By Mr. Propwise
In a recent parliamentary speech, Minister Khaw Boon Wan suggested that his Ministry is looking at ways to bring Build-To-Order (BTO) flat pricing in non-mature estates down to “four years of salary”, where it was before the current property bull market started more than six years ago, down from the current 5.5 times. The media has suggested that this means a potential fall of 30% for BTO prices, which would be disastrous for both HDB resale flat and mass market private property prices.
New flat prices unlikely to fall by 30% on an apples-to-apples basis
However, I believe such an outcome is very unlikely to happen.
First, it is unclear what combination of household income base and flat type Minister Khaw is referring to. Even currently, most households earning the median household income can afford 4-room BTO flats in non-mature estates. Over the last two years, there has been a gradual de-linking of BTO prices from the resale market by increasing subsidies and keeping BTO prices stable even as resale prices rise. Now almost all HDB first-timers buy new flats instead of resale flats, reflecting the current attractive pricing of BTO flats, at least on a relative basis.
Also, the characteristics of such cheaper flats could be different from the current HDB flats. They could be smaller, have shorter leases or be located in less desirable estates. Thus it would not be an apples-to-apples comparison.
We should not forget that home ownership has crossed 90% in Singapore, one of the highest levels in the world. Policies that are implemented will have to avoid negatively impacting the majority of Singaporeans who already own a home. Thus while drastic policies such as reinstating a pre-1971 rule that HDB flats can only be sold back to the Housing Board have been suggested, I believe that they are highly unlikely.
I also believe that it’s unlikely that we will see new BTO launches of flats at prices that are 30% lower than those of recent neighboring launches. Imagine the angry outcry from those who had previously bought! The whole point of these changes to the housing policy is to placate angry Singaporeans, and not piss off the “silent majority” who already own property.
Deflating the property bubble
Instead, the government’s focus is on controlling the property market and preventing prices from rising further to create (or more accurately, inflate) a property bubble. Even the media has been admonished for their role in highlighting resale flats that go for record high prices.
One way the government hopes to cool the market is by increasing supply. Minister Khaw announced that 25,000 BTO flats would be launched in 2013, a slight increase from the 23,000 previously announced by the HDB in January. Compared to the roughly 25,000 in 2011 and 27,000 in 2012, the pipeline of BTO flats in 2013 has been kept stable, higher than the 15,000 or so marriages each year, in order to clear the demand backlog.
There is also the hope that the large upcoming supply of homes – 30,000 units to be completed this year, 50,000 in 2014, 54,000 in 2015 and 63,000 in 2016 – will help to moderate price and rental increases.
Minister Khaw also pointed out that as Singapore’s years of high GDP and wage growth in the 7% to 10% range are over, property prices (and especially HDB flat prices) are unlikely to rise as quickly in the future as they have done so as in the past.
But is the property market out of control?
The problem is that property prices in Singapore are not being driven by purely fundamental factors such as wage growth, but also by the sustained low interest rate environment which the government has no control over due to Singapore’s monetary policy.
The affordability of property is a function of not just property prices and income, but also by the cost of financing (i.e. mortgage rates). Add to that Singapore’s open economy and attractiveness to foreigners as a place to park their wealth (due to factors such as the low tax rates, stability, strong Singapore dollar etc), and the result is the continuing strong demand for property.
Thus despite seven (!) rounds of property cooling measures since September 2009 (and various tweaks such as those announced in the Budget 2013), both volumes and price growth have remained strong. If we really think about that, we can only come to two conclusions.
First, government policy on the housing market is reactive and incremental – they watch the data on housing prices and volumes and try to put in place incremental policies to try and control the future direction of the market.
Second, the measures have not been terribly effective – transaction volumes in the past few years have been much higher than previously, and prices have grown strongly (the URA Property Price Index has risen by 37% since 2009Q3). So either the government simply cannot do much to control the market, or they have severely underestimated the demand for property and have introduced measures that are too weak to tame the “animal spirits” in the market.
More cooling measures on the way?
The market seems to just shrug off each new round of measures, while developers and agents introduce gimmicks (such as ABSD rebates, furniture vouchers and other forms of hidden discounting) and play on buyer psychology (e.g. using the 6.9 million population target) to drum up demand for new launches, which remains strong.
I believe that the strong property market despite the multiple rounds of cooling measures has now almost become an embarrassment to the government, and thus the risk of a new draconian set of property measures is significant. If we make it to the tenth round of cooling measures and the property market is still going strong, would the cooling measures become just a joke? So every time prices and/or volumes make a new high, brace yourself!