Calls on the government to relax the cooling measures started 2 years ago, some predicting that measures will be relaxed in 2015. In the recent months, developers, property agents and industry associations, have repeated their calls with some predicting that measures may be lifted or amended by the end of 2016.

With recent Government Land Sales (GLS) still seeing strong responses with 8 to 10 bids per land tender, and with developers and property agents clocking in commendable profits for 2015, I do not think that cooling measures will be relaxed until such profits turn negative.

Since 2010, the cooling measures have added on to a list of “defects” in our property market that may culminate in a significant deterioration of property values over the next few decades.

In this article we examine 6 issues that will further widen the cracks.

1) Firstly, the Executive Condominium (EC) segment provides a clear illustration of the extent of over-supply in the residential market. The term “sandwiched class” households implies a small market segment, sandwiched between the families that are eligible to buy new HDB flats and the wealthier families that can afford private properties. Since ECs were re-launched for sale in November 2010, and up till February 2016, developers have managed to satisfy the needs of 14,708 sandwiched households.

During that period, the household monthly income cap for EC buyers was raised from $10,000 to $12,000 in 2011 to widen the buyer pool. Amidst softening demand, the household income ceiling was further revised upwards to $14,000 per month in August 2015. Notwithstanding that families with $14,000 per month of household income stand at the 77th percentile of households ranked by income levels, these families that can well afford ECs are further funded by generous subsidies of taxpayers. Yet sales of ECs continued to be lethargic.

The number of EC units launched but were left unsold, climbed rapidly in the last year, allowing us to conclude that (1) we have already exhausted most of the demand for ECs and (2) raising the income ceiling did not lead to a significant additional demand. Added on the data point that as of 31Dec2015, there were 1,540 completed EC units that remained vacant (yes, vacant despite a Minimum Occupation Period rule), it means that even the category of “EC investors” have been exhausted.

IMPACT OF POLICIES & DUTIES

2) Secondly, Singapore has relatively few economic policies and taxes that positively discriminate against foreigners and PRs. The Additional Buyer Stamp Duty (ABSD) is an exception. In addition to deterring foreigners and PRs from investing in Singapore’s residential market, this policy has turned Singapore’s desire to be a wealth planning hub on its head. Wealthy families that have invested heavily in Singapore and that are now considering estate and succession planning find their options limited when it comes to their residential assets. Before ABSD was introduced, these families could transfer their properties into a living trust or a foundation by paying the normal stamp duty of just under 3%. With the ABSD of 15%, transferring your accumulated residential assets to a trust will cost a prohibitive 18% in duties. So ABSD does not just cool the residential market, it also cooled the wealth planning industry, slowing down the business for trust managers, bankers and lawyers. 

3) Thirdly, the most successful measure that curbed excessive residential investments termed the Total Debt Servicing Ratio (TDSR), has discounted the value of real estate assets to almost zero. Introduced in mid 2013, TDSR defines the maximum loan for residential properties based on the ability of the borrower to repay the monthly mortgage, stress-tested at 3.5% per annum interest rates for residential properties and 4.5% for commercial properties. The TDSR framework regards a borrower’s income and type of income (e.g. commissions, fixed salary, dividends, ad hoc fees, etc.) as the main source of mortgage repayment and the loan size and loan tenure are determined based on the borrower’s age and credit worthiness. 

The globally accepted practice of asset-backed-lending for real estate does not apply in Singapore once TDSR was implemented. Since the income of the borrower is the main determinant of the size of the property loan, the value of the property itself is secondary. This inherently means that a retiree of age 65 without income and living in a fully paid private apartment that is worth $500,000, or $5 million, or S$50 million for that matter, will not be able to take a dollar of loan against the property to sustain his daily cashflow needs. Where is the inherent value of this piece of real estate called home if in the eyes of the banks and the authorities, value only exists in the income of the borrower?

The issue of demand being exhausted with the last 6 years of massive supply, the ABSD and the TDSR framework wraps up part one of this two-part article. In the next part, we will discuss how the finished quality of recent projects, the hazy laws such as those around strata floor area and the high home ownership rate may lead to a long term decline in property values.

4) One of the methods for capping prices in the residential market involved ensuring that a sufficiently large pipeline of supply is available to investors and buyers. The rationale is that increasing the sales of new HDB flats and private residences will lead to more competition amongst sellers and keep a lid on price growth. The exuberant pace of sales since Singapore pulled out of the Global Financial Crisis in 2009 has led to a massive boom in construction. Between 2011 to 2015, the total stock of Singapore’s residential units, net of demolitions, increased by about 150,000 and between 2016 to 2019, another 155,000 residential units will be completed. 

While the Building & Construction Authority has reported better performance and higher scores in construction quality across both HDB flats, ECs and private residential projects, there are also more and more high profile cases of building defects, some of which have resulted in law suits. Cases of building defects in new developments highlighted by the media included million dollar homes such as The Sea View, RiverParc Residence, The Sail @ Marina Bay and The Coast in Sentosa Cove. 

Given the large number of properties being built, these cases may be regarded as negligible when compared to the number of homes that are properly built. However, what might negatively impact future home values is a recent landmark ruling by the High Court. Owners of The Sea View who sued for numerous alleged defects were told by the High Court that the developer, the architect and the main contractor are largely not liable for negligence claims because most of the work have been delegated to other companies, or independent contractors. 

One implication for all Singapore property investors might be: investors would need to know the whole plethora of contractors engaged by the developer, the architect or the main contractor for any work on the property. Should investors find any defects in the property and their claims against the developer, the architect and the main contractor did not result in any compensation, the investors would have to direct their claims further down the food chain, directly at the company that had specifically performed the work resulting in the defects.  
Such a ruling incentivises developers and main contractors to outsource more of their work. Coupled with the increasing incidences of shoddy workmanship and building defects, the finished quality of real estate might drop, as would its value.

5) The fifth flaw relates to the slowly but increasingly complex set of rules around Singapore property investments. In addition to the various layers of buyer and seller stamp duties, property taxes are tiered and strata area laws are perplexing even to seasoned real estate professionals. An investor purchasing 2,000 sqft of strata area could have as little as 1,200 sqft of usable floor area: a drop of about 40%.

PAYING FOR VOID AREAS

The large difference between the area we paid for and the area we can use lies mainly in the void. Yes, the airspace between us and the ceiling, if the ceiling is above certain height limits in a residential or a non-residential space, termed “internal void”, is considered “sellable strata area”. Stretching our imagination further, in strata landed houses, investors pay for several levels of “external void” strata area between themselves and the sky.

Strata void areas proliferated in the last decade and extended themselves into office and industrial segments. The investors paid for the void which is of little interest to tenants, especially in the industrial category where the size of the production floor area is a key determinant of rental discussions.
As our economy progresses with technological changes, the rules around various category of industrial uses are also getting muddled and in most circumstances, require more precise definitions. Overall, hazy rules coupled with complicated duties and taxes will make our properties less and less attractive to serious, long term investors. 

6) The final point: our housing policy. It served us superbly well in the nation-building-years of Singapore. Looking forward, it is more likely to be a millstone around our necks in a future economy which has shorter boom-bust cycles and which is more nimble. 
 
Chapter 1 in my new book Weathering a Property Downturn: Defensive plays for real estate investors discusses the merits of Singapore’s drive for high home ownership rates during its formative years and the first five decades of nation-building. But this ‘achievement’ did not come without its sacrifices. 
Singapore’s home ownership rate, at a 90.3% level is very high compared to developed nations such as 36% for Switzerland (one of the role-model-countries for Singapore), 45% for Germany, 64% for the UK, 64% for the USA, 61% for Japan and 67% for Australia. These are countries which consistently generate more innovative, world-leading products than Singapore.
 
Chart 1: Singapore ranks third in this chart comparing owner-occupier rates for homes across 35 countries. But is it a good thing?
Source: Century 21 (International Property Advisor Pte Ltd); Eurostat, People in the EU: Who we are and how do we live 2015 edition; Australian Bureau of Statistics (from population census 2011); Statistical Survey Department, Statistics Bureau, Ministry of Internal Affairs and Communications, Japan (from population census 2013); SingStat (2014)
As Singapore seeks to transform its workforce to be more innovative, entrepreneurial and nimble-footed, we need to adapt our housing policy to the needs of a future global economy that rewards asset-light, agile and adaptive entrepreneurs. Hand-cuffing our young households with 30-year-long mortgages when they get married at 28 years of age will not foster any entrepreneurial spirit. In fact it does the opposite, making our society of well educated workers averse to risk, and happy to just conform to the status quo. 
A housing policy that encourages high home ownership may put a drag on future economic growth. And eventually a reduction in the value of its real estate. I concluded the chapter with suggestions about how policymakers may house the entire nation’s changing needs in the future, taking into account the changes required for an aging population.

The six “defects” are similar to the cracks in a leaking roof. We could keeping patching the six cracks as they slowly split wider. And we could patch new cracks as they appear, such as game changing trends like short term home-sharing. But even if the roof does not buckle and give way, continuous patching of cracks will bring down home values.

A version of this article was published in 2 parts in Business Times, Singapore on 20Apr16 and 21Apr16.