A tale of two cities

 December 26, 2011

Avid readers of regional newspapers would have noticed an interesting trend recently: While headlines in Hong Kong and China have highlighted declining transaction volumes and sliding prices in their residential property markets, local newspapers are still reporting healthy demand, especially for mass-market homes, with prices reaching record highs.

An interesting case in point is the recent launch of Bedok Residences, which attracted strong interest from buyers who queued for days to book their choice units. To be sure, Bedok Residences has strong and unique selling points, being integrated with Bedok bus interchange and situated next to Bedok MRT Station. Still, the overwhelming response stood in stark contrast to the declining buyer interest in Hong Kong and China.

A look at past residential property market cycles would reveal that Singapore and Hong Kong tend to track each other closely. Some market observers even argue that Hong Kong’s residential prices tend to lead Singapore’s by a few quarters. This was evident in 2008/2009, when prices of private homes in Hong Kong started to recover around the end of 2008, whereas prices in Singapore did so only in the second quarter of the following year.

This close correlation between Singapore and Hong Kong residential prices is to be expected given that both cities are vibrant and highly-open economies with scarce land supply (in contrast with China, which has abundant land resources).

Governments intervene with cooling measures

Perhaps not surprisingly, the governments of both Hong Kong and Singapore have been trying to cool home prices over the last two years – through the imposition of harsh measures and the introduction of record pipeline supply of residential land bank.

In Hong Kong, the government imposed last year a special stamp duty on residential property sold within two years of purchase. This year, it also set a land sales target that would supply 20,000 units a year for the next 10 years, higher than the take-up rates for last year and this year.

In Singapore, the Government imposed early this year a seller’s stamp duty of 4 to 16 per cent on private residential properties sold within four years of purchase. This month, the Government also introduced an additional buyer’s stamp duty on certain categories of residential purchases – 10 per cent for foreign buyers; and 3 per cent for both permanent resident buyers who already own a home and citizens who already own two residential properties.

Mortgage rates make the difference

So what contributed to the recent decoupling of Singapore and Hong Kong home prices?

The simple answer is mortgage rates.

Driven by strong loan growth and rising loan-to-deposit ratios, Hong Kong banks have raised their mortgage rate spreads since early this year. This has resulted in higher mortgage rates and reduced demand for residential properties, which in turn led to the slide in private home prices since September.

On the other hand, the Government’s property cooling efforts have so far been thwarted by very low mortgage rates. With base interest rates remaining near record lows and Singapore banks charging very low mortgage spreads, affordability remains high.

However, there is a risk that Singapore mortgage rates would rise next year from their current low levels. Like their Hong Kong peers, Singapore banks have also experienced strong loan growth over the past year, which in turn has pushed up their loan-to-deposit ratios – although it must be said that ratios in Singapore dollars are generally still low.

Moreover, with the debt crisis that is plaguing the European Union, there has been anecdotal evidence that some European banks are pulling back their credit lines in Singapore to help boost capital ratios as required by the EU debt plan. If these banks continue to deleverage, it could result in less competition in the lending market for Singapore banks, which may then feel comfortable enough to raise their lending spreads, including mortgage spreads.

In fact, during the 2008/2009 global financial crisis, local banks such as UOB and OCBC were able to increase their net interest margins as foreign banks reduced their lending activities in Singapore.

Thus, while the recent decoupling in Singapore and Hong Kong residential property prices may make for an interesting read, we do not expect it to last for long, especially with the latest round of cooling measures introduced in Singapore.

By Tan Chin Keong – an analyst at UBS Wealth Management Research.