Will cooling measures work this time?

Government measures are most effective when they are unexpected. That was why I concluded last week that the single most effective move was not the measures themselves but the timing of their introduction.

In economics, this topic is covered under the expectations theory. If the market expects the announcement, players will take positions that will nullify some of its effectiveness.

Looking at the latest round of cooling measures, the tools are not very different from the previous rounds except that they come with more punitive conditions.

The hike in sellers’ stamp duty penalises early resale but tellingly, no mention was made of how big the problem was, unless the purpose was to deter property buying for investment by making it less attractive. Indirectly, this confirms for the first time that overly strong sales are also viewed as a problem, not just rapid price growth.

Seller’s stamp duty on new properties was raised as much as 16 per cent of the sale price if the home is offloaded within a year of purchase, dropping by 4 per cent each subsequent year till the fourth year.

Given Singapore’s strong fundamentals and steady – if not buoyant – economic growth, both local and foreign property investors can do no worse than park their monies in properties here than elsewhere, even if it is for four years. Lest we forget, investment purchases by foreign investors may even grow without any price increases if our local currency appreciates substantially against their home currencies.

Some have commented that the revised stamp duties are like taking a sledgehammer to the market. Are we not underestimating the extent of the problem here? Could anyone have foreseen that we would have reached our fourth set of cooling measures in just sixteen months after the first in September 2009. This works out to be about one set every five months!

Others expect sales volume and home prices in all segments, except at the top-end, to fall.

Let us put ourselves in the shoes of a hypothetical investor. By now, prices have already risen to quite high levels and we are closer to the peak.

Let us say that the investor has resources to buy only one high-end property or four mass market ones. Which is the preferred option? I am almost certain, nine out of 10 will pick the latter. Should the market correct unexpectedly, it is a lot easier to dispose of the lower-priced properties. In a sharp correction, most buyers are owner-occupiers and they have affordability issues.

The comment that prices of suburban homes are most vulnerable is also tantamount to saying that many of the developers who participated in the state sales of suburban sites last year did not do their homework if demand is indeed so fragile. You can question their bids but you cannot deny the demand. Let us give them some credit. They are putting their money where their mouths are – it is not just coffee shop talk.

Many are also expecting a price correction for the whole year. I can foresee a short-term correction, if any, because of panic sales in the secondary market. But a correction for the whole year, led presumably by price cuts from developers? Has anyone taken a recent look at their balance sheets after record sales for 2009 and last year? Are these knee-jerk analyses?

In the latest set of measures, we expect potential buyers to act “rationally” and pull back their buying. But are we expecting too much? This is the same group of people who have irrationally ignored the fact that there is more than ample supply in the market. We know that the authorities have been highlighting this fact at every opportunity. Can this group still feign ignorance?

We cannot simply brush this “selective rational thinking” aside because then our line of argument lacks consistency. Then we believe only what we want to believe.

For sure, with each set of measures, a slice of potential buyers are removed from the market but are many of us continuing to under-estimate the depth of liquidity in the markets?

It is worth repeating here what a local pre-eminent economist concluded in a published e-mail exchange with another last year. It is that loose monetary policy invariably leads to asset inflation. There are no two ways about it.

For the economist, the crux of the problem is low interest rates. Not many have bought into or fully understood this yet. Have the latest measures addressed that? If not, I am convinced more cooling measures will be needed until the liquidity problem fully dissipates.

By Colin Tan, Head, Research & Consultancy at Chesterton Suntec International.

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