Resale cash premiums set to slide

Govt measures take effect, with 25% fall in transactions of HDB resale flats

Published October 7, 2010
By EMILYN YAP

MEASURES to cool the property market have started to take effect in the public housing sector.


The Housing & Development Board (HDB) estimates that transactions of resale flats fell 25 per cent in September compared with August.

Property agents are expecting cash premiums for resale flats to slide to $10,000-$22,000 by the end of the year, down from a median of $30,000 in Q2.

Industry watchers are on edge, and they have good reason to worry. Over the years, government policies have shaped the property market significantly. While the economy certainly affects home prices and sales volumes, state measures push them up or drive them down faster and sharper.

Government policies are also far-reaching. New rules for HDB flats often influence the private home sector. Changes on the use of Central Provident Fund (CPF) savings affect property demand further.

With Singapore's small market and the presence of active upgraders, downgraders and investors, one policy often hits the real estate industry on various fronts.

Government measures have 'quite a significant impact' on the property market, says DTZ executive director Ong Choon Fah. She likens the market to a pyramid, with HDB flats occupying the broad lower strata, executive condominiums in the middle, and private homes making up the narrow peak.

'Each layer provides the support base for the next,' she says. If there are policy changes at the lower levels, 'that whole spectrum is affected.'

This relationship was borne out in the late 1980s and early 1990s with major changes to public housing rules - the government started opening up the market to let people buy, sell and even invest in flats more freely.

As Hersing president Jack Chua describes, 'the public housing programme shifted from building for shortage to deregulation and the creation of a resale market'.

Some of the most crucial changes took place in 1989. The government allowed permanent residents (PRs) to buy resale flats; removed income ceilings for resale flat buyers; and allowed resale flat owners to also invest in private homes, subject to conditions.

The changes created new sources of demand for resale flats and private residences, setting the stage for a price surge.

The property market experienced a mild hiccup in 1990 when the Gulf War broke out but soon regained its footing, egged on by post-war pent-up demand and more state measures facilitating property purchases.

In 1991, singles aged 35 and above got the green light to buy resale flats. HDB also allowed those who bought flats directly from it to invest in private property, subject to conditions.

From 1993 onwards, it became easier for people to finance property purchases. They could borrow more from HDB as the board changed the way it determined loan sizes for resale flats. CPF Board also allowed buyers to use CPF savings for interest payments on top of principal payments.

'Market reaction to these policy changes was rapid - HDB resale prices increased quite sharply and added a further upward push to private property prices,' says Knight Frank in a note to BT.

The heady mix of strong economic growth, low interest rates and looser state policies in those years sent property prices soaring. The HDB resale price index hit 101.9 in Q4 1995, more than triple the 33.6 in Q1 1990.

Flat owners took advantage of rising prices to upgrade to private property. More people also bought private homes for investment or speculation. As a result, the Urban Redevelopment Authority (URA) Private Residential Price Index more than doubled, to 164.9 in Q4 1995 from 57.2 in Q1 1990.

The run-up began in the HDB resale market, spread to the private home market, and then took on 'a life of its own,' Mrs Ong recalls.

The government ended the party with a forceful set of cooling measures in 1996, which hit the private home market first.

'The impact from these measures was immediate and speculative activity fell sharply. The market was generally quiet for the rest of the year,' according to Knight Frank. After reaching a high of 181.4 in Q2 1996, the URA Private Residential Price Index slid 9 per cent in the next one year.

The HDB resale market continued to climb for a few more quarters, but it wasn't long before poor sentiments and more policy tightening cooled it.

In 1997, HDB limited flat buyers to only two subsidised mortgage loans and started conducting credit assessments on buyers. Later that year, it raised resale levies, and required aspiring upgraders to live in their flats for the full five years before they can book private homes.

Tighter rules coincided with the arrival of the debilitating Asian financial crisis to sink both the public and private property markets. The government tried to provide support later, by suspending the stamp duty imposed on sellers for instance, but could not stem the tide.

The URA Residential Price Index slumped 45 per cent from its peak in Q2 1996 to end-1998. By then, the HDB Resale Price Index had also plunged 27 per cent from its height in Q4 1996.

In the last decade, the government loosened and tightened policies more frequently as the property market went through several cycles. Prices stayed low for years through the dotcom bust, Sept 11 terrorist attacks, Iraq war and Sars; climbed to new heights as the economy soared; fell again with the global financial crisis; and recovered on the back of strong liquidity and economic improvement.

There was a sense of deja vu among veteran industry watchers as the government tightened some policies again this year to stop speculation. It re-introduced a sellers' stamp duty and slashed the loan-to-value limit to 80 per cent. For those with outstanding home loans, the limit became 70 per cent.

It also required a private property owner who buys a non-subsidised HDB flat to sell his private property within six months of the purchase - regardless of whether the property is here or abroad. To some extent, this undid the liberalisation that happened in as far back as 1989 - PRs who own homes abroad, and the rich with private homes, will no longer be able to buy flats.

History shows that government policies are forces to be reckoned with. With the introduction of the latest measures, most industry watchers are expecting property sales volumes to drop and prices to stay flat, if not dip.

In the resale flat market, cash-over-valuations are likely to slide, says Hersing's Mr Chua. 'This would mean lower resale prices by year end, bringing the resale market more in tandem with the pace of economic growth which is expected to be slower in the second half of this year.'

For the private home market, some analysts are also anticipating a drop in sales volumes and prices.

DTZ's Mrs Ong expects the changes to arrest property price increases. The impact will be gradual and will not be 'something that we will see dramatically overnight,' she stresses. 'Especially if you're talking about moderation in prices, prices tend to be very sticky on the way down

Source: http://www.businesstimes.com.sg