James Hee, a property agent who lives with his family of four in a government-built flat he owns in Singapore, was eyeing a condo for about S$1.5 million ($1.2 million) earlier this year. Then Hee discovered that he wouldn’t qualify for a mortgage after the government restricted lending.
“Being self-employed, only 70 percent of what I earn is considered for the loan calculation, and with my car loan I can’t get the amount I would need to upgrade,” Hee, 32, said.
Singapore curbed lending after home prices climbed 25 percent between 2006 and 2008. While the measures pushed down prices, they also prevented some Singaporeans, who mostly live in government-financed units that they own, from buying privately built apartments. The central bank said in July that it’s too early to ease property restrictions, a view that some economists support to protect borrowers from an impending rise in interest rates.
“This preemptive step to limit loan liabilities could actually help to buffer a slump as it reduces the number of marginal home owners who may struggle to meet loan obligations and then need to liquidate,” said Vishnu Varathan, an economist at Mizuho Bank Ltd. in the city-state. “It’s priming the Singapore market for more resilience when the rate cycle turns.”
The government has shaped the country’s housing market for decades. Singapore’s first prime minister, Lee Kuan Yew, transformed the city of 5.4 million from a colonial backwater during its independence in 1965 into one of Asia’s most prosperous nations. His housing policy created hundreds of thousands of government apartments where today more than 80 percent of Singaporeans live, according to the Housing & Development Board, known as HDB, website.
Singapore’s homeownership rate is among the highest in the world. The figure for resident households was 90.5 percent in 2013, up from 58.8 percent in 1980, according to government data, thanks to housing grants and a program that allows buyers to use accumulated government pension contributions for purchases.
As foreign speculators and low interest rates in Singapore sent housing prices soaring beginning in 2006, the government took action. In 2009, officials tightened lending by barring interest-only mortgages for some housing and forbidding developers from absorbing interest payments for units under construction. The government also taxed speculators and placed levies as high as 15 percent on foreign buyers. Home prices hit a record in September 2013.
The Monetary Authority of Singapore, or MAS, further restricted lending last year. It stipulated that total debt should not exceed 60 percent of the income of a borrower. The central bank also cut the maximum period for new loans to buy public housing by five years to 25 years.
The HDB last year capped how much a borrower’s gross monthly income can go toward a mortgage -- or the mortgage-servicing ratio -- for public housing at 30 percent, down from 35 percent.
The restrictions have made it more difficult for Singaporeans to sell government housing and buy better private apartments.
Public units, which are clustered throughout the island-state, tend to be blocky and unadorned, with laundry often hanging off bamboo poles outside. While condo owners have easy access to swimming pools, gyms and tennis courts, these amenities are commonly shared by entire suburbs of public housing residents. Government units have an income ceiling for buyers and restrictions on the resale and rental of the units, as well as a minimum occupation period.
Government policy has cut the growth in outstanding mortgage loans to 7.5 percent in June, almost the slowest monthly pace since June 2007, data compiled by Bloomberg based on MAS figures show.
Resale volumes of public housing have declined by 63 percent as of July from a peak in May 2010, when 3,649 units were sold, according to The Singapore Real Estate Exchange’s preliminary figures on Aug. 7. Resale prices for HDB flats dropped 0.9 percent in July from June, for the sixth consecutive month, to a 29-month low. A three-bedroom public flat cost about S$500,000 as of July, according to data from the exchange.
“Earlier, people bought HDBs at cheap prices and with the profit on the sale they made the down payments to upgrade to a private condo,” said Denka Wee, head of business services at property broker Dennis Wee Realty. “Now they can’t get the price they need for the upgrade.”
The private market is also plunging as one of its biggest sources of buyers is stuck in government housing.
Private-home sales dropped 56 percent to 4,505 units in the first half of 2014 compared with the same period a year earlier, according to Urban Redevelopment Authority data.
Prices of mass-market private homes -- apartments which cost about S$1,000 per square foot and are located about 10 kilometers from the central business district -- posted their third quarter of decline in June, sliding 0.9 percent, URA data show. The average price of a new 900-square-foot private condo in Singapore is estimated to be between S$900,000 and S$950,000, according to Savills Plc.
“We could see slower sales in mass market projects because of lower demand from HDB homeowners as the loan measures have dented their ability to afford private homes,” said Nicholas Mak, an executive director at SLP International Property Consultants in Singapore. “Some of the mass market suburban condo demand was coming from the HDB upgraders.”
For the year, public housing prices are expected to decline by between 5 percent and 8 percent because of falling demand and increased supply, according to Singapore-based Christine Li, head of research and consultancy at property broker Orangetee.com Pte. Developers will complete 28,000 build-to-order HDB units by year’s end, Li said.
“When HDB prices slow, there’s a psychological effect that some upgraders tend to hold back because they feel their HDB cannot fetch a premium for them to upgrade to a condominium,” she said.
Barclays Bank Plc reiterated its underweight rating on City Developments Ltd. (CIT), Singapore’s second-largest developer, and Keppel Land Ltd. (KPLD), the third largest. CapitaLand Ltd. (CAPL), Southeast Asia’s largest developer, hasn’t been hit as hard because its residential assets make up only a quarter of its total.
Tricia Song, an analyst at Barclays, said that the government probably won’t scale back its housing restrictions anytime soon.
“The government is unlikely to relax property tightening measures before a significant decline in the property price index, which we forecast to be sometime in mid-2015,” Song wrote in an Aug. 4 report. Prices may drop by as much as 15 percent in 2015, according to Barclays.
City Developments said the housing limits run the risk of harming Singapore. The nation could lose its competitive edge as an investment destination unless the government reviews its property cooling measures, Kwek Leng Beng, executive chairman at City Developments, told the Straits Times newspaper. Foreigners are choosing to plough their investment dollars into countries like Britain, Australia and the U.S. over Singapore, while Singaporeans have been investing abroad, he said.
The developer today reported a 33 percent drop in profit to S$137.9 million for the quarter ended June 30.
“Singapore’s property landscape continues to experience challenging headwinds,” Kwek said in today’s statement. “We will accelerate our overseas expansion initiatives to supplement existing operations.”
City Developments shares fell 2.7 percent to S$9.78 at the close of trading in Singapore, posting the biggest decline since Jan. 30.
Hee, the property agent, said he will continue living in government housing in Hougang along with his wife, child, mother-in-law and a maid until he can save the extra money for a condo.
“I don’t see the loan measures going, so I guess I’ll just need to work harder, earn more and wait a few years before I can move to a private condominium,” Hee said.
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