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Is this the year to reinvigorate Singapore’s residential property market?

It has been an optimistic start to 2017 in Singapore, as recent estimates from the Ministry of Trade and Industry reveal that the city state has sidestepped a technical recession, posting 1.8% growth in GDP for 4Q2016, and an overall growth rate of 1.8% for the year.

While this is gratifying news, we still face a subdued economic outlook both globally and domestically. In Singapore’s real estate sector, the combination of slower employment, earnings and population growth is impacting housing demand. Add to that expectations of rising interest rates — thanks to likely hikes by the US Federal Reserve — and the overall sentiment is fairly gloomy. Thus, house prices in Singapore are under considerable downward pressure. With this in mind, the residential real estate market is likely to remain stagnant, with cooling measures still in place alongside ongoing slow economic growth.

In fact, according to flash estimates from URA, private home prices in Singapore softened further in 4Q2016 for the 13th consecutive quarter, reaching their lowest level in six years. This means homes today are at one of their most affordable levels on record.

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Based on JLL estimates, prime properties have corrected 18% on average, while mass-market prices have softened about 10%. Prices for some residential projects, especially those in prime districts, have corrected between 25% and 30% since the height of the market in 2011.

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Leading the way in cooling measures

Since Singapore first introduced its policy to cool the residential market in 2010, other governments around the world have taken similar steps to prevent rising prices caused by low interest rates, high liquidity and the increasing presence of overseas buyers. The initiatives put in place here between 2010 and 2013 seek to reduce demand and increase supply by imposing transaction taxes on sellers and buyers. The taxes, targeted at local speculators, investors and overseas buyers, aim to stop prices from escalating so they will remain affordable for local residents, especially first time homebuyers.

The Additional Buyer’s Stamp Duty (ABSD) has been effective in managing the inflow of foreign capital and excessive local speculation. It has greatly reduced demand, causing prices to fall as household incomes increased. The introduction of the Total Debt Servicing Ratio in 2013 put a limit on the amount that could be borrowed on all types of credit. TDSR has significantly reduced the amount of debt available to finance the purchase of residential property. Based on our analysis of household balance sheets, the level of mortgage liability to a household’s cash holding has declined from a record peak of 90% in 2002 and 2003 to 59% today.

Keeping housing available and affordable for citizens is of critical importance, in the same way as providing affordable education and healthcare. Scarcity of land in Singapore and its open economy could easily drive home prices to unaffordable levels if supply cannot match demand.

But now, with smart policies having delivered the desired effect, it could be the right time to consider measures that would allow the residential market to resume a course that will boost moderate growth.

Re-energising the residential market

Many potential homebuyers are clearly holding back because they believe the ABSD is temporary and will be withdrawn or changed. Reducing or removing ABSD for Singaporeans and replacing it with a tax based on the investment period would be a sustainable way to revive demand.

Raising the tax on residential investment properties will steer buyers to evaluate their capital investment against the long-term holding costs. Such costs include property taxes, asset management and maintenance fees and capital expenditure on the property. This will shift the investment decision towards the longer term.

Adjusting ABSD would remove a barrier, making it easier for investors to return to the residential market as well as making it easier for Singaporeans who are interested in investing in the local residential market to save for a rainy day or retirement. With TDSR in place, we believe it is unlikely that adjusting ABSD will create excessive demand and cause prices to soar. It will, however, bring some activity back into the market and prevent prices falling further.

Overseas investment

One of the consequences of the continued cooling measures is that Singaporeans are looking abroad for property investment in countries such as Malaysia, Australia, Japan and the UK. Data from the Monetary Authority of Singapore indicates that the value of overseas property purchases by Singaporeans reached a high of over $2 billion in 2013, although it softened to $400 million in 1H2015.

Investing in overseas residential markets can offer good returns, but there is typically more risk, relating to political, economic and currency factors. Investing in the country where your existing and future liabilities are, and where you will spend your retirement savings, may be a less risky way to match assets with liabilities. At the same time, the residential market in Singapore is able to keep pace with local inflation and offer real returns compared with low-yielding bonds and fixed-income investments that are likely to struggle to offer substantial returns in the foreseeable future.

Maintaining Singapore’s status as a global city through an open and investment-friendly environment — which includes encouraging investment in residential real estate, while preventing foreign capital from pushing up prices to unaffordable levels — is a delicate balance. But if some elements of the cooling measures could be thawed, it would be particularly beneficial for both the property market and the wider Singapore economy.

Chua Yang Liang is JLL’s head of research for Southeast Asia.

This article appeared in The Edge Property Pullout, Issue 763 (Jan 30, 2017) of The Edge Singapore.

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