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22 July 2013

Residential market poised on a knife-edge
Record number of new homes nearing completion clouds outlook

Source: Straits Times | Money
By Goh Eng Yeow Senior Correspondent

DEPENDING on which set of data you are looking at, you will get a very different picture of the effectiveness of government measures to rein in property prices.

Urban Redevelopment Authority figures show that an astounding 1,806 new private homes were sold last month.

This was a 23.8 per cent jump over May's 1,459 units, which was, in turn, a 5.4 per cent improvement over the 1,384 homes sold in April.

However, flash data from the Singapore Real Estate Exchange (SRX) showed that only 605 resale condos were sold last month, a 21 per cent drop from May's 762 and a 10 per cent drop below the April tally of 671.

Some will argue that the June new home sales data was a fluke, as demand had been bolstered by blockbuster sell-outs at projects such as the 738-unit J Gateway in Jurong East and the Jewel@ Buangkok condo with 616 homes.

But the half-yearly data shows a similar divergent trend.

There were 10,061 new private homes sold in the first half - a drop of 16 per cent over the corresponding period last year.

But resale volume for the first six months was down a striking 30 per cent to 3,954 units from 5,675 transactions a year earlier.

Judging from the data, it would be safe to infer that the Government's January cooling measures, including imposing a 7 per cent additional buyer's stamp duty on Singaporeans for buying a second property and 10 per cent for a third or subsequent property, have been effective in dampening demand for resale homes.

However, the curbs are having a smaller impact on the new home sales market, perhaps due to developers' aggressive tactics such as giving cash rebates on stamp duties.

That leads to the next question: Will the tougher rules on home loans announced at the end of last month have an impact on the new home sales market?

Essentially, the rules cap how much a property buyer can borrow by ensuring that his monthly repayments, combined with all other debt obligations, do not exceed 60 per cent of his gross monthly income.

To plug the loophole whereby some parents use their children's names to buy a second property, loan guarantors will also be considered as co-borrowers.

Daiwa Capital Markets analyst David Lum believes that linking the loan to the debt will remove some demand from the market.

"Anecdotally, some buyers (near retirement age) have circumvented the additional buyer's stamp duty and loan-to-valuation restrictions by buying their second and third homes in their children's names," he wrote in a recent note.

But Mr Colin Tan, research head of property consultancy Chesterton Suntec International, believes that many property buyers have sufficient spare cash to overcome whatever measures are thrown at them.

"Most of us think all existing buyers are stretching themselves to the hilt. Personally, I don't think so. Investors borrow to the hilt because it is silly not to do so. Likewise, they use their children's names because it is silly not to."

Certainly, there are plenty of people with spare cash to buy a property or two, even after tightening the rules on home loans.

The Monetary Authority of Singapore data shows that there is plenty of liquidity sloshing around here, with Singdollar deposits jumping to $534.3 billion in May from $487.9 billion a year earlier.

Many home buyers also find the progress payment scheme in buying a new flat attractive. To them, this is like getting a long-dated option to buy a stock which magnifies any gains they may make, if property prices go up.

However, one challenge the market faces is the record number of new homes that will be completed in the next two years.

Using a stock market analogy, this is equivalent to a large number of stock options expiring simultaneously - an event that can trigger wild swings in stock prices.

There are about 290,000 completed private housing units and executive condos in Singapore but analysts estimate that a further 100,000 units will be completed in the next four years.

This means that the supply of private housing units will jack up by one-third - a huge increase by any measure, even after taking into account the recent increase in population.

Macquarie Equities Research analyst Soong Tuck Yin wrote: "As most of these (private home) completions may affect buyers seeking tenants, there will be pressures on rental yields. If this happens, yield spreads will be narrowed and weaker holders may be tempted to sell."

Throw in a couple more uncertainties such as an interest rate hike and a hard landing in big economies such as China, and you will understand the headwinds facing the residential market.

That is why it does not take a rocket scientist to explain why property counters seem stuck in the basement, unloved and neglected, even though new home sales stay buoyant.