Most of us have already heard about the latest property cooling measures which came into effect 30 Sep 2022. The two main headlines were: the raising of the medium-term interest rate floor by 0.50% which goes to 4% for residential and 5% for non-residential properties; and the 15-month waiting period for private property owners downgrading to a resale HDB flat. Your can see the full announcement from the joint-ministries’ press release here.
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The raising of medium-term interest rate floor is largely expected with the steep rise in interest rates this year. We had anticpated that coming in this blog. What’s more interesting to us is its implementation (in point 3 below), largely missed by most commentators. Whilst revising interest rate floor is a cyclical measure in accordance with market conditions, the minister has assured us the 15-month waiting period will be more of a temporary measure which will be up for review later. It’s clearly designed to take the froth out of HDB resale market where million-dollar HDB transactions have become more common place.
We like to share our thoughts on this latest round of cooling measures:
1. Reining in resale HDB prices
At the top end of the HDB market, the 15-month waiting period will work quite immediately to push demand for larger resale HDB flats down the road to the next one to two years. Most analysts unanimously agree it will also shift such demand to the private rental market for the time being whilst people wait to buy. There should be softening in prices for the larger HDB resale units which will have some knock-on effect across all HDB room types and sizes downstream. There’s also the impact from the reduced loan-to-value for taking out loans from HDB from 85% to 80%.
2. Market will slow but effect may be short-lived
The raising of medium-term interest rate floor by 0.50% will also crimp loan capacity for buyers in the private property market. As a gauge, based on a typical purchasing power for a 3-bedder family unit worth $1.5 to $2m, we estimate this will reduce the maximum loan available by around 6-7%. That would in theory translate to a reduction in purchase price by around $100,000 to $130,000 for developers and sellers in the private resale market. It will be hard to negotiate for such a drop in the closing prices so we expect activities in the market to slowdown especially when we approach the traditional quiet period of year-end.
However, given how resilient the Singapore property market has been, I will not be surprised that market participants will learn to adapt to the new pricing dynamics and equilibrium. After a tug-of-war in prices between buyers and sellers, there might not be that much of a drop in the private property prices, which differs from the HDB market. Developers selling new launches which target first-time HDB upgraders may be more affected though.
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What, we think, will cause a bigger correction in property prices is the imminent economic slowdown in 2023 and whether it will lead to a mild or deeper recession with job losses. As long as people keep their jobs, there will be no or little distressed asset sales as the prudence of our central bank’s TDSR policy in place since 2013 had largely ensured that. Not even if prevailing interest rate rises to 4%. Households’ balance sheets are strong
As a gauge, based on a typical purchasing power for a 3-bedder family unit worth $1.5 to $2m, we estimate this will reduce the maximum loan available by around 6-7%. That would in theory translate to a reduction in purchase price by around $100,000 to $130,000 for developers and sellers in the private resale market.
3. Greater adverse impact in the commercial property market.
Where we see the biggest impact is in the commercial property market. It could potentially suffer triple-whammy blows in 2023 from slower economic activites, skyrocketing interest costs and the dearth of buyers.
What we find interesting in this cooling measures is the introduction of the “higher of the two” in the implementation of the new medium-term interest rate. Incidentally, it also has implication for residential mortgages pricing in 2023. MAS now wants banks to use the higher of the floor rate of 5% (for commercial property) or the thereafter interest rate in the computation of maximum loan quantum. The problem with commercial property loans is they often come with ridiculously-high thereafter rates in the range of 6% upwards. The hope here is that banks might be forced to reduce their thereafter spreads (what is added to the mortgage loan peg like 3-month compounded SORA) in order to make the loan. However, banks are often reluctant to reduce the spreads for commercial property loans which carry higher risks than residential properties. If such loans are calculated at 6-8% interest rate, it means a smaller pool of buyers with greatly reduced loan capacity to purchase commercial properties.
What, we think, will cause a bigger correction in property prices is the imminent economic slowdown in 2023 and whether it will lead to a mild or deeper recession with job losses.
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