Is the SG government planning new property cooling measures in the private residential market?

It is hard to believe that private property prices actually increased during a Covid-induced recession. Even more surprising is private property prices reached the highest level not seen since Q4 of 2013.

The has sparked off rumours that the SG government may be planning more property cooling measures. To understand more about the real intent of property cooling measures by the government, it is important to look at the historical events that occurred during the property cycle of 4Q19 to 4Q13.

Dynamics of the Property Cycle of 4Q09 to 4Q13

The above chart tracks private property price index from 4Q93 to 4Q18. A property cycle is the period between the peak and trough of each price trend. For example, property prices hit the lowest in 4Q09 after the global financial crisis sparked off by the Lehman Brothers Bankruptcy, and peaked in 4Q13.

There is no fixed period for a property cycle. It could be as long as 4 to 5 years or as short as 1 year. As mentioned, I would like you to understand the underlying reasons for why property prices sank after 4Q13, which marked the end of the property cycle from 4Q09 to 4Q13.

When property prices recovered on the back of the global financial crisis, it was caused by rapid economic growth in Singapore, marked by strong economic recovery of Singapore's major trading partners. Singapore recorded the highest economic growth rate of 14.8% in 2010, which was the highest in the world.

The pace of property recovery started to worry the government, as concerns about over-leveraging and low interest rates fuelled fears of a property price bubble, characterised by speculative demand whereby investors buy and sell properties (aka "flipping") within a short period of time for a profit.

Hence, the Singapore government started introducing property cooling measures in 2011-2013. We shall leave the details of those measures aside since it may complicate the layman reader. Generally speaking, those measures seek to curb speculative demand and came in the form of Additional Buyer's Stamp Duty (ABSD), Seller's Stamp Duty (SSD) and Total Debt Servicing Ratio (TDSR).

The ABSD is mainly aimed at Singaporeans who owned 2 or more properties, which effectively reduces the return on a property investment since the capital gains has to be offset by increased taxes paid on a property purchase.

The SSD is mainly aimed at speculators who "flipped" properties within the span of 4 years, which was effective in weeding out short-term speculators.

The TDSR is geared towards reducing over-leveraging and caps the monthly instalment of a housing purchase at a maximum of 60% of monthly income, provided the purchasers have no other loans.

Shortly, the market tanked as speculative demand was "sucked" out of the buoyant market which was clearly not supported by fundamentals. This marks the end of the property cycle of 4Q13.

Understanding the Current Property Cycle (4Q18 - now)

It is worth noting that the government actually introduced even more stringent ABSD in 3Q18 marking the end of the short-lived property cycle from 4Q17 to 3Q18.

What is remarkable about this current property cycle (4Q18 - now) is that property prices are resilient despite the Covid-induced recession. This is largely explained by the ultra-low interest rates (0% - 0.25%) seen in the US. Being an interest rate taker, Singapore's mortgage rates have hit a decade low, which has reduced borrowing costs for property investors, thereby explaining the uptick in private property prices.

But the more important reason why property prices stayed resilient is because there is very minimum speculative demand in the market given the previous rounds of stringent property cooling measures. There means there is unlikely to be a property price bubble, which would naturally burst in a recession where people with dwindling incomes sell assets such as property to reduce debt.

Coupled with a debt moratorium on loan repayments as part of the Covid relief measures, whereby private property owners can postpone their mortgage repayments, there is unlikely to be fire sales of private properties.

Final Verdict

It is quite evident that the risk of a property price bubble is very low at this current point in time. Also, the introduction of the debt moratorium indicates the government does not desire a sharp property price correction during a Covid-induced recession.

The suggestion that the Singapore government would want to introduce property cooling measures now may be too much of a stretch given that the current measures taken are meant to support property prices in a downturn.

A stable property market requires income growth to be in sync with property price growth. Admittedly, that is currently not the case as income growth is negative while property price growth is positive.

Perhaps the Singapore government is waiting out for an economic recovery spurred by the successful implementation of the Covid Vaccine to close the gap. However, if the gap between income growth and property price growth continues to widen, one cannot rule out more property cooling measures in the works.

Disclaimer: The information provided in this article does not constitute any provision of legal advice and is based on certain implicit assumptions.