Will the new policies sustain its impact on the residential property sector?

More than half a year since the last round of direct private residential property cooling measures were implemented in January, private home-buying interest seem to have been moderated and probably, optimism has become a thing of the past.

Coming into this part of the year, with the ‘fresh’ financial crisis in US and Europe, the current concern has shifted to whether private property prices will fall even before the supply surge of physical completions in 2013 arrive.
Most recently, the highlight has been on the raising of the monthly income ceiling for HDB flats to $10,000 from $8,000, and a raise in the monthly income ceiling for executive condominiums (ECs) to $12,000 from $10,000. To assess the effectiveness of these changes, it will be appropriate to have a holistic look, at its immediate impact and longer term effects. Long term effects are critical, presuming that the change is set to stay unless there is material change in market conditions.

Direct impact
It has been common understanding that raising the HDB and EC income ceiling can help to moderate the strong buying interest for private mass-market condos, as some homebuyers, typically those in the $8,000 to $10,000 per month income household, may opt for public housing, which is a lower cost alternative.

Timeliness and implicit impact
These new rules are reasonable at the current market condition. Firstly, even when these measures were implemented in the face of a weakened economic environment, expectations for local economy is that it may be challenged but are unlikely to be as severe as the last round in 2009.

Secondly, the last round of direct private residential cooling measures have already some impact but did not totally create a plateau to private residential price increase. These new rules, which tackle public housing, have dual impact - for they can moderate home-buying interest for private residential properties and can be viewed as 'implicit measures' for the private residential market.

The impact to private residential properties will be visible but are unlikely to be harsh compared to direct private residential cooling measures. A diversion of homebuyers from the private to public housing as they weigh the alternatives may psychologically enable a more willing decision to settle for public homes, instead of harsh buying restrictions on private residential which limit entrants who have strong housing aspirations from purchasing private residential properties.

This policy is timely as it comes in the face of new economic challenges arising from the US and EU significant debt issues and homebuyers in Singapore will be cautious as property prices have significantly run up, consistently challenging affordability.

Conventionally, new housing policies and cooling measures will require a longer time to see its effect in curbing home-buying optimism in ordinary economic conditions. But the implementation of the new public housing rules at the onslaught of subdued economic conditions may help to ease optimism and potential for consistent price increase for mass market private condominiums faster. Buyers who opt for public housing or executive condominiums in lieu of private condominiums would have gone through a careful evaluation process, which is key to sustainable home-buying decision.

This set of cooling measures which implicitly moderate private residential demand also plays a pivotal role in incrementally easing the interest for private residential properties, instead of harsh measures which can potentially result in sharp falls of private residential prices and the wealth of such owners. It is a reflection of the sophistication of property market issues and strategies to overcome unrealistic buying behavior.

Downside risks from new rules in longer run?
These new rules may not necessarily create downside risks in the form of significant lackluster demand for the private residential sector, in the medium or longer term. Private home-buying interest may still persist with economic stability albeit at a moderation which can keep price increase in check or at most, resulting in a slight appropriate downward price correction. There should still be sufficient takers for the private homes available for sale amid ample private residential supply. Under such situation, we know there will be opportunistic buyers who will action when prices are attractive, leading to some reversion in price correction. That said, however, opportunistic private home buyers are still expected to be overall cautious but not pessimistic.

There are also new emerging demand drivers for buying private residential properties, such as buying for societal status, enticed by product innovation and for therapeutic reasons – typically by many white collar professionals in this fast paced society. If the economy gradually recovers or sentiments are overall cautious but not pessimistic, these motivations may support on-going private home-buying interest.

However, a challenge for public housing is that there may be more eligible interested buyers. A way to overcome this is to ramp up the supply of Build to Order flats which the HDB is currently doing.

After the implementation of the rules, the next stage for possible refinement would be to consistently track applicants’ status, behavior and appeal, including possibly prioritizing the needs of unsuccessful applicants who fell into the original income brackets, i.e. for households which earn less than $8,000 per month and are applying for a new flat.

Constant monitoring, review of the newly implemented rules and providing suitable adjustments will contribute to the total strategy of meeting housing needs and sustainability of the property market, which has been proven to be the government’s commitment to affordable housing.
 

Ong Kah Seng, Senior Manager, Research – Asia Pacific, Cushman & Wakefield