Getting to the bottom of the Covid-defying property market

The weather in Singapore has been strange lately, fluctuating from a cooling 25-degree Celsius one day, to blazing hot the next. But the same can’t be said of the real estate market, which has been just simmering hot, defying expectations and the realities of the Covid-19-hit economy.

While thousands worry about job security and potential loss of income (total employment excluding foreign domestic workers plunged by 103,500 in June), the property market seems to be heading in only one direction — up. This is particularly noticeable for private new home sales, which recorded 1,256 transactions (excluding executive condos) in August 2020 — the highest level in 11 months.

Last weekend, the market reached a new fever high. Penrose, a development by Hong Leong Holdings and City Developments, moved 341 units (or 60.3%) out of a total of 566 units, making it one of the top-selling projects this year.

Much has been written and debated, especially in mainstream media, about the dangers of developers and agents hyping up the property market. Some have gone so far as to claim that agents have been channelling their fat commission from developers as kickbacks to buyers. While there may be some truth to these allegations, they are difficult to prove. Regardless, any claims about the hype and distortion of the property market must be put into context.

Domestic demand

Firstly, let’s look at the underlying demand. Most of the new projects were bought by either Singaporeans or permanent residents. Purchases by foreigners, often blamed for distorting the market, have remained relatively flat, especially for mass-market projects in city fringes. Out of the 6,532 transactions since the beginning of the year, only 16.5% are attributable to foreigners. This signals a healthy and buoyant domestic market.

This year, we estimate that around 47,000 HDB units will reach the Minimum Occupancy Period (MOP). MOP is the period of time you are required to physically occupy your flat before you can sell it. This is 16% and 77% higher than the numbers in 2019 and 2018, respectively. Not surprisingly, the majority of the purchasers of new private homes are HDB upgraders, based on their residential addresses.

The same narrative applies to the private residential market as well. There is no seller’s stamp duty (SSD) for a private property if the holding period is more than three years. Coincidentally, 2017 is the year when there were the most transactions in the private residential market since 2014. In addition, the holding period was changed from four years to three years in March 2017. Hence, those who bought the units in 2016 and sell this year will not incur SSD. This adds to the pool of potential buyers for the year.

Furthermore, coupled with the fact that we are now in a period of historically low interest rates, a listless local stock market, and historically high household liquidity, you have the perfect recipe for a surge in domestic demand.

Not everything is what it seems

Now, despite the seemingly healthy vitals underpinning the Singapore residential property market, it is far from perfect and one shouldn’t throw caution to the wind. Industry insiders are debating the definition of “new sale transactions”, a figure published by URA.

According to the URA website, new sale transactions are based on options issued by developers, whereas resale or secondary market transactions are based on caveats lodged. (Caveats are legal documents lodged by purchasers with the authorities to register their legal interest in the property. Caveats are usually lodged by purchasers after the Option-ToPurchase (OTP) is exercised or the Sales and Purchase Agreement (SPA) is signed).

The current definition of new sale transactions came into effect in May 2015, perhaps as a way for the authorities to keep tabs on the market (the prior definition is the same as the one for the secondary market, which is based on lodged caveats).

Now, this is fine as long as most OTPs are exercised, and translate to actual sales. However, it is generally well-known in the industry that the same OTP can be re-issued multiple times to the same buyer. This has the effect of artificially inflating the new sale transactions figures, which are used by consultants and agents. The same numbers are also often quoted in the media. Invariably, a self-reinforcing view of the market will result. In Singapore where property shopping can be considered a national pastime, this could stoke herd mentality and encourage speculative buying for those who succumb to the fear of missing the boat.

We estimate that the official definition of “new sale transactions” were “inflated” by around 15-20% monthly on average, primarily due to options re-issuance (see Chart 3).

Since no official statistics on options re-issuance or returned units were published, one needs to look at the monthly change in cumulative sales figures for each project to derive the returned units/re-issued options. (Please see sidebar on the methodology we used to derive this.)

On Sept 28, the Controller of Housing (COH) announced that OTP will expire three weeks after the SPA and copies of the title deeds are delivered to the buyer. Failing which, the buyers will lose 25% of their booking fees, or typically around 1.25% of their purchase price.

We applaud this latest directive from the COH. However, we believe this will only reduce the current problem of options re-issuance, but will not eliminate it completely. For one, nothing prevents buyers from using different names within their own families to obtain new OTPs. Forfeited booking fees can be passed on as a discount to the eventual buyer. Since OTPs can now be extended to 12 weeks

as per COH’s new directive, using two different names (say, husband’s and wife’s) will give buyers as long as six months to exercise their options! For property speculators, 1.25% of purchase price is also a relatively small price to pay as a call option on the property if the prices start to run.

We believe that a simple tweak can be made to the methodology of counting the “new sale transactions”. Instead of using OTPs issued, let’s use OTPs exercised for a more accurate definition. By doing so, this heavily quoted monthly figure will be a more reliable number reflective of the true health of the market.

For most people, purchasing a million-dollar property is a once-in-a-lifetime exercise. It is also a lifelong dream. Total transparency and proper due diligence in the process will ensure buyers do not over-leverage themselves if the market enters a sudden downturn. Perhaps, this is not so different from the Singapore weather after all.