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Why Singapore residential property prices may take their cues from car loans

Singapore's beaten down home prices may find hopes of a recovery from an unusual source: car loans.

In May, Singapore's central bank unexpectedly eased restrictions on car loans, both by raising the maximum permitted loan-to-value ratios and extending the maximum loan tenure from five years to seven.

It was a significant change in a country where cars are rationed and buying one requires not only purchasing the vehicle, but also buying at auction the permission to own it. That permission, called a certificate of entitlement (COE), is pricey, with the June auction coming in around 53,000-56,000 Singapore dollars ($39,100-$41,300), down from levels over 90,000 Singapore dollars in 2013.

Some analysts pointed to the eased car loan restrictions as a sign that the central bank may also soon ease measures that were aimed at slowing the flow of credit to the property sector. Those measures included limits on the total amount of debt a borrower could take on as a percentage as income, as well as additional stamp duties on property buyers.

Credit Suisse said in June that it expected the market would begin pricing in rising chances that the cooling measures' days were numbered. The bank predicted a change by the end of 2016 and pointed to stamp duty as likely to be the first cooling measure to go.

The Additional Buyer's Stamp Duty (ABSD) adds as much as 15 percent to a property's purchase price for foreign buyers and Singaporeans with more than one property.

However, analysts at DBS said speculation that the cooling measures were on the way out was "still premature," noting that the Property Price Index had only fallen 9.4 percent from its peak, leaving prices still about 40 percent above 2009 lows.

DBS said in June that it would likely take another 13-15 percent decline in property prices for authorities to ditch cooling measures.

But DBS analysts did come to roughly the same conclusion as Credit Suisse, predicting the measures' removal at the end of this year, or possibly in the first half of next year.

Real estate agents said they believed that the ABSD was holding back buyers and that its removal was the catalyst needed to unleash pent-up demand.

Property investor Alexander Karolik Shlaen, an economist and CEO of Panache Management, a luxury brands and real estate investment adviser, said that demand never completely evaporated, even in the market downturn.

Shlaen called the declines in Singapore home prices a "self-inflicted wound," citing both the ABSD and the introduction in mid-2013 of a total debt servicing ratio (TDSR) to limit how much debt households could take on.

Even if authorities stand pat on the property cooling measures, there are signs that the downturn's days may be limited.

For one, while new supply in the market is still climbing, it is expected to taper off in coming years.

About 20,000 private residential units are set to be completed in the last three quarters of 2016, with about another 15,000 each in 2017 and 2018. But by 2019, that number will more than halve to about 7,500, before falling again in 2020 to just under 4,000 expected completions.

Indeed, one developer appears to be counting on that drop: In an April sales preview presentation for media, Cheung Kong Property included the falling supply and lack of competition from other developers as a positive feature to market its "British-themed" Stars of Kovan project, which is slated for completion in 2020. The project has nearly 400 units, with expected pricing ranging from 800,000 Singapore dollars to 3.5 million Singapore dollars.

Due to a quirk of Singapore's land policy, the developer won't have to worry about overhang from other finished, but unsold projects.

Developers aren't allowed to sit on unsold units while waiting for buyers to return: Any units unsold two years after a project's completion face an "extension charge" of 8 percent of the proportional land cost for the first year, rising to 16 percent in the second year and 24 percent in the third.

The measure was aimed at preventing property hoarding by "foreign" developers in the land-starved city-state. The only way to avoid the charges was if the developer was Singaporean or the company had only Singaporean shareholders and board members.

In a note last week, analysts at CIMB said it expected home prices to fall around 5-8 percent this year as looming penalties were expected to intensify from 2017 and developers would start clearing unsold inventory.

With many developers running out of time before the charges kick in, more discounts may be afoot in the near term, but projects further out will face less competition for potential buyers.

Some commentators pointed to signs that one segment of the market was already undergoing some recovery: Luxury housing.

"Big players are back in the market and they are buying," Chandran V.R., managing director at luxury property agent CRE, said recently, noting that some had been sitting on the sidelines for more than a year.

"The real buyers feel it's the right time to come in," Chandran said.

He reported seeing a gradual pickup in apartments priced above 5 million Singapore dollars in the high-end districts of nine, 10 and 11.

While Chandran expected that could mark a weather vane for the entire market, property investor Shlaen said that while the luxury end had likely bottomed, he still forecast declines for other segments.

And in what may not bode well for developers' sales, Shlaen said the real value was in the secondary sales, noting that older units were usually around 20 percent larger than newly launched ones at the same price.

That did not mean, however, that rents would rise; Shlaen expected rental yields to stay low as potential tenants currently had a lot of bargaining power, because they could threaten to move a couple subway stops away to get lower rent.

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