Sunday, August 14, 2011

NDP Rally 2011, impact on the property market

Yesterday in NDP Rally 2011 speech, Singapore Prime Minister Lee Hsien Loong announced two important policies which will have effect on broad Singapore property market, from re-sale HDB flats to private condominiums, and from flats for sale to flats for rent. The first one is that income ceiling for the primary market HDB units increased from 8,000 SGD to 10,000 SGD. Second, HDB will release 25,000 more units in 2012, on the top of 25,000 units to be released this year in 2011. Employment Pass issues of mid-level foreigners, major tenants of rental units, will be tightened further.

There are 2 markets for HDB units, primary market where Singaporeans can buy new flats directly from HDB and secondary market where Singapore residents (Singaporeans and Singapore PRs) can buy second hand HDB from HDB owners. To be eligible to buy new HDB flat, there is an income ceiling based on flat size, but if a household earns more than 8,000 SGD per month, they are not eligible for any type of unit. Last 10 years’ economic growth plus increased marriage age brought many above the threshold and these couples had to look for a unit in resale HDB market or private property market.

We have also seen a supply crunch in the years between 2000 and 2010, where HDB built on average 5,000 new units per year. This had a double impact on the resale HDB market. First, there are not enough resale HDB flats to satisfy demand for them since less are built 5 years back (an HDB flat can enter resale market at earliest 5 years after completion due to minimum occupancy rules). Second long waiting times for new HDB units made many new HDB eligible couples to buy from resale market. Decreased demand, increased supply resulted in current ultra-high public housing prices. This also had directly and indirectly effects on the mass market primary property market.

More HDB flats are welcomed news but it will take some time these released units be built and several years they enter the resale market. So the effect on supply crunch will not be immediate. But it will have immediate effect on the demand side. According to Ministry of Development blog, 23% of demand for resale HDB flats comes from first time buyers.  There are several reasons other than difficulty of getting a new HDB flat for these people to buy more expensive resale flats instead of new HDBs such as the location of these flats. But many probably do so because they are not eligible to buy a new HDB flat or frustrated with long waiting time. These measures will channel their demand back to new HDB flats from resale flats (although there will still be demand from many first timers who are earning more than 10,000 SGD but less than the number to make a private property affordable).

But some think, impact will be limited on resale HDB flat:

“As for the HDB market, Credo’s Mr. Ong expects the higher HDB income ceiling to draw some demand away from resale flats, but he does not think impact will be major.”[1]

He has a point since we are at one of the worst years in terms of HDB resale supply crunch due to the number of units completed in 2006 (five years before 2011). Still this new announcements combined with the tightening on Singapore PR approvals (20% of the demand for resale HDB flats) can alone have an effect on the resale market, more than a property broker want to see or share :) We later this year will have the number of PR approvals to have a better picture.

Higher income ceiling for executive condominiums will reduce some demand for mass market private property units. According to Business Times, “Jones LaSalle head of Research and consultancy for Singapore Chua Yang Liang estimates that annual new housing demand in the private market could drop as much as 5-15 per cent, or about 700 – 2,000 units”[1]

And the rental side: rents are one of the main supporters of property prices since investors usually count on the cash flow from rent to pay the mortgages. In this current zero interest rate environment, monthly mortgage rates are down and rents are up due to demand from foreigners working here, so the cash flow from a property investment is in the positive region.

In Singapore, where majority of its residents own their flat, major bulk of rental demand comes from foreigners on various employment passes. Private properties are demanded by expat packages and higher end employment pass holders (i.e. P1 and P2) while public housing flats are popular for rent among S-Pass and Employment Pass Q1 holders. So support on the rental prices heavily depend on the number of foreigners chasing for rental units. Since this year growth will be half of last year at best and these further tightening on mid-level employment pass criteria will reduce the demand for rentals. Couple this with the bumper supply on its way to private property rental market; there are few things to support the current very high rentals. And as you may have recognized, I am not factoring in any downturn in economy (although there is a panic in the market now after free money from QE2 disappeared), it is still a few weeks early to talk about permanent downturn in economy. In fact West is probably crazy enough to continue to kick the can a few years more by a QE3 or even QE4. But still, it is pretty obvious that 2011 – 2012 will not be like 2009-2010 period in terms of economy.

Does this mean a fall in rentals of condo units? There will eventually be a fall in my opinion but not a crash. This is because the fresh foreigner demand vanished due to tightening will probably be replaced by the demand from people already in here but downgraded to HDB flats due to high private property prices. And people sharing units due to high rents will probably move to their private flats if the prices fall.
[1] – More Qualify for new flats, ECs as government raises income ceiling, The Business Times   

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