Monday, November 5, 2012

Avoid feast and famine in housing

Nov 04, 2012

Better to have stable supply of new homes every year than try to predict property cycle
By Han Fook Kwang

When I bought my first property, I didn't know I would still be living in it 27 years later. I had bought it soon after getting married after a year of house-hunting.

I don't remember it as being an eventful year for property then and I don't recall being particularly anxious about whether we were buying it at the right time in the property cycle. We needed a place to call home, we liked what we found and the price was within our budget.

As it turned out, it was not a bad buy. The house has appreciated in value about 10 times since, which works out to an increase of about 9 per cent every year compounded over 27 years. I can't think of anything I have bought or owned which has risen as much in value or as rapidly.

As an individual, this must count as a good thing and a source of some satisfaction. In fact, my experience is not untypical of many in my generation and I would think those who bought around the time I did would have seen similar appreciation in values, some more, others perhaps less, depending on location.

Singaporeans have generally felt good about how property prices have moved over the years, barring the occasional dips in every economic cycle.

Until quite recently, that is.

There has been a discernible shift in public attitude towards ever-rising property prices over the last few years and it is important to understand why this is taking place and what can be done about it.

For a flavour of the negative views being expressed, here is a recent sampling from the Internet:

  • Low property prices favour citizens as they help everyone have a roof over their head. High property prices favour only developers and rich people as they can make super normal profits and collect rent instead of working hard and creating value.
  • The Australian government takes care of citizens and imposes strict restrictions on property purchases by foreigners, for example, when they leave, they have to sell, when they sell, they have to sell only to locals, etc. Why doesn't the Singapore Government take effective steps and also contribute to raising property prices?
  • The property owners of today are only raiding the future earnings of the next generation. How? Well, all these gains in property prices must come from somewhere. It will come mostly from the next generation. But this will net the wealthy much more as they own many more and higher-value properties.

These online comments are in response to recent news that some executive condominium units had been sold for more than $1 million. As with many Net postings, they are often not logically argued and are laced with an extra dose of negativism. But the sentiments they represent are real and shared by an increasing number of people here.

Indeed, rising property prices were an issue at the general election last year. In response, the Government introduced several measures, mostly increasing the supply in both the public and private housing markets.

Prices, however, have yet to come down.

According to the latest data reported last week, private home prices rose by 0.6 per cent in the third quarter, while the Housing Board resale price index climbed 1.3 per cent.

This public sourness over property prices is a relatively recent phenomenon given the history of rising prices here, which has been generally welcomed by the public.

It shows there is a point beyond which resentment sets in, even if the majority see the value of their homes going up.

They worry whether their children will be able to afford these prices in the future, and whether they themselves will be able to upgrade.

Worse, they perceive it as largely favouring one class of people over another.

It used to be said that property prices cannot rise by too much, otherwise who would be able to afford them? In other words, prices cannot run too far ahead of income levels.

This link between prices and incomes is, however, broken when the market is open to foreigners whose salaries have no connection to those of Singaporeans.

When rich Chinese, Indians, Indonesians and Malaysians account for a significant number of the purchases here, prices can run away from the local population's ability to pay.

The Government's recent measure to make it more expensive for foreigners to buy property through the additional stamp duty was aimed at cooling the market.

But the Government has never made clear if this will be a permanent feature of its policy on foreign purchases and the extent it will allow them to influence prices.

There is clearly a tension between wanting Singapore to be a global city attractive to foreigners (which includes how open it is to them buying homes here), and preserving the link between home prices and Singaporeans' income levels.

Getting this balance right is critical to having a successful property policy which is politically acceptable.

How much should the Government protect local buyers from the purchasing power of foreigners?

This is an especially important issue with so much surplus money flowing round the world after so many rounds of loose monetary policies, with central banks printing money to stimulate their domestic economies.

Should Singapore go the way of Australia, for example, and force foreigners to sell property back only to citizens?

[So foreigners can buy property but they can only sell back to locals, so when they make an offer, they have to take into account the constraints of the local demand. So if they are here for the short term, they would rent. Only if they are here for the long term should they buy, and even then there is the chance that they would lose on the buy and sell. It would in fact curb speculation. This should be more targeted and be limited to HDB, HUDC, EC, and DBSS flats.]

One word of caution though about the Government's ability to get the property market right. Its track record of trying to match supply to demand has in fact been patchy.

In the early 2000s, it was saddled with a record surplus of 25,000 unsold HDB flats when it overbuilt and demand collapsed following the Asian financial crisis in 1997.

[This is a bigger problem than just having too many flats. Depreciation, and need to maintain "ghost towns" were not happy problems to have. When the flats were finally sold, the lease was considerably shorter than 99-years.]

And the sizzling market of the last two to three years in both the public and private sectors was clearly the result of it underestimating demand, which rebounded after the slump of the 2008 financial crisis.

Governments, and not just in Singapore, are often behind the curve when trying to read the market.

This being the case, the better approach is to aim for a stable supply of new homes every year and to not try to predict too closely the ups and downs of the property cycle.

There is a steady underlying demand for homes from new households being formed every year, and even when it falls because of an economic downturn, the pent-up demand will likely return in subsequent years.

Better to aim for a predictable and transparent policy on how many homes to build so as to avoid a feast-and-famine situation.

Fortunately, public housing is available for the large majority of Singaporeans in a market that is largely protected from foreign funds.

These estates today enjoy some of the best facilities - markets, hawker centres, MRT stations, bus interchanges, sports stadiums and shopping malls, and most have been upgraded to high standards.

Because of the convenience of having these facilities nearby, Singaporeans are prepared to pay relatively high prices in the resale market for these flats.

We take this for granted but it could have turned out completely differently, with few takers, had they become urban slums.

And because the resale market is open to all Singaporeans regardless of income levels, the prices these flats command reflect their true market worth.

But there is one tweak to this market which may be needed to make sure it remains affordable to Singaporeans.

At present, permanent residents are allowed to buy resale HDB flats - this door was opened to them in 1989, presumably to make the country more attractive for PRs.

But it might have inadvertently caused prices to move up and, more critically, weakened the link between local wages and resale prices.

The PR numbers are in fact not insignificant - it was reported last year that they accounted for 20 per cent of all resale transactions in 2010.

That's one fifth of all sales, enough to move prices significantly.

Making the HDB market - both for new and resale flats - exclusively for citizens is the best safeguard for the future to ensure that public housing prices will always remain within reach of the majority of Singaporeans.

[The other problem in the resale market is the Cash Over Valuation (COV) the cash component over and above the official valuation of the flat. There is no cap on the COV. Perhaps COV of up to 10% of the valuation of the flat can be allowed without any restrictions. However beyond 10%, every dollar of COV will be taxed as "Windfall" tax, or even considered part of income tax of the seller.

Beyond 20% of valuation, every dollar paid by the buyer must be matched with a dollar of tax to the govt to be paid by the Buyer. i.e. 100% tax.

So if a flat is valued at $400,000, the seller may ask and receive up to $40,000 as COV tax free.

If the COV is $45,000, the seller will be taxed on the $5000.

If the COV is $100,000, the first $40,000 will still be tax-free, but the seller will have to include $60,000 as part of his income tax. The buyer in addition to the COV of $100,000 will also be required to pay the govt $20,000 for a total of $120,000.

This effectively puts a loose "cap" of 20% of the valuation for COV, as beyond 20%, the buyer has to pay 100% tax.]

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