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Further home price spikes may spell risk of renewed cooling measures

Further home price spikes may spell risk of renewed cooling measures.

Most analysts believe that the 3.1% q-o-q hike in URA's private home price index in Q1 is an indication of stronger price upside in 2018.

SEVERAL more quarters of private home price increases of the magnitude seen in the first quarter could leave the property market here staring at the possibility of fresh cooling measures, industry players say.

While the immediate risk of that is low, the surprise 3.1 per cent quarter-on-quarter (q-o-q) jump in Q1 private home prices has led some in property circles to contemplate how policymakers would respond if the uptrend of similar or even bigger price spikes continues in the next two quarters.

"Looking historically, I think the authorities will start to do something when they see double-digit growth in the price index," said Dr Lee Nai Jia, research head at Edmund Tie & Company. This suggests that the authorities will wait until the Urban Redevelopment Authority overall price index for private homes rises another 5.1 per cent from the current level.

The much higher-than-expected flash estimate for the URA's Q1 2018 overall private home price index came after milder q-o-q rises of 0.8 per cent in the fourth quarter of 2017 and 0.7 per cent in Q3 2017 - following a bottoming out of the index in Q2 last year.

Most analysts believe that the Q1 flash estimate is not a blip but more likely an indication of stronger price upside this year fuelled by the bullish land prices paid by developers in the past 15 months or so. Based on the Q1 flash estimate, the URA overall private home price index is up 4.7 per cent from the recent trough in Q2 2017.

If similar q-o-q hikes in the index continue, the 11.6 per cent decline in the index over nearly four years (between Q4 2013 and Q2 2017) would be wiped out by the end of this year.

Alice Tan, head of consultancy and research at Knight Frank Singapore, reckons that some form of government intervention is likely should the magnitude of the q-o-q increase in URA's overall private home price index hit 3 to 5 per cent for another couple of quarters, especially the subindex for non-landed private home prices in the suburbs.

JLL national director Ong Teck Hui said: "If the index were to continue escalating at a higher pace in the next few quarters, the risk of intervention would be higher."

Responding to BT, a spokesman for the Ministry of National Development referred to a speech by National Development Minister Lawrence Wong last November, when he said: "We will continue to stay vigilant and monitor the market closely. We recognise that there will always be ups and downs in the property market. As far as possible, we will make use of the various levers we have to achieve a more stable and sustainable property market."

Mr Wong, who is also Second Minister for Finance, had delivered that speech at the Real Estate Developers' Association of Singapore's 58th anniversary dinner.

Besides monitoring the price index, analysts say other potential red flags the authorities would be on the lookout for include income growth lagging behind the escalation in home price, and a significant increase in the proportion of foreign buying.

"The authorities will also be watching banks' exposure to real estate lending, be it for land acquisition or housing mortgages, plus the proportion of household wealth being locked in real estate," said Savills Singapore research and consultancy head Alan Cheong.

Dr Lee said that studying vacancy trends, as well as comparing the number of private homes sold against the growth in the number of Singaporean households, would also provide a gauge as to whether demand for private homes is being driven more by owner occupation or investment/speculation.

Intervening when the time is right would have beneficial impact all-round.

"From the government standpoint, the banking system would be vulnerable if a property bubble is formed," said Dr Lee of Edmund Tie & Co.

Savills's Mr Cheong, who noted that the case for intervention is strong if the rate of price increase is excessive, said: "Contrary to the conventional belief of some market players, weak-to-mild-impact interventions are actually good for the property market if these help tone down irrational exuberance and in doing so prolong the 'up phase' of the price cycle for the benefit of all stakeholders."

Ms Tan of Knight Frank said: "With the government's consistent objective of ensuring a stable and sustainable property market, interventions are necessary to ensure home prices grow in tandem with income growth, which is crucial in ensuring private homes remain accessible to aspiring home upgraders."

In line with the views of most analysts, CIMB Private Banking economist Song Seng Wun thinks it is premature for the government to intervene at this stage. He said: "Unless we see the bullish sentiment in the private housing market spill over to the HDB resale side, the government will probably continue to take a wait-and-see approach."

Observers also point to an expected moderation in private home prices arising from a stronger supply of project launches next year, due to the collective sales boom. "So any policy action should take that into account," argues JLL's Mr Ong.

Dr Lee said that rolling out cooling measures now may further delay a recovery in the construction sector, which has a major bearing on Singapore's economy.

"Things are expected to improve for the construction industry in the second half of this year due to the redevelopment of sites sold through en bloc sales.

"However, if we begin a new round of cooling measures at this juncture, developers would try and phase out launches and slow down developing their sites. To reduce an adverse impact on the construction sector, it would be better if any possible cooling measures take effect next year at the earliest," Dr Lee added.

Savills's Mr Cheong highlights another potential negative fallout from a premature intervention. "The private housing market is only beginning to find its footing after a prolonged slump. If the intervention causes transaction volumes to collapse, it would then increase the risk to financial institutions that have belted out loans to developers who have been stocking up on land either from the Government Land Sales Programme or through collective sales."

Just what sort of cooling measures could the authorities unleash?

Dr Lee said that the the first step would be to reverse the changes to the seller's stamp duty (SSD) in March last year. Back then, the authorities reduced the holding period for residential properties - after which the SSD does not apply - from four years to three years and also cut the SSD rates for each tier by 4 percentage points.

Knight Frank's Ms Tan also expects the authorities to potentially reduce the loan-to-value (LTV) limits for the second and subsequent housing loans.

"This would be more palatable compared to, say, raising the 7 per cent additional buyer's stamp duty (ABSD) rate on Singaporeans buying their second residential property."

Singaporeans are exempted from ABSD on their first residential property purchase, and pay 10 per cent ABSD on their third and subsequent residential property purchases.

Adapted from: The Business Times, 11 Apr 2018