COMMENTARY
Chilling effect on property market as cooling measures hit developers, buyers
Mon, Jul 09, 2018
CHRISTINE LI
THE timing of the additional cooling measures came as a surprise on Thursday, as developers have just loaded up their landbanks over the last 18 months in anticipation of blockbuster sales in the second half of the year and beyond. Private property home prices have only risen 9.1 per cent over four quarters since the start of the recovery in 3Q17. This pales in comparison with the recovery in the previous cycle, when prices rose by 38.2 per cent from 3Q09 to 2Q10.
With new cooling measures hurting affordability from first-time buyers to investors, buying demand will take a hit. Primary home transaction volume can take a plunge of easily 30 per cent, as developers will tread cautiously with new launches. Although affordability of the buyers will be impacted, developers are unlikely to slash prices at this juncture, before the dust settles. We could expect a quiet quarter or two ahead with new home sales going back to on average 500 units a month for the rest of the year (with the exception of the month of July as buyers rushed into the three new launches before the new tax rates took effect).
In terms of price expectation, although we are only 3.6 per cent below the last peak in 2013, touching those levels would be challenging now given the battered sentiment and wide-ranging impact. Buyers would want to renegotiate the terms because of the higher acquisition costs and lower affordability, but the sellers with deep pockets will not slash prices just yet. With such mismatch in price expectations, the market could come to a standstill over the next couple of months.
We expect these additional measures to affect foreigners, Singaporean/Permanent Resident investors and real estate developers the most. ABSD rates have been raised across the board with exceptions for first-time Singaporean and PR buyers. For example, Singaporeans buying a second property worth S$1 million will now have to pay S$120,000 in ABSD, up S$50,000 as compared to S$70,000 previously. Loan-to-value (LTV) rates will also be tightened by five percentage points for all housing loans granted by financial institutions. LTV limits for mortgage equity withdrawal loans have also been tightened. With 15-24 per cent upfront acquisition costs, investors - both domestic and foreign - will take a back seat and reassess the viability of the investment.
Entities buying residential properties were the hardest hit, with the ABSD rate increasing 10 percentage points as compared to a rise of five percentage points for retail buyers. Developers now have to pay an additional 5 per cent in non-remissible ABSD. We believe this would have a cooling effect on the en bloc market, as the cost of acquiring land has effectively increased. Furthermore, developers now face higher risks if they are unable to sell all the units within five years of acquiring the land. Developers are likely to take a cautious stance in their bidding for both en bloc sites and GLS sites before the dust settles.
Given the further increase in cooling measures in the residential market, the commercial or industrial market could now see renewed interest as investors scour for other opportunities in the market. Commercial rents have performed strongly since 2017, while industrial rents are showing signs of stabilisation.
Though this round of cooling measures is quite heavy-handed, the outlook on buying demand remains uncertain, given the firm economic outlook, recovering labour market and strong latent demand for property investment.
The writer is senior director of research at Cushman & Wakefield (S) Pte Ltd.