As we head into the post-election period, the property market is stable. A combination of steps taken by the Government and the real estate industry over the last few years has made it safe to remove the 15 per cent Additional Buyer’s Stamp Duty (ABSD) on selected foreigners and up to 10 per cent tax on qualifying Singaporeans.
In doing so, the Government would make Singapore the envy of global property markets.
According to SRX Property’s analysis, prices in all of Singapore’s property markets are subdued and there is no longer a threat of a housing bubble. SRX price indices for last month show that HDB resale prices have declined 11.3 per cent since their peak in April 2013. Resale prices of private apartments are down 6.5 per cent from their peak in January last year.
Rents for both HDB and private flats continue to slide as more supply comes to market.
Meanwhile, market sentiment shows that any threat of a housing bubble has disappeared. Since 2013, the market has been trading below or at SRX Property’s X-Value, which is a computer-generated estimation of the market value of each home in Singapore.
In fact, the private market has traded exactly at X-Value for five months straight, which suggests none of the “irrational exuberance” typical of a bubble.
As a whole, private market participants are transacting at the X-Value’s mathematical value, while HDB transactors have traded close to it (negative $1,000 in July and on a par last month).
Furthermore, overall price indices have not kept pace with growth in gross domestic product (GDP) and median household income. Since 1995, according to government and SRX Property data, GDP has increased 6.2 per cent annually, household income 4.3 per cent, and the SRX Price Index 3.6 per cent.
This being so, housing is very much affordable vis-a-vis key macroeconomic indicators, thanks to efforts by the Housing Board, including the construction of more Build-to-Order flats and other initiatives to improve affordability.
As prices are under control and home ownership is accessible to all generations of Singaporeans, it is an opportune time to remove ABSD for the good of the overall economy.
Safe haven for overseas capital
As China struggles and Europe stagnates, capital is in search of a safe haven for investment. The United States is clearly a destination but Singapore can once again be one too. Imagine a robust Singapore economy driven, in part, by a robust and transparent international property market.
It is possible to achieve this vision without risking a return to the rapid price expansion of 2010-2012. In fact, the market has learnt much since the financial crisis of 2008.
We have three tools at our disposal that make it safe to remove ABSD: standardised underwriting constraints; flexible speculation controls; and transparent pricing.
• STANDARDISED UNDERWRITING CONSTRAINTS
In his book, Hidden In Plain Sight, Peter Wallison, a member of the Financial Crisis Inquiry Commission authorised by the United States Congress, 2009-2011, writes: “It is clear beyond doubt that good underwriting standards produce a stable housing market during normal (non-stressed) times, while deviations from these standards produce instability and high rates of mortgage default. A decision to loosen underwriting standards as a matter of deliberate (US) government policy was a serious error.”
A stable housing market underpins a strong financial system and vice versa. Thus, in late 2012, the Monetary Authority of Singapore (MAS) conducted a thematic inspection of the residential property loans business of the major banks in Singapore. MAS determined that there were “areas for improvement, particularly in banks’ underwriting practices”. Following its thematic inspection, MAS took several steps in 2013 to standardise the mortgage underwriting process. These steps included: tightening loan-to-value limits for different loan scenarios; reducing maximum loan tenures; reducing the mortgage servicing ratio for HDB loans to 30 per cent and imposing a total debt servicing ratio of 60 per cent.
SRX Property’s analysis on the effectiveness of cooling measures indicates it was a combination of increased housing supply and the standardisation of underwriting that stabilised the market.
When ABSD was implemented, the market was not operating under standardised underwriting. This should give us confidence that we can lift ABSD and still protect Singaporeans from overextending themselves in a low-interest-rate environment.
• FLEXIBLE SPECULATION CONTROLS
No economy wants hot money, but every economy needs capital to spur business and asset growth.
For most people, their homes represent the bulk of their retirement savings. For many, property offers people the opportunity for upward mobility as they use financing to buy and sell their way into incrementally more expensive homes.
As Mr Lee Kuan Yew famously said: “Home ownership motivates Singaporeans to work hard and upgrade to better flats for a better quality of living.”
It is clearly in the best interest of Singaporean homeowners for their homes to appreciate at a steady rate over time. Stagnation and volatility in the housing market are equally undesirable, both for Singaporeans and overseas investors.
As good overseas capital spurs the economy and price appreciation in the housing market, the trick then is not to prevent capital from coming into Singapore, which is precisely what ABSD does. An upfront duty of 15 per cent means foreign buyers start, from day one, in a negative position in terms of return on investment and must still contend with market risk. This being so, ABSD makes Singapore’s property market less attractive to prudent, long-term investors and thus encourages them to invest elsewhere.
The trick is not to keep good capital out but to keep it from leaving. The Seller’s Stamp Duty (SSD) is an example of a safeguard that prevents speculation without deterring good capital inflows into Singapore. Given the role of property in Singapore’s economy and financial system, we would suggest that thoughtful investors would agree that SSD benefits them as well. In fact, in comparison to other lock-in periods for private placement investments, the Government is rather lenient. SSD’s holding period is only five years and the tax on a premature sale of the home decreases from 16 per cent in year one to 4 per cent in year four.
Investors are more than used to lock-in periods of seven to 10 years, especially those who are investing in private companies. Rules designed to prevent speculation help the property market by attracting long-term investors who are committed to the long-term sustainability of their homes.
SSD is another reason we should feel confident that we can remove ABSD and still maintain long-term, sustainable property markets in Singapore.
• TRANSPARENT PRICING
The third safeguard is that Singapore has much more transparency in pricing than it did during the price build-up in 2010-2012.
Since 2012, the Government has made property data more accessible to the industry and the general public.
Meanwhile, the estate agencies and StreetSine Technology Group, a subsidiary of Singapore Press Holdings, formed the Singapore Real Estate Exchange (SRX) to improve pricing transparency, productivity and market efficiencies.
Now, all market participants, including consumers, agents, bankers, underwriters, policy analysts and decision-makers have access to pricing tools like X-Value and Home Report. No longer are people making decisions in the dark.
More transparency makes speculation and housing bubbles more difficult to form. The distribution of X-Value to all market participants strengthens pricing, valuations and underwriting, and thus reduces systemic risk to the financial system.
Furthermore, granular data and analytic tools now available to policy analysts allow them to understand each type of property and market (HDB, cluster houses, et cetera) in ways that were not possible before 2010-2012.
This, in turn, means policymakers can devise customised policy solutions for each market instead of applying a blunt instrument to all of them. This ability to target specific sub-markets can protect one market from negatively impacting another one.
These tools were unavailable when ABSD was installed. If ABSD were removed today, these tools are in place to help prevent the future market from getting out of control.
Much has changed since the rapid price expansion in 2010-2012. Some of the cooling measures have been good for the stability of the market while others are hurting household wealth and the economy.
We would suggest that, as a market, we have learnt much about what works and what does not over the last year or two. At the same time, the market has improved in its governance, productivity, efficiency and transparency.
As long as the Government and industry continue to practise sound mortgage underwriting, guard against speculation and strive for more transparency in pricing, it is our judgment that it is possible to remove ABSD without destabilising Singapore’s property markets.
Both the Government and the private sector have worked hard to stabilise the property market.
Is it not time to start getting a return on all this hard work and reopen Singapore as a much stronger, more stable and more prosperous property market?
• The writer is co-founder of SRX Property, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. Singapore Press Holdings owns a stake in SRX Property’s parent company, CoSine Holdings.