Why the latest round of cooling measures is necessary – 12% ABSD

 

It has been a matter of almost a fortnight since the Singapore government imposed the latest round of property cooling measures to try to tame a seemingly overheating property market. To most analysts expectations, the measures seem heavy-handed.

12% ABSD for citizens!

 

The manner in which the developers were caught unaware also shows the independent nature of the Singapore government and its commitment to maintaining a sustainable property market. I have heard countless stories of how the government is constantly working in cahoots with the wealthy conglomerates and perhaps the speed and severity of these latest measures would put paid to those unfounded claims. To those aspiring to own their first property, these measures could not have come at a better time, especially with land prices as well as prices of new launches spiking.

I personally am supportive of the new measures and I believe they are necessary and these are the reasons why.

 

 

1) The vision was to create a nation of homeowners, not a nation of landlords. New ABSD address this.

One of Lee Kuan Yew’s and perhaps the PAP’s greatest legacies to Singapore is the vision that home ownership would become a key pillar of a strong society. At the opening ceremony of Pinnacle@Duxton, then the member of parliament for Tanjong Pagar, Lee Kuan Yew commented that “If all the HDB flats built over the past 50 years were rental flats, Singapore would be a very different society today.  We would not have the stability, progress and prosperity that the stake in home ownership of a growing asset has made possible.” Having its citizens own the property in which they live in is essential to how social cohesion was built in Singapore. The people will feel a need to keep the environment and their homes clean and well maintained and as Singapore progresses, the value of their homes will appreciate accordingly. The vision was never to create a society whereby the vast majority of people owned multiple properties.

Yet the dream for many living in Singapore is to live off passive rental income and the goal to that was to own multiple properties. If we were to take a look at the various rounds of cooling measures, they hardly had any impact to first time home buyers, especially towards Singaporeans. In fact, the stamp duties that first time Singaporean home buyers had to pay remained largely unchanged and even the recent 5% reduction in the loan to value is perhaps helpful in promoting financial prudence and does not add to suck acquisition costs like taxes to be paid.

 

 

2) There may be an economic slowdown around the corner. New ABSD would prevent some pain.

We have had about a decade of artificially low-interest rates no thanks to the US’ monetary easing policies. This has caused asset bubbles to form around the world. In cities like Singapore and Hong Kong, the interest rates on mortgages have hovered below 2% per annum for the most part of the last decade. In fact, interest rates on private loans have been consistently lower than interest rates on HDB loans for the most part of the last decade. If you had bought an HDB about ten years ago and decided to take a bank loan instead of an HDB loan, you would have been paying lower monthly instalments to date. In fact, private property owners have had to pay less interest than HDB owners in the last decade.

There were instances whereby the interest rates were below 1% and this helped fuel asset purchases especially properties. The truth is that interest rates will invariably rise in the US and this will cause a knock on effect which will see rates in Singapore rise. In addition to this, there is a possibility of a trade war escalating between China and the US. The US is also scaling back on its asset purchases and this would see a drying up of easy capital across the world.

 

 

3) The Singapore property market is not similar to the Hong Kong property market. New ABSD prevents this.

It would be foolish to compare the Singapore property market to the Hong Kong property market. The common rationale is that the Singapore property market is cheap compared to the Hong Kong property market but then Hong Kong does not have a successful government subsidised program like Singapore does. I will be first to admit that the HDB program does have some shortcomings but then it was designed to provide affordable housing to the citizens and for a large part it has been rather successful.

Home prices in Hong Kong have far outstripped what is economically viable even to those who are earning above average income.

In fact, the average home price of a Hong Kong apartment in May 2018 is HKD$21,858 or about SGD$3,800 per square foot. The annual increase in home prices in Hong Kong was 9.7% and these are the types of figures that the Singapore government is trying to avoid. When the prices of new launches in the rest of central region are commanding prices in excess of SGD$2,000 per square foot (Park Place Residences), then perhaps it is time to step in to tame prices a little.

Singapore should never walk down the path of the Hong Kong property market in terms of unaffordability. In my work as a real estate practitioner, I have seen countless examples whereby certain groups of people reduce their spending and quality of life just to afford the mortgage on their property.

 

4) En bloc sale prices have gone ahead of fundamentals. New ABSD address this.

When I speak of fundamentals, I am talking about whether the properties that are about to be redeveloped can find suitable tenants or homeowners. En bloc sales have become a lottery ticket to financial freedom and just about every homeowner is looking to cash in on the en bloc craze and pocket that sizable sum of money that will come their way. The common notion would be that these homeowners would be flushed with cash and immediately pour their monies back into the property market but the reality is that some of them will be taking this money to help fund their retirement. They may downgrade to an HDB flat, buy a smaller, older condominium or stay in their spare property. Yet redevelopment of the site yields so many more units than it replaces.

Take Serangoon Ville as an example. It was initially a 244 unit development and it will be redeveloped into a 1,012 unit development called Affinity at Serangoon. I am not against en bloc sales as I do believe that there is a need to rejuvenate an ageing development and replace it with something newer and more functional. I am just saying that the supply that is coming onto the market because of these en bloc sales is far more significant than the en bloc sales proceeds that are going to be reinvested back to the property market. I cannot guarantee that all 244 owners in Serangoon Ville are going to spend all if not most of their en bloc sales proceeds on a new property but I am certain that there are going to be 1,012 more units coming onto the market because of this en bloc sale. Whether there is going to be enough rental demand to absorb all the new launches that are happening across the island is a huge question. While property prices in Singapore have been increasing, rental rates and volumes have been dropping.

 

 

5) Wealth creation must not be constrained to property investment only

6) Singapore is not the only property market in the world

 

Post was reproduced with permission. For more on point 5 and 6 on why the latest round of cooling measurements is necessary, visit the post by Daryl Lum and find out.