Property Take. Singapore: Residential. Highlights. 05 Sep 2013 New Sales to Drop 40-50% in 2H, Is The Market Right?

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1 Property Take New Sales to Drop 4050% in 2H, Is The Market Right? Singapore: Residential Highlights Primary sales estimates by consensus (analysts) point to a drastic drop in 2H2013. Developers sold 9,950 private residential units in 1H2013 (17% YoY). Consensus expects new sales to drop by a drastic 4050% HoH in 2H2013. Our analysis of 2H/1H data from 1997 to 2012, reveals that such a large percentage drop in new sales has only occurred three times (1999, 2002 and 2007). Consensus expects new sales volume to drop close to 30% YoY (15,00016,000 units) in The new sales (private residential) recorded in 2012 and 2011 were 22,197 units and 15,904 units, respectively. The historical average new sales in the last 15 years is 10,370 units. In the past few years, Singapore property purchases by foreigners have been partly driven by currency appreciation (S$ gains). There is a strong negative correlation (0.92) between the US$ and the Property Price Index (PPI) in Singapore. Data from 1997 to 1H2013 reveals that as the US$ weakened against the S$, the PPI and Rental Index in Singapore increased. The challenging factors for the residential sector include a supply overhang in 2014 and government policies, specifically several rounds of property cooling and foreign workforce tightening measures. The supplydemand dynamics that supported high occupancy rates and rents in the past few years are expected to reverse. Rental yields in certain areas have softened and will become increasingly affordable in the foreseeable future. Our analysis of the PPI of Condominiums shows that the trough in the property price cycle happened in 2H1998 (Asian Financial Crisis) and another pronounced dip occurred in 1H2009 (Global Financial Crisis). During the economic crisis, the quarterly PPI for the Central Region fell close to 30% YoY. The PPI of Condominiums vulnerability to external shocks coupled with record completions, indicate that the next dip in the event of an economic downturn is likely to be steep. From a global perspective, fears of Fed tapering have increased the risk of a liquidity dryup. The nearterm prospects for continued large capital inflows are not as promising as before. Taking into account underlying factors and the low probability of QE pullback, we think that it is extremely unlikely that home prices will increase further in Even if there is a downward adjustment in home prices, we think it will not exceed 10% and will probably be shortlived (based on Singapore s GDP growth forecast of 2.5%3.5% in 2013). During periods of economic crisis in the past, the PPI decline lasted 6 to 10 consecutive quarters. Further tightening measures will continue to moderate sales volume The market expects a significant drop in 2H2013 private new sales. The 8 th round of property cooling measures (effective 29 June 2013) and the 9 th (effective 28 August 2013) will further crimp demand in the primary market. The 7 th round (effective 12 January 2013) of cooling measures has already made an impact, with primary sales falling by 17% YoY to 9,950 units in 1H2013 (from 11,928 units in 1H2012). Consensus expects primary sales to fall by 4050% HoH in 2H2013. Based on 2H/1H sales data from the last 16 years, such a big drop has only been witnessed in 1999 (64.6% HoH), 2002 (48.7% HoH) and 2007 (50.6% HoH) which is close to periods of economic downturn (refer to URA Price Index vs. 2H/1H New Sales % Chg chart). HSR International Realtors Pte Ltd Estate Agent Lic. No. L G

2 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2012 URA Price Index vs. 2H/1H New Sales % Chg Price Index Asian Financial Crisis 140 DotCom Bubble Global Financial Crisis 2H/1H Sales Chg 100% 80% 60% 40% 20% 0% 20% 40% 60% 80% URA Price Index 2H/1H New Sales % Chg However, new sales are still relatively high compared to historical levels (refer to Private Residential Primary Sales vs. URA Price Index chart). Hence, the Government sees the need for the comprehensive Total Debt Servicing Ratio (TDSR) framework. The combined effects of the TDSR, latest additional measure on public housing and the earlier policy measures will continue to moderate sales volume. The TDSR framework takes into account the borrower s other outstanding debt obligations for both property and nonproperty loans and applies discounts to variable income & eligible assets. It will also close up loopholes by requiring that the borrowers named on a property loan have to be the mortgagors of the residential property for which the loan is taken. The TDSR also requires that FIs use the incomeweighted average age of borrowers in the case of joint borrowers. The TDSR also states that guarantors who are standing guarantee for borrowers otherwise assessed by the FI at the point of application for the housing loan not to meet the TDSR threshold for a property loan will be brought in as coborrowers. Since the introduction of the TDSR, banks have taken a longer time to process loan applications. In addition, the latest public housing measures are expected to negatively affect demand in the massmarket private residential segment. The further pressure on the already weak HDB resale market will negatively impact the potential HDB upgraders demand for both HDB flats and private residential units. HDB upgraders accounted for close to 50% of private home sales in 1H2013. With further tightening, consensus forecasts private new sales to drop close to 30% (15,00016,000 units) in 2013 versus new sale transactions of 22,197 units in The historical average new sales volume in the last 15 years is 10,370 units. Private Transactions New Sales Secondary Sales 5year average 14,669 16,674 10year average 11,920 14,381 15year average 10,370 11,933 * Simple average Page 2 of 11

3 2Q Q Q Q Q Q Q Q Q Q Q Q 2012 Units 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Private Residential Primary Sales vs. URA Price Index Price Index New Sales (uncompleted) URA Price Index New Sales (completed) 30,000 25,000 20,000 15,000 10,000 5,000 Private Residential Transactions New Sales 15year avg (new sales) Secondary Sales 15year avg (secondary sales) Secondary transaction volume. Secondary sales volume in 2Q2013 had declined to its lowest level since 1Q2009. Private secondary transactions peaked in and have been on a downward trend in the past few quarters. 1H2013 secondary sales fell by 35% YoY to 4,667 units. On an annualised basis, this translates into less than 10,000 units. The historical average for secondary sales in the past 15 years is 11,933 units. Page 3 of 11

4 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2012 Units 12,000 Private Secondary Sales vs. URA Price Index Price Index , ,000 6,000 4, , Secondary Transactions URA Price Index Relatively low number of resale applications. After the implementation of the Mortgage Servicing Ratio (MSR) in January 2013, the HDB resale volumes fell to an alltime low. HDB resale transactions recovered in 2Q2013 but were still relatively low compared to historical levels. HDB Resale Applications Recorded vs. Resale Price Applications Index 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 RPI Resale Applications Resale Price Index Source: HDB, HSR Research In the past few years, Singapore property purchasers by foreigners have been partly driven by currency appreciation. Foreign purchases peaked in 2011 when foreign buyers accounted for 17% of total private property transactions. There is a strong negative correlation of 0.92 between the US$ and the PPI in the past 16 years. The US$/S$ vs. URA Price Index chart shows that as the US$ depreciated, the PPI and Rental Index increased. The chart also indicates that rental growth was slower than price increase and the gap has widened. Rental yields have softened and rents will become more affordable in the near future. Page 4 of 11

5 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2012 Currency US$S$ vs. URA Price Index Index US$S$ Currency URA Price Index URA Rental Index Rental Yields Non Landed Private Residential 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% D9 D10 D11 D15 The effects of the ramp up in supply of flats and private residential units will be felt partially in 2013 and fully in Huge supply in the pipeline. The total supply of uncompleted private residential units was 87,789 (2013 to >2017) as at. If we were to include the 12,449 units of Executive Condominium (EC), the total supply in the pipeline would be 100,238 units. Furthermore, another 12,329 units from Government Land Sales (GLS) will be added to the pipeline soon. Including these units, there will be 112,567 private housing and EC units in the overall pipeline, of which a sizeable portion is slated for completion in the next 34 years. If we were to include HDB flats, the total supply would be above 205,000 units over Page 5 of 11

6 30,000 25,000 20,000 15,000 10,000 5,000 Private Residential Units Construction Starts vs. Completions Construction Starts Completions Units 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Supply of New Residential Units Public Housing EC Private Source: URA, Minister for National Development blog, HSR Research Residential oversupply in 2014 onwards Supply > Demand = Prices. The supply of residential units is likely to outstrip underlying demand in the coming quarters, leading to a decline in home prices, theoretically. Rents will likely come under pressure from the substantial number of completions, the expected reversal in high occupancy rates and lower rental demand due to the Government s ongoing policies to tighten the inflow of foreign workers. These factors coupled with the slowdown in Singapore s resident population growth ( 1% in the last 3 years) suggest that there is rising risk of a supply glut. Page 6 of 11

7 1Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2013 % Occupancy Rate of Condominiums vs. the Rental Index of NonLanded Residential Properties Rental Index Central East North East North West Core Central Rest of Central Outside Central Condominiums comprised 50% of private residential stocks in 2Q2013 The Central Region s Condo PPI dropped by ~ 30% in 4Q1998 and 2Q2009 External shocks could trigger a downturn in property prices. We take a closer look at the PPI of Condominiums as condominiums accounted for 50% of private residential stocks in 2Q2013. Our analysis of the PPI of Condominiums in the past 16 years shows that the trough in the property price cycle occurred at end1998 during the Asian Financial Crisis and another pronounced dip happened in 1H2009 during the Global Financial Crisis. Real GDP contracted by 2.2% and 0.8% in 1998 and 2009 respectively. PPI Condominiums YoY Chg Central East North East West 1Q % 15.1% 1.7% 10.5% 2Q % 19.3% 8.7% 13.7% 3Q % 26.0% 21.9% 22.5% 4Q % 26.7% 26.3% 28.8% 1Q % 11.3% 16.2% 13.4% 2Q % 15.4% 15.0% 16.1% 3Q % 2.5% 1.4% 0.8% 2.2% 8.3% 12.5% 13.4% The Central Region s PPI of Condominiums fell by close to 30% in 4Q1998 and 2Q2009 (refer to PPI Condominiums YoY Chg table). In the last three consecutive quarters (4Q20122Q2013), the Central Region s PPI of Condominiums declined marginally YoY. In 2Q2013, the Central Region s PPI of Condominiums was 1.5% below its historical peak. The Singapore economy is expected to grow by % in 2013 (based on Government s forecast) hence we do not expect a significant dip this year. Page 7 of 11

8 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2012 Property Price Index of Condominiums Global Financial Crisis Asian Financial Crisis DotCom Bubble Central East North East West QE and its impact on the property sector. In June 2013, the United States (US) Government announced that it might start to taper QE3 by end Sept and end the program by mid2014 when unemployment rate is around 7%. Tapering implies a slower pace of new asset purchases (the Fed is currently buying US$85 billion worth of securities per month). The financial markets reacted negatively (bond yields rose and equities declined) to the news of the expected tapering and unwinding of QE in the US as investor perception of global liquidity changed. To recap, QE increased the money supply as lower interest rates spurred strong demand for credit and allowed banks to make more loans, and thus, stimulate the economy. As a result, there was a significant flow of credit to the asset markets, especially real estate. QE kept the mortgage rates low and that s a key factor supporting the housing market especially in Asia. Hence we have seen growing leverage and a hike in property prices. In our opinion, although the probability of QE tapering in the near term is low, it will happen eventually. Government measures. To date, there have been nine rounds of property cooling measures. These measures are calibrated to be stricter in the cases of property ownership for investment and foreign buyers, as well as to discourage overborrowing. The broader aim of these measures is to prevent a price bubble and foster longterm stability in the property market. On 28 June 2013, MAS introduced the TDSR framework for all property loans granted by FIs to individuals, and subsequently on 27 August 2013, the Singapore Government introduced additional public housing measures to emphasise financial prudence. Refer to Summary Key Measures in Appendix. Page 8 of 11

9 APPENDIX Singapore Property Summary Key Measures Introduced Since Sept 2009 Announced on Measures Round Removal of Interest Absorption Scheme and InterestOnly 1 14 Sept 2009 Housing Loans. Reinstatement of the Confirmed List for the 1H 2010 GLS programme (continued since). 19 Feb 2010 Seller's Stamp Duty (SSD) on all residential properties bought on or after 20 Feb 2010, and sold within 1 year from the date of purchase. LTV limit lowered to 80% (from 90%) for all housing loans (except for loans granted by HDB for HDB flats including those under DBSS). 5 Mar 2010 Minimum Occupation Period (MOP) for the resale of nonsubsidised HDB flats increased to 3 years (from 12.5 years). HDB will withold $10,000 of the housing subsidies enjoyed by SC/SPR households when they buy a flat. If they buy a resale, a DBSS flat or an EC, their Housing Grant will be reduced by $10,000. For new flat, they will have to pay a $10,000 premium on top of HDB's selling price. SPR quota introduced for HDB. 30 Aug 2010 SSD holding period increased to 3 years Jan 2011 For buyers with outstanding housing loans at the time of the new housing purchase, the minimum cash down payment increased to 10% (from 5%) and LTV limit lowered to 70%. MOP increased to 5 years for nonsubsidised flats. Buyers disallowed from concurrently owning both HDB and private properties within the MOP. SSD holding period increased to 4 years. SSD rates raised to 16% 12%, 8% and 4% for residential properties sold in the 1st, 2nd, 3rd and 4th year of purchase respectively Dec 2011 Lowered LTV limit to 60% for 2nd and subsequent individual housing loans. Lowered LTV limit to 50% for nonindividuals. Additional Buyer's Stamp Duty (ABSD) imposed at 10% for foreigners and nonindividuals, 3% for PRs buying 2nd or more property and citizens buying 3rd or more property. 5 Oct 2012 Maximum loan tenure capped at 35 years and lower LTV limits for loans exceeding 30 years or beyond retirement age (apply to both private properties and HDB flats). Lowered LTV limit to 40% for 2nd housing loan and 60% for a borrower with no outstanding property loan. LTV ratio for nonindividuals lowered to 40%. 11 Jan 2013 ABSD rates raised between 57% across the board, and also imposed on PRs (buying 1st property) and Singaporeans (2nd property). LTV limits lowered to 50% for individuals obtaining a 2nd housing loan or 30% if the loan tenure exceeds 30 years or loan period extends beyond the borrower's retirement age of LTV limits lowered to 40% for individuals obtaining 3rd or more housing loans or 20% if loan tenure exceeds 30 years or the loan period extends beyond the borrower's retirement age of 65. LTV for nonindividuals lowered to 20%. Minimum cash down payment for 2nd or subsequent housing loan raised from 10% to 25%. For HDB flats, Mortgage Servicing Ratio (MSR) for housing loans granted by financial institutions (FIs) at 30% of a borrower's gross monthly income. While for loans granted by HDB, the cap on the MSR will be lowered from 40% to 35%. PRs not allowed to sublet their whole HDB flat. Page 9 of 11

10 Singapore Property Summary Key Measures Introduced Since Sept 2009 (cont d) 11 Jan 2013 (cont d) PRs must sell their HDB flat within 6 months of purchasing a private residential property in Singapore. Maximum strata floor area of new EC units capped at 160 sqm. New dualkey EC units restricted to multigenerational families only. Developers of future EC sale sites from the GLS programme can only launch units for sale 15 months after award of the sites or after physical completion of foundation works, whichever earlier. Private enclosed spaces and private roof terraces wil be treated as GFA for private residential and ECs hence subject to payment of charges. SSD rates imposed on industrial properties and land. SSD at 15%, 10% and 5% for properties sold in the 1st, 2nd and 3rd year of purchase respectively. 28 June 2013 Total debt servicing ratio (TDSR) threshold of 60%. FIs are required to apply appropriate haircuts (of at least 30%) for variable income and incorporate the mediumterm interest rate (floored at 3.5% for residential properties or the prevailing interest rates whichever is higher) when computing the TDSR for a property loan. To prevent circumvention of LTV limits with proxy arrangements, MAS required the borrowers of housing loans to also be the mortgagors of the same property. The age of the borrower to be used when determining the applicable loan tenure for joint applicants be the average age of the borrowers, weighted by the borrowers' respective gross incomes. 27 Aug 2013 The maximum tenure for HDB housing loans granted by HDB will now be capped at 25 years (from 30 years previously). The maximum tenure of new housing loans and refinancing facilities granted by MASregulated financial institutions for the purchase of HDB flats (including DBSS flats) will be reduced from 35 years to 30 years. New loans with tenures exceeding 25 years and up to 30 years will be subjected to tighter LTV limits. 8 9 The Mortgage Servicing Ratio (MSR) will be reduced from 35% to 30% of the borrower's gross monthly income. Singapore Permanent Resident (SPR) households have to wait 3 years from the date of obtaining SPR status, before then can buy a resale HDB flat. Page 10 of 11

11 Commonly Used Abbreviations ABSD Additional Buyer s Stamp Duty COV Cashovervaluation DBSS Design, Build and Sell Scheme EC Executive Condominium FIs Financial Institutions GLS Government Land Sales HDB Housing & Development Board LTV LoantoValue MAS Monetary Authority of Singapore MND Ministry of National Development MOF Ministry of Finance PPI Property Price Index PRs Permanent Residents SSD Seller s Stamp Duty URA Urban Redevelopment Authority Penny Yaw, CFA; (pennyyaw@hsr.com.sg) This report is for information purposes and has been prepared by HSR Research based on sources believed to be reliable. Any opinions or estimates in this report are that of HSR Research as of this date and are subject to change without notice. The company and its directors and staff may have an interest in the properties mentioned. Issuance of the report by HSR Research is not an offer to sell or a solicitation to buy the properties covered in the report and HSR Research shall not be responsible for any consequential loss or damage, whether direct or indirect. Page 11 of 11