Triple whammy of cooling measures, rising supply and higher rates can end up cycle in home prices

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The Business Times – 

TRANSACTION costs have just gotten a lot higher for those who are thinking of using their year-end bonus to help fund the purchase of another private home here for investment.

New property cooling measures kicked in on Thursday (Dec 16) to temper the exuberance in the private home and Housing Development Board (HDB) resale markets. They include higher additional buyer’s stamp duty (ABSD) rates – up by 5 to 15 percentage points – for all individuals and entities except Singapore citizens and permanent residents buying their first home. Total debt servicing ratio threshold and the loan-to-value limits for HDB loans were also tightened.

For instance, citizens buying their second home must now pay 17 per cent ABSD, up from 12 per cent previously, while foreigners buying any home are subject to a 30 per cent rate, up from 20 per cent.

Investing in private homes here generates a net yield of around 2 per cent per annum. This means that to recoup the ABSD via rental income, it would now take about 9 years for a citizen buying a second home and and 15 years for a foreigner buying a home respectively.

If home prices rise by an average of 2-3 per cent per annum, it would now take around 6-9 years for a citizen who is a second home buyer and 10-15 years for any foreign home buyer to see capital gains exceed ABSD respectively.

Singaporean couples can hold 1 private unit for owner-occupation and 1 for investing without incurring ABSD by having the 2 homes held under separate names. Singaporean singles can possibly earn rental income through owning a dual- or triple-key unit.

In short, there are still ways to generate rental income from private homes without incurring ABSD.

Dampening demand

Still, the cooling measures will invariably dampen investment demand. The measures may also lead to foreigners who were hoping to visit Singapore as travel restrictions ease to buy a home cancelling such plans.

Additionally, the minting of en bloc millionaires looking for replacement homes will slow down as developers become more cautious in making en bloc purchasers, given the higher ABSD rates that apply should developers fail to sell out all their units within a fixed time frame.

Private home prices rose nearly 9 per cent between the first quarter of 2020 and Q3 2021, showed data by the Urban Redevelopment Authority. Meanwhile, the HDB Resale Price Index rose around 15 per cent between Q2 2019 and Q3 2021.

Will the cooling measures halt rising home prices? Quite possibly, as cooling measures are supplemented by big increases in the supply of homes.

On Thursday, the government announced plans to increase the Build-To-Order (BTO) supply of HDB flats by 35 per cent over the next 2 years, with the HDB set to launch up to 23,000 flats per year in 2022 and 2023 – up from the 17,000 flats in 2021.

Demand for public housing has been increasing, with the overall number of applications received per BTO flat rising from 3.7 times in 2019 to 5.5 times in 2021. Raising the supply of BTO flats will enable more home buyers to meet their needs via the BTO market instead of the resale market.

If demand and prices of resale HDB flats ebb, this in turn affects those who are looking to sell their HDB flats and recycle proceeds into buying private homes.

Unsold inventory of uncompleted private homes, with planning approvals, has been declining since Q1 2019.

But the supply of private homes is rising to meet demand. The government offered land that can potentially yield about 2,000 private homes (including executive condominium or EC units) in the confirmed list under the H2 2021 Government Land Sales (GLS) Programme, up almost 25 per cent from 1,605 units for the H1 2021 GLS Programme.

On Thursday, the Ministry of National Development said it will release 4 private housing plots and an EC site in the confirmed list of the H1 2022 GLS Programme which will yield 2,785 homes, up 39 per cent from the H2 2021 GLS Programme.

There will also be net additions to the stock of private homes from recent en bloc sales and developments that are taking place under schemes such as the CBD Incentive Scheme.

Collective sales of existing condominiums can result in new developments that yield 2-3 times the number of units. In October, UOL Group and Singapore Land Group clinched a tender to buy Watten Estate Condominium, which has 104 units of townhouses and apartments. A new development can potentially yield 286 homes based on the mandatory minimum average size of 100 square metres.

City Developments is redeveloping its former Fuji Xerox Towers located at Anson Road under the CBD Incentive Scheme. Subject to authorities’ approval, a predominantly office building will become a mixed-use integrated project with about 35 per cent for residential use.

Taming inflation?

When assessing prospects for private home prices in 2022, cooling measures and rising supply are the known negative factors. An unknown factor, which can add to the pressure facing the private home market, is rising interest rates.

Inflation has spiked in many places and may stay elevated as supply chains continue to be affected by the pandemic, wages increase amid labour market shortages, and the rise of globalisation slows. Could interest rates rise aggressively to tame inflation?

Today, the 3-month compounded Singapore Overnight Rate Average (SORA) is around 0.2 per cent per annum compared with around 1.3 per cent in early 2020.

For a borrower with a 25 year loan of S$1 million, who is paying an interest rate of 1 per cent plus 3-month compounded SORA, monthly instalment rises 14 per cent from S$3,860 to S$4,386 if interest rate per annum rises from 1.2 per cent to 2.3 per cent.

All else being equal, the size of the home loan shrinks by nearly 16 per cent when one uses an annual interest rate of 3 per cent versus 1.5 per cent.

The pandemic has strengthened the value of a home as people spend more time working, shopping and doing other things from home. Singapore’s handling of the pandemic has likely given locals and foreigners confidence to invest in the Republic for the long term.

While population growth here may be slow, growth in the number of resident households may continue to outpace growth in the resident population as household sizes get smaller, which supports the need for more homes. Ongoing upgrading of infrastructure should also help lift home values.

There are many positives going for the Singapore private residential property market. But with a government that is preemptive in its actions, up-cycles may be relatively short, with price rises kept in check.

While private homes are coveted stores of value, a triple whammy of cooling measures, rising supply and potentially higher interest rates point to an imminent end to the ongoing run-up in private home prices.

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