Don’t blame it all on TDSR

Judging by the regularity with which property analysts have blamed the Total Debt Servicing Ratio (TDSR) framework for the recent less-than-bullish property sales, it appears that we finally have a cooling measure that actually works — notwithstanding the fact that it was never framed as one in the first place. Do we?

Although the developers’ sales volume for August of 742 units was 54 per cent higher than that in the previous month, it was adjudged by many as further signs of a cooling market, mainly because July’s sales were close to the bottom. Only 481 units were sold that month, 73 per cent lower than June’s 1,806 units.

Analysts promptly blamed the weak August sales on the Hungry Ghost Month — a convenient and believable scapegoat if you don’t know what actually ails the market — and, you’ve guessed it, the TDSR. Some feel the spectre of TDSR will haunt the market for a longer period, saying the new framework has shaved off a significant slice, if not much, of home-buying demand.

The announcement of last month’s new home sales also coincided with the release of a stockbroking house’s research report that warned of the rising risk of a property market correction within the next two years.

Expected higher interest rates could coincide with a big rise in housing supply over the next year to 2015, said the Barclays report, which also warned that a macroeconomic shock or a policy misstep could also trigger a market correction.

Is the TDSR a policy misstep? So concerned was Nominated MP Tan Su Shan that she filed a question in Parliament on whether there was any risk of a policy overshoot in property cooling measures.

The Ministry of National Development’s written reply described the status of the cooling measures as a dynamic situation that it continues to monitor and review as economic conditions evolve.

It is fair if you want to blame the current weak market sentiment on the TDSR but why stop there? Why not the whole slew of cooling measures that came before it, many of which are even more drastic?

While the TDSR has been blamed for the woes experienced presently by the market, it does not adequately explain why developers are continuing to bid keenly for sites.

It does not explain why prices have not come down despite developers supposedly giving more incentives and discounts. In reality, developers have generally not lowered their prices; they merely lowered their selling price expectations.

It is a no-brainer to forecast a market correction within the next couple of years: The newspapers are replete with many warnings from industry experts over the course of this year — even from developers.

How do we explain these warnings? These experts know that the market is long overdue for a correction or an inflexion point as some have put it. The only thing holding back the correction is liquidity — loads of it.

But what of the signs of a “turning” market based on the weak developers’ sales. I have often said that analyses of monthly developers’ sales cannot be done partially. One has to look at the launches as well: What is not launched cannot be sold. Developers holding back launches accentuate the volatility of the monthly sales figures and make the declining numbers worse than they really are — and vice-versa.

Also, having been announced in June, the TDSR would also have fed through the market completely by now. I do not think it is holding back the market any more. So if the TDSR is not responsible for the recent lacklustre performance, what is?

The answer can be found in the United States. If you have noticed, sentiment in the local property market turned less bullish since the Fed signalled its intention to unwind its quantitative easing policies. As the private housing market is dominated by investors, it naturally cooled. As one investor told me, the smart money was staying on the sidelines, awaiting clarity in the Fed’s policies.

We now know that the tapering exercise widely expected on Wednesday has been put off, as the US central bank await robust signs of an improving US economy. The question is, can the tapering exercise take off any time soon?

Much depends on the recovery of the US economy. But — and this is crux of the problem — what if the problem with the US economy is structural rather than cyclical? If structural reforms are not undertaken, will the jobs come back? If the job situation does not improve, will the tapering exercise be executed any time soon?

Is it so inconceivable that the US economy could drift in the “lost decade” of deflation that Japan experienced? If so, will interest rates remain low indefinitely? But life has to go on: Investors cannot remain on the sidelines indefinitely.

By Colin Tan – Head of Research & Consultancy at Suntec Real Estate

Source : Today – 20 Sep 2013

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