Despite the COVID-19 disruptions to supply chains and economic activities, the residential property markets defied gravity. The benchmark private residential property price index, published by the Urban Redevelopment Authority (URA), experienced 12 consecutive quarters of growth of 25% after exiting the “circuit breaker” in June 2020. The resale public housing price, measured by the Housing & Development Board (HDB), grew by 28% over the same period.
The Government acted swiftly and decisively to further tighten investment flows, especially from foreign investors, into the private housing market on 26 April 2023. The latest round of cooling measures increased ABSD for foreigners from 30% to 60% when buying private residential properties and for Singaporean Citizens (SCs) and Singapore’s Permanent Residents (SPR) from 17% to 20% and 20% to 25%, respectively, when buying the second residential property. The measures aim to pre-empt housing prices from diverging further from the economic fundamentals.
The new ABSD of 60% is a hefty transaction cost for foreigners to buy private residential properties in Singapore. Foreign investors may switch their investments from private properties to commercial properties or REITs with no ABSD levied on foreigners. SC and SPR investors could only defray the increases in ABSD costs and break even when their private residential property prices appreciate 20% and 30%, respectively.
Market responses
The new cooling measures could trigger two possible responses in the market. First, developers of the luxury segment will defer their new project launches and recalibrate their marketing and development strategies if more foreign investors stay out of the market.
City Developments Limited (CDL), one of the biggest publicly listed developers in Singapore, deferred the scheduled launch of its new project, the Newport Residences, which is the redevelopment of the former Fuji Xerox Towers in Anson Road in the Central Business District (CBD). The project was priced above S$3,000 per square foot (psf), targeting foreigners and high-income local investors.
Second, some developers may still, as planned, launch new projects that are less dependent on foreign investors. The sales of these properties, mostly in the city fringe and suburban areas, will attract local buyers, especially first-time SC and SPR buyers, who pay zero or 5% ABSD when buying their first private residential properties for own-occupation purposes.
Blossoms by The Park, the first project launched on the weekend after the announcement new ABSD rule, sold 70% of the 275 units project at an average price of $2,423 psf. 96% of the buyers are SCs and SPRs, who snapped up the smaller 1-room and 2-room units in the projects, whereas 4 foreigners paid 60% ABSD to buy units in this project.
A foreigner who buys a 3-room unit with a floor size of 1,076 square feet in this project will pay an ABSD of $1.37 million on top of the listed price of $2.28 million. They pay $3.65 million for the unit, which increases the psf price from $2,120 to $3,390. The price is even higher than comparable units in the prime CBD area before the new ABSD.
Even the local first-time buyers do not need to pay ABSD; this 3-room unit will be stretched for them unless they are in the top 10th decile by households with a monthly income above $18,840. This is based on the assumption of a 4% interest rate floor, a loan term of 20 years, and subject to the total debt servicing ratio (TDSR) of 55%.
The Continuum, the second project after the new ABSD rules, sold only 26% or about 216 units when launched on the weekend. On average, the larger 816-unit freehold project near the Tanjong Katong area is priced at $2,732 psf.
Besides the size and tenure differences between the two projects in the Rest of the Centre Region (RCR), the higher unit price in the Continuum puts more pressure on the developers to fill the void left by foreign buyers. Despite the slightly higher sale number in the Continuum than in Blossoms by the Park during the launch, the sale rate has weakened, which may signal that the new measures are starting to bite.
The same pressure will also impact other new projects launched earlier but still with a large balance of unsold units in the inventory. These developers could be compelled to reduce prices to sell units to local buyers or risk paying a hefty ABSD when the 5-year remission deadline is due.
Costs of inaction
With the rising interest rates, private housing will become more unaffordable and inaccessible to the median-income families. The global economic uncertainties also significantly increase the risk of investing in private real estate markets. If the macro-risks trigger negative economic outcomes, such as recession and unemployment, prices could spiral down quickly in the private housing markets, which could have widespread social-economic consequences.
The latest cooling measures could take some steam off the red-hot markets and prevent further divergence between housing prices and economic fundaments.
While market watchers disagree in their views of the potential effects of the new ABSD of 60%, regardless of which way the prices will go, the costs of inaction could be more detrimental if prices ever plunge when exuberance dissipates, and market corrections occur.