Hot money flows and real estate

Just when you think that the cost of money in Singapore cannot possibly get any cheaper, this paper reported on Wednesday that the battle among banks here to secure more home mortgages is intensifying.

Malaysian bank CIMB is offering to charge private-home buyers only 0.65 per cent more than the three-month Singapore Interbank Offered Rate (Sibor), which is currently at 0.44 per cent, for the first two years, while Maybank is asking for 0.5 per cent plus Sibor for the first year.

This new home-loan war is to secure more mortgage business as expectations gain ground that the Government will announce new measures to cool the residential property market.

Among the main concerns voiced by Members of Parliament earlier this week was the worry that the quantitative easing by the United States Federal Reserve will suddenly flood Asian markets with liquidity, fan inflation and fuel home prices.

The Fed said recently that it would inject US$600 billion ($786 billion) into the world’s largest economy by buying long-term US Treasury securities.

This round of quantitative easing has unsettled many developing countries, which say the capital flows into their economies are pushing up home and stock market prices.

As rightfully pointed out by the Government, these fears are exaggerated. The US is not going to mop up US$600 billion of longer-term Treasury securities in one fell swoop but gradually, in phases.

With respect to the local property market, I would add that it is never going to enter the real-estate sector directly. Property is a unique asset. It is location- specific.

Almost all property investors buy in places in which they are familiar with. You are never going to get foreigners in the West who know little about Singapore’s property market phoning their brokers overnight to put them down for a local property.

Having said that, I have heard of some housing agents who get general instructions from their Chinese clients to buy any “suitable” property from a given budget. However, these clients are already familiar with Singapore and are often repeat buyers.

The hot monies are likely to enter the real-estate sector indirectly via globally traded financial products such as stocks and shares. The sellers of these products, who are themselves real estate investors and who are more familiar with Singapore, do the actual property investing.

In any case, it is never any property but one that has more upside potential. It takes time to scout for the right property. Also, unlike shares, each and every property product is unique. So it is never going to shoot up like shares within a short period of time.

The ample liquidity situation in Singapore is not new. Earlier stimulus measures introduced by governments in Singapore and the region have already raised liquidity levels considerably.

To prevent property bubbles from forming or growing larger, Singapore has already introduced three sets of cooling measures.

The Government is also addressing the issue from the supply side. The Ministry of National Development said yesterday that the Government Land Sales programme for the first half of next year will have 30 sites for residential development, which can generate about 14,300 private homes. This is higher than the 13,900 available in the GLS programme for the second half of this year, the ministry said.

Of the 30 sites, 17 are new while the other 13 sites are carried over from this year.

More can be expected as the cooling measures are not “solutions” because this is a global problem that Singapore cannot solve alone.

In the current situation, where major governments worldwide are not courageous or co-operative enough to unravel the stimulus measures, it is not a question of “if” but “when”.

These measures manage rather than attempt to solve the problem. When they lose their effectiveness, more needs to be introduced. The main target is runaway prices without corresponding growth in fundamentals. Buoyant sales in themselves are not a problem.

The series of cooling measures also serve as a continuing signal to all investors that the situation will not be allowed to get out of hand. So, contrary to what some have suggested, a series of measures is better than a sudden one-time shock.

So what more measures can we expect? Softer options include raising the cash component further for downpayments. In the past it used to be 20 per cent, so we still have ammunition for 10 per cent more.

Raising the stamp duty by a few percentage points is another option although the 15 per cent imposed in Hong Kong is a little too drastic. Even then, one could argue that if investors are mainly long-term investors, higher stamp duties for shorter holding periods may not deter risky purchases.

More impactful options include lower loan-to-value ratios. These are more effective as they help soak up liquidity that is the real problem and at the same time provide more buffer to the financial system for any unexpected sharp price corrections. More importantly, they do not discourage long-term investments.

The philosophy of the Government with respect to property investments seems to be caveat emptor or buyer beware. You reap what you sow. In plain words, you can benefit handsomely but you are free to make costly mistakes as well.

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

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