Surprise property cooling measures announced by the Singapore Government on 5 July saw a knee-jerk sell-off of blue chip property stocks of between 6% and 15% in short order. Barely two days later, it was reported that over 1,000 condominium units were sold in one night as buyers rushed to avoid the additional stamp buyer duty (ABSD) and revised loan-to-value (LTV) limits that came into effect on 6 July.
In this article, I will look at possible reasons for the implementation of the latest property cooling measures, and what this development may mean for Singapore’s stock market in general.
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Why the property cooling measures were implemented
Flash estimates released by the URA in early July showed private residential housing prices rising to a four year high, with analysts anticipating price recovery to 2013 peak levels relatively soon. This coincided with the Monetary Authority of Singapore’s recent call for caution on “euphoria” in the property market.
Singapore’s central bank stated that the supply of unsold private home units is anticipated to more than double within the next two years, and that the local rental market remained weak, with over 30,000 vacant home units as of November 2017. Research at the end of 2017 also showed the Singapore rental market yield to be at a record low of 3.2%. Rental yields in central areas were reported to be 5% or lower.
Precipitous drops in property prices have an established history in exacerbating economic recessions. The US’s experience in the late 2000s with the Global Financial Crisis is a prime example, with more instances found in Sweden in the 1990s, and Japan in the 1980s. This, I believe, is something the Singapore government is keen to avoid.
Cooling measures such as the Seller’s Stamp Duty and the lowering of LTV limits began as early as 2010, but the Singapore property market has remained robust. Sales of over 1,000 units in one night – as mentioned above – likely reflects purchases by second-time home buyers or foreign investors looking to avoid the additional stamp duty, rather than first-time home owners looking to avoid a 5% increase in the cash down-payment they need to fork out. In all, the new cooling measures look to be inducing short-term pain on the property market that enables long-term gain by ensuring buyers’ fiscal prudence.
Effects on the stock market
It’s worth noting that a weak property market – over the short-term at least – may negatively impact not only property developers, but also banks. As of end-March 2018, over 40% of the loans-portfolio of the three main banks in Singapore are in loans related to housing and building and construction. The banks though, have robust leverage ratios (total assets over total equity) of around 10 to 11, which should enable them to ride out any rough times. Moreover, the rising interest rate environment may provide an offset to any difficulties the banks may face in their property-related loan activities.
We should also take note that the latest round of property cooling measures does not affect commercial as well as other types of properties – only residential properties are affected. Property companies with heavy exposure to properties outside of the residential sector should see less impact to their bottom-line.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.