Singapore Residential: A winter chill
- Fresh measures to cool property market, new restrictions to curb loan quantum and taper demand
- Most measures appear targetted at the HDB market where resale index has accelerated ahead of private properties YTD-2022
- Transaction velocity to cool further; property prices will flatten out; robust rental market and sticky land prices to provide resistance to a drop in prices
- Developers are trading at 0.6x P/B; expect a negative knee jerk reaction at worst – muted reaction to developer share prices during last round of measures
Tighter loan limits introduced to cool property market; encourage prudent borrowing
The Monetary Authority of Singapore (“MAS”), Ministry of National Development (“MND”) and Housing Development Board (“HDB”) have introduced several cooling measures to ensure prudence in borrowing and avoid future difficulties in servicing home loans. These measures are summarized in Figure 1.
What is the potential impact?
Taking the wind off the HDB resale market?
The government has moved early to prevent further exuberance building up in the HDB market where close to 78% of Singapore’s population live. Since the last round of cooling measures in Dec 2021, we note that the private property price index (“PPI”) and HDB Resale index have risen by c.4.2% and c.5.2% respectively (Figure 2).
Flash estimates, expected to be released in the first week of October, will likely indicate further strength on the back of robust sales in both the private market (recent new launches) and resale HDB market where the media has reported an increasing number of million-dollar HDB flats so far in 2022. A continued rise, if unabated in a rising interest rate environment, will put even this segment of the market out of reach to aspiring homeowners.
Will there be a boost to the rental market and demand for “mixed use” developments?
The reduction in Loan-to-Value (LTV) limits for housing loans coupled with the “wait-out” period for private property owners’ (PPO) who may choose to “cash-out” from their private property and buy a resale HDB flat could imply a double hit to the resale market in our view if aspiring upgraders are counting on the proceeds from the sale of their home to “roll up” into a private property. The more restrictive addressable pool of buyers coupled with lower affordability would mean a tapering of the upward momentum in HDB prices in the coming quarters, in our view.
While the wait out period does not apply to seniors who may have a genuine desire to trade into a smaller home at more convenient locations, we note that private property owners (age < 55 years) who intend to move into a HDB resale home will now have to either (i) delay the sale of their private property or (ii) if already sold, will have to rent first (private or HDB) before buying after 15 months, or (iii) trade down into another smaller private property which offers better amenities (i.e. mixed used developments).
How does the new total debt servicing ratio (TDSR) lower affordability ?
The 50-percentage-point (ppt) increase in the medium-term interest rate would rein in overall loan eligibility and affordability for households for the private property, executive condominium (“EC”) and public housing markets. Based on our estimates, assuming a household income of S$16,000/mth (the upper limit for eligible buyers for ECs), the 50-basis points increase in the assumed medium-term rate to 4% will reduce the loan by S$101k–131k for a private property (at an assumed 30-25 year loan tenure) and S$49k-63k for an EC / resale property purchase. Overall, the lower loan quantum equates to roughly 4.5% of the maximum property price that a household can borrow. Therefore, to afford the same property at the same price, households will have to look at cheaper alternatives or come out with more cash for their property purchase. These sensitivities are shown in Figure 3.
Will the property market drop?
We believe that overall transaction volumes will likely cool further. After a drop of close to c.45% in primary sales in YTD-2022, we believe sales performance in upcoming launches will likely be more modest when compared to the recent strong response to property launches in recent months. In terms of pricing outlook, we believe that the measures will stem a further rise in property prices or “flatten the curve” with a downside bias likely driven by the employment outlook in the future.
Property prices have been rising from high land prices and sticky construction costs, and with developers having strong pre-sold inventories YTD, a meaningful cut in selling prices will not be a base case for now. For households, we note that balance sheets and liquidity remain strong for now, and they are able to “hold-on” in our view. With the residential rental market still strong, we see an increasing tug-of-war (or stalemate) between buyers and sellers.
Opportunity to buy the developer dip?
Developers have historically reacted negatively to such government measures, and we believe we will see a knee jerk reaction to share price but this is unlikely to last for an extended period. With the recent share price correction, developers are trading at 0.6x P/B on average, which we believe has priced in the anticipated cooling measures. In fact, we believe that any knee-jerk reaction will be an opportunity to buy those developers who are trading at attractive discounts to book. Our preferred picks are City developments (CDL) and Guocoland (GUOL) (Figure 4).
