A Fine Mess We Have Gotten Ourselves Into!

Real Estate Market thought, impacts and outcomes.

8^th December 2011, Tuesday.  The unveiling of a set of “unprecedented” stamp duty taxes which in summary are:

1.       Additional stamp duty paid on top of the prevailing 3%.
2.      Foreigners who pay an additional 10%.
3.      PRs pay an additional 3% for second and subsequent properties.
4.      Singaporeans who already have two residential properties will have to pay an additional 3% on their third and subsequent properties.
 
A)     Understanding the latest cooling measures
Two very key events lie in this latest property curb announcement made by the government. 

How this markedly differs from the previous cooling measures is that under the previous administration of the Ministry of National Development under then Minister Mah Bow Tan, the government used incremental cooling measures which had little impact on an upward trending residential real estate market as it had little impact on the price expectations on both buyers and sellers.  What could be derived from that is that the cooling measures failed to address some of the core issues that were leading to “over” investment in the residential property market.

The first key difference is in the recognition that foreigners are playing a part in making an impact on residential real estate prices.  Till yesterday, all previous cooling measures had equal impact on all real estate buyers.  Today’s official press release is the only one that has a specific intention to reduce the appeal of Singapore residential properties as an intended destination as investments by foreigners.

For the longest time, foreigners buying residential properties had only 2 restrictions;

a)      Not being eligible for the purchase of HDB flats, and

b)      In purchasing landed property with the exception of Sentosa. 

This current cooling measure has is predominately targeted at foreigners with a hefty stamp duty placed on residential purchases made from December 8^th 2011.  For PRs and Singaporeans, it is clearly an attempt to smooth over the residential purchases to seek to achieve something similar to a more equitable home ownership in terms of number of units owned.

The second aspect is the size and scope of the impact of these foreign buyers.  Within the Straits Times press release comes the second key difference between previous press releases.  On page A10, column 2 under “Concern over investment demand”, under the paragraph that reads,

“The numbers have clearly been given a boost by foreign buyers who accounted for 19 per cent of all private residential property purchases in the second half of this year, up 7 per cent in the first half of 2009.  And these figures exclude purchases by PRs”

The above numbers of foreigners accounting for 19% of all private residential property purchases is not a new release.  A previous parliament sitting had a minister quote that foreigners made up 19% of the private residential property purchases, with locals making up the rest.  Hence the admission here given the cooling measures is that foreigners and PRs are making significant residential real estate acquisitions which are driving up the markets as quote,

“13 per cent above the 1996 peak and 16% above the most recent peak in 2008”

In understanding the reasons behind the implementation of the above cooling measures, one will be better able to have better foresight of things to come, and better position themselves for the reactions of the markets as will be discussed later on below.

B)     The next step is to better understand what is driving up the property prices.

Global Crisis and international money

Following on the conversation developed in part A, we can start to see that it really is not foreigners per se that are the cause for escalating price increases, but rather, Singapore residential real estate is being sold on global markets as a big ticket commodity.

How is this so?

International money

Unlike people who have defined nationalities, and reside within specific geographical boundaries, money on the other hand, needs no passport and hence has little restriction when it comes to crossing borders. 

The current global economic environment is marked by historically low interest rates, which fuels borrowing, and chasing give better returns than bank deposits.  Coupled with the fact that real estate allows a buyer to leverage by making substantial borrowings with these cheap funds, it makes for a real estate boom in parts of the world.

The trouble with this phenomenon is that this international money can flow out as quickly as it flowed in, often leaving the country’s residents holding the short stick.

Global Crisis

Typical recessions are usually marked by economic recessions in one part of the world, with bright spots someplace else. 

Rarely have we seen recessions or crisis happening in many places at the same time.  Suffice to say, there has always been someone to take over being the growth engine of the world but one would be hard pressed to find such a white knight in these times. 

China is going through a severe real estate price correction given the bubble that have been forming in the market there, the USA is experiencing high endemic unemployment, and Europe is in the midst of a currency and debt crisis.  This leaves few areas that could pull the global economy out of this coming downturn.  The outcome of this is that the growing liquidity on the international scene would be flooding into these remaining bright spots in the hope of earning some form of return given the relative cheapness of borrowing money at this stage.

On the Singapore front,

The cooling measures would seek to stop this international money from reaching the residential real estate markets with the aim of keeping prices here sustainable and not to end up pricing out a whole generation of Citizens from becoming home owners.  The unfortunate thing is that it is like trying to stop a flood in a leaking dam by plugging just one hole. 

Ultimately, the money will flow into other asset classes rather than residential real estate.

C)      What can we hope for next?

Stability and Endurance

Singapore real estate is not the exception to this new phenomenon that is sweeping around the world where real estate prices are driven up as international investors seek out properties that are relatively under-priced given the state of global real estate prices in general. 

Hence and therefore, intervention on the government level to stem the inflow of such funds into residential real estate will be necessary to mitigate the demand for residential real estate.  However, this is akin to plugging one hole of an over-flowing dam as the funds will be flowing into alternative asset classes instead of residential real estate.

On endurance, a desirable state that would be nice to reach is that of stable and sustainable growth.  Given the low interest rate environment and the large flux of liquidity that is washing around global markets, we need to hope for a return for stability in Europe, America and China such that these funds are more evenly spread out instead of being concentrated in a few areas to mitigate asset bubbles forming in the mid to long term.

In the near term, the key consideration would be that foreigners comprising of 19% of transaction volumes would now be priced out of the market, causing Singapore real estate markets to see a sharp drop in sales volumes as the collective buyer mentality shifts to that of anticipating that sellers and developers adjust their prices accordingly given the new measures. 

The faster prices adjust to this new environment, the sooner transaction volumes will start to pick up again, albeit at adjusted prices. 

Hence, endure.