When will the Cooling Measures be Removed?

Recently there have been many calls to remove or tweak the cooling measures. But the Government has also repeatedly said it will stay for now and they have a rough idea when to remove it.

The question on everyone's mind is when.

Let me try to second guess that.

According to official numbers from the Urban Redevelopment Authority, property prices have risen some 62% from the trough in 2Q 2009 to the peak in 3Q 2013. In pure numbers, it means if property price on a per sq ft basis is $1,000 in 2009, it would have risen to $1,620 psf in 2013.

 
Source: URA

How much has property prices fallen based on the official price index? Around 9.1% as per the flash estimate for 1Q 2016. It means prices now are around $1,472 psf. Compared to the trough in 2Q 2009, prices are still 47% higher.

This also means property prices have appreciated on average 8% per year from 2009 to 2015. Have our economy grew on average 8% per year over the same period? The answer is no. So property prices have ran ahead of the economy.

So that is probably why the Government is not doing anything.

My guess is a comfortable range in the mind of the Government will be between 15 and 20% fall from the peak. If prices did indeed fall by this amount, the average price appreciation per annum is between 4 and 5%. This price appreciation is closer than economic growth.

	15% from Peak	20% from Peak
Estimated Property Prices at end 2016	$1,377 psf	$1,296 psf
Average Price Appreciation per annum	5.4%	4.2%

Source: Real Property Advisory Singapore

When will that happen? Again my guess is by the end of 2016 because 2016 will see the largest number of unit completed.

Is the Private Residential Market Worthwhile to Enter Now?

No one likes to catch a falling knife.

The private residential price index has fallen for seven consecutive quarters. With the Government still keeping the cooling measures in place, it seems that there is no end in sight. But at the same time, interest rates are starting to creep up. It is really double whammy for the market.

The chart below compares the change in 3-month Sibor rates versus the change in private property prices. 2Q 2009 was the quarter the property market recovered. It is clear that the change in property prices is on a downtrend ever since. While the 3-month Sibor rates were steady for some quarters, it does show an increasing trend since 2010. It means that the relationship between the two are inverse. ie. when one goes up, the other goes down.

Change in Sibor Rates versus Change in Private Property Prices

 

 Source: Real Property Advisory / URA / Money Smart

This is worrying for some buyers as it means they have to fork out more in monthly installments if prices remain stable. But if the fall in prices is large enough to offset the increase in monthly installments, it means that buyers would be better off entering the market.

Let's carry out a hypothetical example.

Assuming a buyer buys a $1 million resale property and takes a loan of $800,000 for 25 years at 1.5% (this is the interest rate before the property market declined in 4Q 2013), he will have to pay $3,199 per month.

If he holds out and makes the purchase in 2Q 2015, based on URA private residential price index, the property price would have fallen about 6% to $940,000. He needs only to take a loan of $752,000. However interest rate has gone up to 2% in 2Q 2015. He would have to pay $3,187 per month which is not much different.

This mean that a decline in prices of 1.2% would be offset by an increase in interest rate of 0.1%.

So is the buyer better off by delaying his purchase? Yes. While the monthly installment is not much different, the savings from less upfront cash and taxes is a lot. Even if the property is tenanted, the net cash flow (rental less mortgage payments) is unlikely to be much more than the savings in cash and taxes.

However if the seller is willing to accept an offer of 10 to 20% below the latest transacted prices of comparable properties, the deal is worth taking a second look.