Finally, some cooling measures with bite

The much-awaited third round of cooling measures were finally announced yesterday but with a big difference – the current set have a lot more bite than the earlier ones, which were largely symbolic.

Of the measures, the 70-per-cent cap on loan-to-property-value for second mortgages is the most significant as it addresses for the first time the problem of excessive liquidity in the market. Helping to soak up some of the liquidity to a lesser extent, is the increase in minimum cash payment from 5 per cent to 10 per cent of valuation.

The earlier cooling measures had addressed the problem of speculation which was not a serious problem in the current bull run. As a result, the effectiveness of the measures were more cosmetic than real.

Much of the push towards higher and higher benchmark prices achieved in new private housing launches in recent months had come from investors with much higher risk profiles. For this group of investors, where previously they were able to buy three similar-priced properties, they can now only afford two. So, you can say demand from this group of investors is effectively down by a third.

Even demand from novice investor buyers with lower risk profiles will be affected as I expect the majority to have at least one outstanding mortgage. This effectively means the huge upside potential for “speculative” projects such as those with many small apartments and those close to MRT stations will be severely crimped. I am not saying that there will be no profit-making opportunity, but that it will be considerably less.

But the impact to the long-term investment potential of private property investments comes not from the cap on loans but from the current measures introduced in the public housing sector.

The increased opportunities for lateral upgrading via DBSS and EC projects and the greater BTO supply have raised the risks of investing in private housing to a new level. To restore the upgrading dreams of heartlanders which have been quashed by the rapid rise in private property prices, the authorities are now providing new opportunities for them to fulfil their housing aspirations.

In place of mass-market private housing units, there will be more DBSS units and EC units in more varied locations than simply in the more remote areas such as Punggol and Sengkang. For first-timers, there will be many more BTO units put up for booking this year and the next. This has prompted some to ask whether there will be a glut in the public housing sector. The answer is no because the occupants will still be there.

However, with many owners trying to sell them at about the same time – they would reach their minimum occupation period together – would mean that there will be little upside for HDB resale prices in the future. The lower resale values will definitely impact the ability of HDB occupants to upgrade to a private property.

In the meantime, the upgrader market for the next few years is being creamed off by the larger numbers of DBSS and EC projects in the future.

What we are seeing is the gradual erosion of market support – both now and in the near future – for the lower end of the private housing market. If there is to be a housing glut, it will happen in this segment. The glut will persist until price levels come down sufficiently low for the two markets to link up again and for the upgrading stream to resume once again.

Will this be the final set of cooling off measures? I would not bet on it. The liquidity monster is hard to tame.

The exuberance in the market may calm down for the time being – sale volumes may come down and the price rise may stall for the moment – but the problem will rear its head once again. As it is, one avenue for the monies to flow into – namely the safe haven market of HDB resale flats – has now been effectively closed to investors. The liquidity problem is a global one. In Singapore, we are only starting to tackle this problem.

Believe me. This is just the beginning. Just ask the Chinese authorities.

By Colin Tan, head of research and consultancy at Chesterton Suntec International.

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