New heights for Singapore property

Megawati Wijaya
Asia Times

A bubbling property market represents the latest indication that Singapore is recovering from its global crisis-induced economic doldrums.

Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

When the global economy crashed last year, Singapore was among Asia’s hardest hit. As one of Asia’s most open and export-dependent economies, the island state was the region’s first to slip into recession last year after recording two consecutive quarters of economic contraction. Slowing growth took an especially heavy toll on the island state’s property market, which was growing briskly in the run-up to the crisis.

Local property consultancy company DTZ said that the number of property transactions it handled last year was down about 35% on the number of units sold in 2007. Prices of non-landed freehold private homes in the island state’s prime districts fell by 21.6% year on year in 2008, driven down by a 14% quarter-on-quarter contraction in the fourth quarter.

Prices of government-built Housing Development Board (HDB) flats also suffered, with many apartments sold at or below market valuation.

Bearish sentiment, unsold inventories and the potential for buyer default risk had caused industry analysts earlier this year to predict that high-end property prices could decline by between 15-20% in 2009. For mid-market properties, the consensus forecast was a 5-10% decline. Singaporean buyers have defied those downcast expectations, with market sentiment turning positive in the second quarter judging by the surprisingly high number of deals closed.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month. Over 43% of the transactions that took place in July fell under the middle- to high-end tier, with prices anywhere between S$1,000 (US$715) and S$1,999 per square foot depending on location.

New luxury developments in Singapore’s reclaimed areas on the offshore island of Sentosa, where prices average S$2,000-S$3,500 per square foot, also reported steady sales. Significantly the rush has also driven up the prices of government-built HDB flats. In the second quarter, more than 10,000 HDB resale flats changed hands, up from 6,446 units in the first quarter and 7,763 units in the same quarter of last year.

That figure climbed higher to 11,649 units sold in the third quarter, representing the highest such level in five years. Mass-market leasehold projects outside of prime areas have returned to 2007 price levels, according to Chua Chor Hoon, head of Southeast Asia research at DTZ Debenham Tie Leung, a property consultancy. The average price of a leasehold non-landed resale home rose to S$610 per square foot in the third quarter of this year, a mere S$5 less than the 2007 peak level. This, he notes, reverses a more than 20% fall in 2008.

For resale HDB flats, price increases are calculated by the level of cash-over-valuation (COV) buyers pay sellers. The COV median in the third quarter quadrupled to S$12,000 per unit compared to the going rates in the second quarter, according to data released by the Housing Development Board (HDB). Property agents say many sellers now ask for a minimum of 30,000 COV per unit, and in some cases, it can go as high as $70,000. Property agency PropNex chief executive Mohamed Ismail, believes that resale HDB prices are on course to rise 2%-3% over the fourth quarter.

Singapore’s rebound comes as regulators in other recovering regional markets bid to rein in property lending due to concerns that rising prices could cause more bad debts. The recovery has also rekindled pre-crisis complaints about the chronic shortage and rising cost of government-built flats. In land-scarce Singapore there is always pent-up demand for new housing, including from newly married couples looking to purchase their first home.

But comparatively rich foreign buyers are now viewed as the main drivers behind the rising prices of both private homes and HDB flats. Property agency ERA’s statistics show that foreigners with permanent resident status (PRS) accounted for 40% of their recent buyers, up from 20% three years ago.

To cool the market, HDB announced it would release 7,000 new flats onto the market between October and December. It also said it would offer over the next two months 4,000 new flats under a build-to-order (BTO) scheme, on top of the 1,200 new BTO flats which were already in the construction pipeline. Private home sales rates came off their recent highs in September. But many analysts are skeptical the moves will stabilize the market due to doubts that buyers will be willing to wait the three year construction time and because the BTO scheme is only available to Singapore citizens.

Popular public housing

HDB flats, in which about 84% of the population resides, have long been the cheapest housing option in Singapore. Getting an HDB flat of one’s choice, however, is not easy because of a tedious balloting process. Flats in popular locations are usually oversubscribed by over 10 times and that high demand is expected to grow due to the inelasticity of supply and a growing population. One local newspaper recently featured a married couple who still live separately in their respective parents’ homes because of their inability to secure a HDB flat of their own.

Resale flats’ higher prices, driven up by foreign buyers, have put them out of reach for your average Singaporean. Many have also blamed the HDB for raising the valuation of its flats at the end of last year as a reason for the recent price spike. An online petition launched in September calling on the government to intervene in the market by lowering HDB valuations and building more affordable flats quickly surpassed its target of 1,000 signatures.

Parliamentarian Lim Wee Kiak raised the issue of affordable housing in September by advocating a new mechanism to provide bridging loans to young couples looking to buy their first flat. In response, National Development Minister Mah Bow Tan said that HDB flats remain affordable to most Singaporeans, with first-time households using on average less than 30% of their household income to service their housing loans.

However a study published last year by National University of Singapore economists Tilak Abeysinghe and Gu Jiaying found that the purchasing power of people’s lifetime earnings was lower in 2007 than it was in 1990 when tracked against the prices of HDB resale flats. The study found that the prices of HDB resale flats were less affordable over the period – and notably before the more recent surge in prices.

What Mah apparently overlooked was the impact of longer mortgage loan periods. In the 1980s, maximum loan tenures were set at 20 years. It has since been revised upward and this year 56% of HDB flat buyers opted for the maximum 30-year tenure. Analysts say a higher cost of living means that your average Singaporean must allocate a higher percentage of their monthly income for housing than was required 20 years ago. It also means that Singaporeans need to work longer than before to pay off their housing loans, they say.

Minister Mah also said that the HDB will continue to supply new housing units but “we cannot be building new flats to cater to every last person who wants a new flat … because if you do that, then obviously you are over-building”. He quoted HDB data which states that “eight in 10 first-timers could get a flat on their first try if they were not choosy; the success rate was 96% for the second try”. HDB has also stepped up efforts to provide smaller housing units for older people who wish to downgrade in size and purchase back flats from the aged who have lost their previous sources of income.

Since it was first established in 1960, HDB was designed to provide affordable homes to Singaporeans in a push towards economic modernization. The state agency was so successful in moving people out of slums and into neat storied flats that last year it won the United Nations Public Service Award, in recognition of its drive to raise public housing standards.

HDB does not intervene directly by fixing prices of its resale flats, but it does influence market conditions through its control over new supply, said Wong Tai Chee, associate professor in urban studies at the Nanyang Technological University and co-author of the paper “A Roof Over Every Head, Singapore’s Housing Policy between State Monopoly and Privatization”.

He cited an example of when the government cut prices by as much as S$40,000 per unit over eight years ago in newly opened remote areas of Punggol and Sengkang. Cash-strapped buyers were attracted by the price cuts and the measure helped to clear a temporary oversupply on the market.

During the 1996 property boom, the government imposed a capital gains tax on profits made from selling properties within three years of purchase. The rule continued until 2001 when it was abolished to spark more property transactions during an economic downtrend. The government could eventually decide to readopt such measures to deter current property speculation, some analysts reckon.

Minister of Finance Tharman Shanmugaratnam recently said the government does not plan to impose capital gains taxes on property as part of new changes to the income tax code, which come into force in January next year.

In a move many saw as a bid to tramp down speculation, the government last month barred certain low cost loans for housing projects. It also recently banned developers from absorbing interest payments for projects that were still under construction. But there are few indications yet that demand or prices are set to slow for HDB housing.

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