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On 19 Feb 10, the government announced 2 additional anti-speculation measures to manage the property market sentiments. In summary, the 2 changes are:
1. Seller’s Stamp Duty (SSD) on Residential Properties Sold within 1 Year: This policy came into effect on 19 Feb 10. Prior to 19 Feb 10, only property buyers had to pay stamp duty when they made their purchase, whereas sellers were exempted. Under the changes, sellers will continue to be exempted from paying stamp duty provided they sell their units after holding them for more than 1 year.
2. Lowering Loan-To-Value (LTV) Limit to 80% for Housing Loans: This policy came into effect on 20 Feb 10. Prior to 2005, the LTV limit for housing loans was 80%. In 2005, in an attempt to stimulate the Singapore property market, URA made sweeping changes to the real estate regulatory framework. Part of this change was that banks could lend property buyers up to 90% of the purchase price (also known as Loan-To-Value). With the latest policy change, only 80% LTV Housing Loans are allowed.
How will this affect the Singapore Property Market?
In the short term, sentiments will definitely be affected as there will be some investors who are not able to come up with the additional 10%. URA shared that at present, less than 10% of housing loans are granted at LTVs greater than 80%. In 2009, there were about 31,000 private residential property transactions (this includes new-sale, resale and sub-sale). If we were to assume that the total number of private residential transactions for 2010 is on par with that figure, the decline of potential buyers will be about 3,100. Moreover, some speculators who were previously thinking of riding the short term market euphoria may now think twice before entering the market as the selling conditions have become less favourable (due to the Seller Stamp Duty). As a result, we should expect to see a short term drop in demand.
On the supply end, we believe that speculators who were timing the market will be most affected. Although these changes will not directly affect speculators who presently own a unit as they bought their units before the deadline of 19 Feb 10, the drop in demand will likely impact them. Hence, speculators who do not have the ability to hold on to their properties for the long term will be less adamant in their high asking prices and be more motivated to sell them off. In short, we expect to see some opportunities in the near term as speculators try to off load their properties.
Will this cause the property market to plummet?
Presently, it is unclear whether the demand is driven by speculators or long term investors/homebuyers. It is the government's belief that euphoria is currently driven by speculators. On the other hand, if demand is driven by genuine home buyers and an influx of long term foreign investors who are confident about Singapore's long term prospect, we should not expect the negative sentiments to last long. We have some reasons to believe that this is the case:
1. Increase in Foreign Owners/investors: With reference to Diagram 1, the volume of foreign investors for 2009 appears to be on the rebound. In 2009, there were about 7,300 caveats of transactions lodged by foreign owners, which works out to be about 20% of all property deals for the year. Presently, most banks grant 70% for foreign investors hence foreigners who are thinking of buying a residential property would not be affected by the 80% LTV policy. As long as foreign interest in Singapore properties remains strong, we should expect to see property prices having a quick recovery.
Diagram 1: Transaction Volume by Foreign Owners
Source: URA
2. High Savings Rate: Based on Diagram 2, it shows that the savings amount for 2009 is S$121billion. This amount has grown from $102billion from the year before. This suggests that there is more money circulating in Singapore's financial system to prevent any drastic fall in property prices.
Diagram 2: Money Supply for 2009
Source: MAS
Based on these considerations, we believe that even though buying sentiments will be moderated in the near term, property prices will not plummet. Any opportunities will likely be snapped-up by cash rich investors who are prepared to hold the units for the long haul. As long as there is no significant change in foreign ownership regulation, continued foreign demand and no further tightening of credit supply, a quick price rebound is highly possible.
While that in turn may prompt the government to take even more action, that will be a blog for another time.
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