Difficult to buy low and sell high for upgraders

 September 11, 2010

THE new measures aimed at restraining property speculation will have different implications for four different groups: the speculators, unconstrained housing investors, constrained home owners or upgraders, and those about to become home owners.

Speculators are short term ‘flippers’, who take advantage of imperfect information about the markets to profit by buying and selling property whenever housing prices deviate from economic fundamentals.

Unproductive ‘flipping’ inflates housing prices. Cash- strapped first-time buyers, who cannot fork out cash to make the down payment, will be temporarily crowded out of the market. The extension of the seller’s stamp duty imposition period from one year to three years adds costs to this flipping.

The lowering of the loan-to- value ratio for the second housing loans to 70 per cent means that the speculators have to come up with more cash upfront, which increases their opportunity costs of investing in the housing market.

The new rules will create disincentives for short-term investors. Unless those short-term returns are commensurate with the risks arising out of illiquidity in the housing markets, speculators may channel their capital into more liquid stock and bond markets.

Unconstrained house buyers are those who invest in multiple houses and hold them for long-term price appreciation. These investors are less affected by the new stamp duty rules. However, the rule disallowing dual home ownership in HDB flats and private houses will exclude them from the resale HDB market. This will reduce the demand distortion in the resale HDB market and make more resale flats available to new home buyers.

Unlike other consumption goods, housing is location-dependent and indivisible. Home buyers may not find the flats of the most optimal design, size and floor level at the time of the purchase. They meet their changing needs and wants over time by trading their smaller flats for bigger flats, or moving from public housing flats to private condominiums with full facilities.

Upgraders who ‘flip’ their existing HDB flats for private condominiums are usually motivated by capital gains accrued to their existing flats. The ban on concurrent HDB and private home ownership will mean that they will have to time the purchasing of new houses to coincide with the disposal of their existing homes. This rule will have a more adverse effect on upgraders in thin markets, when demand is weak and price depressed. HDB upgraders will find it difficult to follow the ‘buy low and sell high’ strategy.

The extension of the five-year minimum occupation period (MOP) for HDB resale flats levels the playing field for new flat and resale flat owners, should they choose to upgrade. Both will have to evaluate the opportunity costs associated with the five-year lock-up periods.

Increases in the amount of land sold for Design, Build and Sell Scheme (DBSS) flats and executive condominiums will dampen housing prices, but the effect will not be immediate because the homes take time to be built. Even with the shortening of the completion period for new flats, buyers will have to wait 21/2 years to collect their keys.

The Government’s intervention in the housing markets will make a clearer distinction between the public and private housing markets. Public housing has become more a consumption good, and less of an investment good, where home owners could make abnormal gains in the short-term. With a smooth functioning dual housing market comprising a more regulated public housing market as well as a free private market that allows risk-taking by investors and speculators, housing can be made more affordable.

The targeted anti-speculation measures will exclude housing investors and speculators from the public resale housing market, and curb upgraders’ demand for mass-market condominiums in the short term. When flipping activities slow down, the momentum of price increases should be contained in the short term. Coupled with strong supply in the pipeline, it will allow housing prices to be adjusted to a level that is in line with market and economic fundamentals.

While the Government’s measures should be targeted at stabilising the market, it should not over-correct the market, as that could trigger a downward spiral in prices. A large decline in prices coupled with the large stream of potential supply coming into the market could have an undesirable impact on the market.

By Sing Tien Foo, associate professor at the National University of Singapore’s department of real estate. He lives in Pine Grove, a privatised HUDC estate.