanent residents). The Additional Buyer Stamp Duty (ABSD) is an exception.
In addition to deterring foreigners and PRs from investing in Singapore’s residential market, this policy has turned Singapore’s desire to be a wealth-planning hub on its head. Wealthy families who have invested heavily in Singapore and who are now considering estate and succession planning find their options limited when it comes to their residential assets.
Before ABSD was introduced, these families could transfer their properties into a living trust or a foundation by paying the normal stamp duty of just under 3 per cent. With the ABSD of 15 per cent, transferring your accumulated residential assets to a trust will cost a prohibitive 18 per cent in duties. So ABSD does not just cool the residential market, it also cooled the wealth planning industry, slowing down the business for trust managers, bankers and lawyers.
Thirdly, the most successful measure that curbed excessive residential investments – termed the Total Debt Servicing Ratio (TDSR) – has discounted the value of real estate assets to almost zero.
Introduced in mid-2013, TDSR defines the maximum loan for residential properties based on the ability of the borrower to repay the monthly mortgage, stress-tested at 3.5 per cent per annum interest rates for residential properties and 4.5 per cent for commercial properties.
The TDSR framework regards a borrower’s income and type of income (commissions, fixed salary, dividends, ad hoc fees, etc) as the main source of mortgage repayment and the loan size and loan tenure are determined based on the borrower’s age and credit worthiness.
The globally accepted practice of asset-backed lending for real estate did not apply in Singapore once TDSR was implemented. Since the income of the borrower is the main determinant of the size of the property loan, the value of the property itself is secondary. This inherently means that a retiree of age 65 without income and living in a fully paid private apartment that is worth S$500,000, or S$5 million, or S$50 million for that matter, will not be able to take a dollar of loan against the property to sustain his daily cashflow needs.
Where is the inherent value of this piece of real estate called home if in the eyes of the banks and the authorities, value only exists in the income of the borrower?
The issue of demand being exhausted with the last six years of massive supply, the ABSD and the TDSR framework wraps up part one of this two-part article. In the next part, we will discuss how the finished quality of recent projects, the hazy laws such as those around strata floor area and the high home ownership rate may lead to a long-term decline in property values.