SINGAPORE, 3 October 2022 – In a climate of rising interest rates, one can hardly blame the authorities for exercising a blanket clampdown on financing to safeguard the stability of the housing market, says EDMUND TIE’s Lam Chern Woon.
Just before the stroke of midnight on Thursday (Sep 29), the authorities released fresh measures to calibrate property financing conditions to moderate housing demand, especially in the HDB resale market.
This was not entirely a surprise.
After all, based on HDB and URA’s flash estimates of the third-quarter price indices released on Monday, prices of resale flats rose 7.77 per cent in the first nine months, while overall home prices increased 7.78 per cent.
Demand for million-dollar HDB resale flats has also increased greatly, with 277 such transactions in the first nine months of this year, compared with 259 for the whole of 2021.
It was a matter of time before the Government stepped in. But as with previous cooling measures, the announcement was met with a knee-jerk reaction, unnerving prospective buyers and sellers and affecting the share prices of property developers.
In the latest episode, no doubt, some bemoaned the impact to their borrowing and homebuying ability, especially when it is the dream of many to climb the property ladder.
NEED FOR MORE SUSTAINABLE GROWTH
Although most homebuyers are likely to exercise prudence in taking on leverage for big-ticket item purchases, the new measures serve as a timely reminder for them to relook their finances and act within one’s means.
Singapore has enjoyed low interest rates for years. In a climate of rising interest rates, one can hardly blame the authorities for exercising a blanket clampdown on financing to safeguard the stability of the housing market.
Plus, not all property hunters will be affected; it just compels one to adjust their budgets accordingly if their borrowing capabilities are now trimmed.
With the stricter criteria for borrowing, our simulation shows that a potential buyer’s maximum loan quantum eligibility and budget will now be reduced by 6 per cent.
For instance, assuming no other debt obligations, a household with a monthly income of about S$12,200 will now be eligible to loan up to S$1.41 million to support a S$1.88 million property purchase. This compares with a S$1.5 million loan for a S$2 million property purchase previously.
This way, the property market will then be expected to grow at a more sustainable pace, which is to everyone’s benefit in the long run. We expect overall private home prices to rise by about 9 per cent this year, following last year’s 10.6 per cent growth, with a further moderation to 1 per cent to 3 per cent growth for 2023.
EVER-RISING HDB RESALES PRICES NEEDED TAMING
Turning to the public resale market, the authorities are clearly concerned about the market’s exuberance, as well as the ripple effects of ever-rising resale HDB prices on the private property market, plus the BTO market where prices are offered at a discount to market.
Previously, potential buyers were able to loan up 85 per cent to finance their HDB flat. This, coupled with the relatively low 2.6 per cent HDB loan concessionary rate, had enabled people to take higher loans, contributing to the eye-watering prices of some resale flats.
With private home owners now having to wait 15 months before they can buy a non-subsidised HDB resale flat, demand will surely moderate and prices will become more affordable.
In particular, because seniors aged 55 and above who are downgrading from a private property to a four-room or smaller resale flat will be exempted from the new wait-out period, the price gap between four-room or smaller resale flats and the larger five-room or Executive Apartment flats will narrow.
Given the tight employment situation, ongoing economic growth albeit slowing, robust household balance sheets, and healthy demand-supply dynamics, we see limited pockets of distress in both the primary and secondary markets.
RISK OF RECESSION
Amid slowing economic growth, rising living costs and interest rates, the property market is now closer to an inflection point.
The final straw that might break the housing camel’s back would be further cooling measures or an outright recession, which is also a current concern of many. This is because during a recession, home borrowing and buying ability are curtailed and distressed sales are also likely to be more prevalent.
There will also likely be downward pressures on prices to move inventories. Eventual reductions in property valuations would impact financing, resulting in a hit to property sentiment and setting off a chain reaction.
Ultimately, it is important to remember that this fresh round of measures is intended to introduce prudence to every segment of the housing market, especially since Singapore’s interest rates are pegged to the United States’ Federal Reserve rates.
The policy objective and public mantra of the authorities have always been a healthy and sustainable property market.
The growth of the market is hardly frowned upon, except when prices run afar of fundamentals.
In the current property climate, while prices are generally still affordable, pre-emptive steps are necessary to ensure sufficient prudence within the banking system.
Should a recession and property downturn emerge, there is no doubt that the authorities have an arsenal of tools to cushion the fall by rolling back earlier measures.
Lam Chern Woon is head of research and consulting at EDMUND TIE. This article was featured in CNA as a commentary.
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