Recent Singapore Real Estate Exchange (SRX) data suggests that the government’s cooling measures have been very effective at reducing the volume sales for condominiums and private apartments. In particular, the combination of measures to tighten the loan-to-value limits and the total debt servicing ratio have helped cut volume sales from 32,125 transactions in 2012, to 20,203 last year. These two measures have been effective at reducing demand because they restrict the amount of capital Singaporeans can borrow to purchase investment properties.The impact of the cooling measures on price has been less dramatic. Again, the two measures seem to have had the most effect. However, prices did not plummet like volume did. Instead, the former plateaued and experienced monthly gains and losses.
It is more difficult for cooling measures to bring down prices than it is to bring down volume sales. The reason is that the market is constantly in search of a fundamental price for each home, factoring in many variables and pricing signals unavailable to analysts and policymakers.This fundamental price does not change when policymakers introduce measures to stimulate or dampen the market. It merely goes into hibernation.
For a transaction to take place, the buyer and seller must agree that the price of the house is acceptable; otherwise one of the two parties will sit out and wait for the market to change. Cooling measures encourage one or two, or both, parties to sit on the side lines and wait for a more favourable environment. Most participants in today’s private market are those who are either uninhibited by the cooling measures or have no choice but to sell.
Thus, the cooling measures have significantly reduced the number of participants, but the market keeps trying to reach the fundamental price in the relatively few transactions that do take place.
Arguably, the market is behaving properly when it comes to price.
From 1997 to last year, Singapore’s gross domestic product (GDP) has outperformed non-landed private property prices, as measured by the SRX’s price index.That puts annualised returns for condominiums and private apartments at 4.0% versus 5.7% for GDP. This is reasonable for property as an asset class, and certainly consistent with the type of growth Singapore has experienced. Furthermore, over the long run, Singapore’s private property has done its job as a hedge against inflation.
So how did we get here and what is next?
Low interest rates, a shortage of housing stock, and Singapore’s rapid growth and strategic initiatives contributed to a dramatic increase in private property prices since SARS. This caused public anxiety over the price of the market.
But is price really the most poignant issue, especially given that it has had to catch up to GDP from a long period of poor performance from the Asian financial crisis to SARS?
The data suggests that price is not the most pressing problem. As the accompanying chart illustrates, the conundrum facing policy makers is that, while property returns are in keeping with the growth of Singapore, median income is trailing. This was not the case for most of the housing market’s recorded history. It is understandable how the public, especially after the quick rebound in prices from the global financial crisis, became nervous about the divergence between housing prices and median income.
From a policy standpoint, it is essential to ensure upward mobility for citizens to crossover from the HDB to the private property market. It is also important for individuals and banks not to over extend themselves.But here is the conundrum. It is equally important to maintain an open private property market to attract capital and support the growth of Singapore as a leading nation-state.
The inherent danger in a property tax and other cooling measures are that they alter the risk-reward equation and send confusing signals to homeowners and investors, both domestic and overseas. This, in turn, has negative ramifications for Singapore’s GDP objectives and strategic positioning in the region. Therefore, in balancing the needs of a nation and its households, it is rational for policies to target the most poignant issues with laser precision.
Going forward, perhaps a more targeted alternative to today’s cooling measures would be to let private property prices float for the sake of Singapore’s long-term strategic growth, and explore alternative measures for boosting median income.