The visible hand

A new era in property market governance

Residential property demand has surged in many Asian cities as speculators and homeowners alike clamour to get a piece of the action before prices exceed their threshold buying level.

We have seen volume and prices of new launches in Singapore rising unabated. In 3Q09, the Property Price Index, a national price index developed by the Urban Redevelopment Authority on residential stock island-wide, took a sudden upturn, jumping by an amazing 15.9 per cent – the largest “initial turn” ever recorded during a recovery since 1975, suggesting that the market could have over-corrected in the previous quarters.

Monthly new sales also recorded a similar surge, particularly in the month of January, which saw sales tripling from the previous month.

The average monthly sales of 1,437 recorded over the first three months of this year is already 1.7 and 5.7 times the monthly average of 850 and 250 transacted over the corresponding periods last year and in 2008, respectively.

This exuberance in the residential market set off cautionary bells, spurring the Government to introduce several contractionary measures as early as Sept 14 last year.

Contractionary measures seek to reduce demand, for example, an increase or introduction of stamp duty or capital gains tax. Conversely, expansionary policies are those that seek to improve demand, such as lower interest rates and a higher loan-to-value ratio.

More intervention, but less bite?

For the past 30 years, the Government has been involved in the property market in a number of ways, from the sale of State land to steer urban development to the imposition of taxes to ensure the smooth operation of the residential market.

In the final two decades of the last century, the State did not intervene in the market as much as it has over the first decade of this new millennium. The State intervened over nine times from 1980 to 1999, especially towards the later part of the period.

But just in the past 10 years from 2000 this year, the Government has already introduced several property-related policies on eight occasions.

For the first time, contractionary measures were introduced immediately after a shock to the real economy. For the past 30 years, the State has adopted mostly expansionary policies.

Following the recession in 1984 to 1985, there were two policies that helped increase the demand for private housing market by allowing CPF funds to be used for the purchase of private properties. And after the Asian financial crisis, stamp duties were suspended to spur demand.

Interestingly, since the collapse of Lehman Brothers, the State has introduced contractionary measures – the removal of interest absorption and interest only loans schemes, reduction of the loan-to-value ratio and the introduction of a seller stamp duty. These measures were aimed at cooling the overheated property market that had been brought forth by the lower interest rate necessary to encourage growth in the larger economy.

Emergence of the soft policy era

The impact of these policies is not necessarily hard-hitting, especially as some of them have been restrained.

For example, the current seller stamp duty is only imposed on those who sell within a year of purchase compared to the three years when a similar policy was introduced in May 1996.

The impact of the policy is soft even though the market seems more heated today than it was in 1996. The average quarterly increase in the property price index over the past three quarters before the introduction of the recent policy is 9.4 per cent compared to 4.8 per cent per quarter over the same period when the policy was introduced in 1996.

The sales volume following the introduction of these policies showed they did not seem to have an immediate effect on the market.

The average monthly new sales over the first three months of this year hit a high of 1,437, exceeding one-and-a-half times the recorded figure for the same period a year ago.

Recent policies could have been more aggressive but it would not help the larger economy over the short to medium term.

The condition facing policy makers today is different. The recent financial crisis has required the injection of state funds to spur domestic consumption. This, coupled with the low interest rate environment, has added inflationary pressures to the physical assets.

While a growing property market would lend some initial lift to the local economy, an asset-led inflation could potentially damage the recovery. The policy makers have the unenviable task of balancing these two countervailing factors.

As China’s late paramount leader Deng Xiaoping once said: “Cross the river by feeling for the stones”.

In other words, a soft and consultative approach to market regulation is a better option today than a heavy-handed one.

The long and arduous path to the property market recovery after 1996′s anti-speculative policy would also serve to remind us of the damage that overly-aggressive policies could do to the market.

Expect more adjustments

We expect the State to retain the soft approach towards the regulation of the property market. There is sufficient free play in the current policies for the State to tweak according to varying conditions.

For example, the stamp duty policy could be extended from the current one year to those transactions within three years of the purchase.

The main concern is the sustainability of the property market. The recent jump in prices has exceeded the real growth in the economy. There have been only a few occasions when that happened and these usually occur immediately following a correction.

The mid-term economic forecast for Singapore is expected to remain at 4 to 5 per cent. As long as the property price growth is moderate and does not exceed the real economy for an extended period of time, the market should remain healthy.

Otherwise, a market correction can be expected, either as a result of market forces or government intervention.

By Dr Chua Yang Liang, Head of Research, South-east Asia, at property consultancy Jones Lang Lasalle.