Living with market cooling measures

The Government’s move to introduce a new set of property market cooling measures two weeks ago was widely anticipated but the harshness of the measures surprised many.

The initial reaction from buyers was mixed. On the weekend immediately after the Jan 14 measures, buyers at Spottiswoode 18 snapped up 170 out of the 251 units launched, surprising many observers. The nonchalant reaction could be because the cooling measures were already a known market risk. These buyers had already overcome their reservations during the pre-launch marketing period and were primed and ready to buy.

This was somewhat similar to the good response to the launch of NV Residences after the earlier round of cooling measures on Aug 30 last year.

In contrast, over the same weekend after the Jan 14 measures, sales cooled in Austville Residences – an executive condominium project – despite earlier reports of potential buyers queueing overnight.

Beyond these anecdotal examples, we collaborated with the research team at leading real estate portal to get a clearer picture of pre-transaction activities.

The number of visitor sessions to the website fell 10.7 per cent in the week after the measures compared with the week before. Comparatively, visitor sessions only fell by 3.5 per cent following the Aug 30, 2010 measures. Visitors searching for resale HDB flats saw the sharpest decline. In addition, the number of new listings fell by 6 per cent, while the number of listings rose 2 per cent following the Aug 30 measures.

While there are many other factors that affect the visitor numbers, the comparison gives us a clearer picture of market activity following the measures.

The statistics above reinforce the consensus view that overall marketing activity has fallen. If this persists, transaction volumes will decline. Based on historical analysis, a drop in total sales volume over four quarters tends to lead to a fall in the overall Urban Redevelopment Authority’s private residential price index thereafter. This happened at two most recent turning points for prices – in Q2 ’00 and Q2 ’08. The question remains as to whether the current market cooling measures would lead to a persistent fall in volume and thus prices.

To answer this, an analysis of events after the May 1996 market cooling measures could be a good gauge, as that was the last time when a similarly harsh set of measures was introduced.

Within a year from May 1996, overall private home prices fell 8.9 per cent. While there can be no doubt that market cooling measures played an important role, a closer look suggests that other factors could have contributed to the plunge in prices.

Firstly, the rental market weakened over the same period. Overall occupancy rate fell from 93.8 per cent in Q2 ’96 to 91.7 per cent in Q2 ’97 due to an increase in the number of units completed. As a result, rents also fell by 9.9 per cent over the same period. In addition, interbank three-month Sibor rose slightly to 5.94 per cent from 5.75 per cent over that period. Buying property for investment became less appealing.

Secondly, the stock market also began to decline over the same period. The benchmark Straits Times Index fell 13.4 per cent within a year from June 1996. To add to the woes, the Asian Financial Crisis started in mid-1997. The loss in wealth in the stock market probably motivated investors to sell assets, which could be another important factor that precipitated the continued fall in property prices.

The above analysis shows that for the current set of market cooling measures to cause another prolonged period of price decline, other conditions need to fall in place. This could come in the form of a decline in the stock market or the business environment, higher unemployment and a deterioration of property market basics. The lack of “wealth destructive” factors was the key reason for the ineffectiveness of the last two rounds of market cooling measures, in my opinion.

Going into the new year, the wealth creation effect appears to be largely on track. According to various equity strategists, the Singapore stock market is expected to perform well this year, on the basis that forward price-to-earnings ratios are still undemanding compared with previous peaks. Business prospects look more promising and employers are planning to expand hiring and increase wages and bonuses.

For the property market, the occupancy rate looks like it could remain above historical average of 92 per cent as completions in 2011 are expected to reach only 6,722 units – below the historical average, according to Urban Redevelopment Authority numbers.

Meanwhile, the prospect for a sharp increase in interest rate appears to be muted. Taken together, this suggests that the slowdown in transaction activity and price growth might again turn out to be temporary. Ironically, if that is the case, we should expect more market cooling measures, which will remain as a market risk in 2011. But by themselves, the measures may not be enough to turn sentiment.

In conclusion, while I expect the market to face immediate downward pressure on volume and prices, the year-on-year price fall in 2011 could be marginal. In the meantime, people interested in properties should keep watch for any of the “wealth destruction” catalysts, which in some instances can fall into place very fast.

Buyers should also note the potential for a weaker rental market from next year due to the large number of housing units to be completed from then onwards. Buyers who are stretching their last dollar to buy their dream home might want to dream less and work their numbers based on more prudent assumptions and exit strategies.

By Tan Kok Keong, Head of Research and Consultancy at Orange Tee.

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