Thursday, September 24, 2009

Residential market needs a rework

Changing policies as market conditions change reflects pragmatic and adaptive policymaking which should be applauded

THE big picture driver of real estate wherever is the economy. A residential property buyer pays a certain amount for a particular location because he likes to work, live and play there. Should Singapore execute successfully on mega projects like the integrated resorts, improve her infrastructure, grow her economy and become an increasingly important global city, the trend for property prices is up.

But how fast should prices rise? Is there excessive speculation in the Singapore private residential property market? These are tricky questions and governments everywhere, through their policies, play a major role in impacting the property market. Recently, the Singapore government, acting to pre-empt any speculative bubble from forming, unveiled both supply measures such as reinstating the confirmed list of land sales in the first half of 2010 and demand measures such as disallowing the interest-absorption plan and interest-only loans being offered to buyers of uncompleted private homes.

Changing policies as market conditions change reflects pragmatic and adaptive policymaking which should be applauded. Moreover, well-timed pre-emptive moves deserve the most kudos. However, perhaps there is a case for adopting a framework where only supply measures change while demand measures remain unchanged. This is not just about letting free market forces reign as adopting such a stand creates more certainty for developers and property buyers, both of whom are committing to sizeable investments. Whenever large sums of investment are being made, consistent regulations are called for and the residential property market should be no exception. For example, let's be clear whether we want schemes like deferred payment or interest absorption all the time, not at all, or some of the time.

Perhaps what we really need to focus on is putting in place the set of demand measures that works best for Singapore taking into account various factors. These can range from affordability of homes, wealth creation through real estate acting as a store of value, promoting home ownership, and making Singapore an attractive investment destination. It may be timely to launch an extensive consultation process and have an informed debate that addresses a spectrum of questions, several of which are highlighted below.

How do we want to treat pre-sales of uncompleted residential projects? At one extreme, allow developers to sell projects only after obtaining a temporary occupation permit (TOP). At the other extreme, let the free market rule and allow developers to sell projects well ahead of completion, accept however a low initial payment and offer, whether on their own or in partnership with financial institutions, whatever financing scheme. My take is that, for uncompleted developments, it may be better to allow developers to start selling units at a fairly advanced stage of a project's construction.

After setting an appropriate level of initial payment, let developers and banks have flexibility on payment and financing schemes but give purchasers a maximum window of say 6-12 months between making initial payment and full payment upon completion. This should better ensure that buyers committing to a unit have the financial means to complete and are not just banking on having a 2-3 year time period in which to flip their properties.

What is our stand on investors? Residential properties after all provide accommodation needs as well as act as investment instruments. The issue here touches on how much of residential property should be in the hands of owner occupiers versus investors, and whether the rich can potentially own too large a chunk of private residential property. My take is to have no capital gains tax on all sales of residential properties but perhaps impose much higher property taxes for owners of luxury properties or serial property owners possibly defined to mean persons owning five or more residential properties.

What about foreigners buying property and do we differentiate here between foreigners and permanent residents? At its core, this question drives at what sort of priority, if any, citizens should enjoy in the private residential property market. The issue here is that of Singapore Inc versus Singapore Home and what role we want private residential property to play in getting this balance right. I think the answer may be to give flexibility to foreigners residing in Singapore to buy property as these people contribute to our economy while being more restrictive on other foreigners buying residential properties here. Perhaps we can restrict the number of residential properties a non-permanent resident can own and bar such persons from buying properties that are below a certain absolute dollar value.

A most critical and tricky question is what is the right role of public housing? A bold rethink here of current policy could be timely. In the early years of nationhood, the building of HDB flats helped in giving Singaporeans a stake in this fledging island state and modernising the cityscape. But amid progress and a more demanding population, should HDB flats get fancier so as to be equivalent to private condominiums? What is the right income ceiling to apply to first-time buyers of HDB flats? What exactly should the government subsidise in the HDB segment?

Perhaps instead of housing 70-80 per cent of the population in HDB flats, let's move as rapidly as practicable to having 20-30 per cent of the population housed in HDB flats. With the modern metropolis that we are and the first world living standards that we enjoy, let public housing serve the needs of those who really need help. For young citizens of Singapore, consider giving a housing grant instead. Helping young people get a foothold in the private residential property market could be a precious advantage that the value of citizenships confers.

Certainly, there is plenty to debate about whether the combination of liquidity, forthcoming opening of integrated resorts, and green shoots appearing in the global and Singapore economy are good reasons for the Singapore private residential market to stage an unexpectedly strong recovery given the hit the economy here, and globally, has taken. There is also much for investors to grapple with on the residential market's prospects and whether to play that through property stocks of physical property. But amid all this discussion, let's think about the long term, about whether supply-only measures work and about the right framework for Singapore's residential property market.

Leslie Yee is a Hong Kong-based real estate executive with extensive experience in the Singapore property market

Source: Busines Times, 24 Sep 2009

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