Have the numerous rounds of government cooling measures been effective?

Dec 21, 2012By Getty Goh

In December 2011, the Singapore government introduced a cooling measure called the Additional Buyer Stamp Duty (ABSD). As part of this cooling measure, foreigners who wish to buy a private residential property in Singapore have to pay an additional 10 percent stamp duty while Permanent Residents (PRs) and Singaporeans have to pay an addition 3 percent stamp duty for their second and third properties respectively.

Shortly after the announcement was made, many real estate consultants forecast a real estate crash. A report from Bank of America Merrill Lynch even forecast that Singapore residential property would drop by 12.5 percent in 2012 and a further 8 percent in 2013.

On hindsight, we now know that a property crash did not happen. In fact, the URA private property price index (PPPI), which is representative of the residential market prices, is now at an all time high at 208.2 in the third quarter. As a result of this, some observers feel that the series of property cooling measures put in place by the government has not been effective. They rationalise that if the measures were effective, the URA PPPI would not be at its peak. I have a slightly different take on this.

The relationship between transaction volume and asset price

In the realm of stock investing, it is generally accepted that there is some relationship between transaction volume and asset price. For some investors, especially those who specialise in technical analysis – those who look at stock charts to decide when to enter or exit the market, transaction volume is often used to confirm a particular trend. In comparison, while there is some relationship between transaction volume and asset prices for the real estate market, it behaves in a slightly different manner.

From Figure 1 below, we compared the percentage change in URA PPPI from Q1 to Q4 in each of the respective years. To illustrate, if the index figures for 1995Q4 is 164.9 and the 1995Q1 index figures is 153.6, the percentage change in index for 1995 would be an increase of 7.36 percent (calculated from {164.9-153.6}/153.6).

Figure 1: Relationship between transaction volume and asset price for properties

Year	Percentage change in URA PPPI from Q1 to Q4	Transaction Volume
1995	7.36%	12486
1996	1.17%	18523
1997	-9.06%	12582
1998	-27.27%	13136
1999	27.20%	23616
2000	-4.05%	12693
2001	-8.08%	11640
2002	-0.69%	17836
2003	-1.14%	10389
2004	1.25%	11862
2005	3.14%	16878
2006	8.50%	24424
2007	25.13%	39427
2008	-8.13%	13972
2009	18.44%	32997
2010	11.31%	38627
2011	3.57%	35131

Source: URA

When this was compared against the transaction volume and a correlation analysis was done, it was found that the correlation coefficient was 65.49 percent (statistical correlation between two factors is deemed to be high if the coefficient is more than 50 percent). Hence, this simple comparison seems to suggest that when there is an increase in property prices (represented by the increase in the PPPI), transaction volume for the year would be high. Conversely, if there were a drop in property prices (represented by a decrease in the PPPI), transaction volume would be low.

Intuitively, this finding is reflective of what is being observed in the market. In a bullish property market, there tends to be more transactions arising from more investment and upgrading activities. Conversely, during a bearish market, transactions drop as investors and homeowners, not wanting to sell their units at losses, would stay away from the markets.

As at 20 December 2012, there were already 33,544 residential caveats lodged, making it the year with the fourth largest number of transactions (see Figure 2). However, in terms of URA PPPI increase, it is only a marginal 1.07 percent.

Comparing this with the other top five years with the most market activity, almost all, with the exception of 2011, saw double digits PPPI growth. Not surprisingly, 2011 also saw marginal price increase (despite having high transaction volume) as that was when the Singapore government had already introduced some of the cooling measures (i.e. in Jan 2011, the Singapore government raised seller stamp duty to 4 years and lowered the Loan-To-Value lending ratio).

Figure 2: Top 5 years with the largest number of transactions

Year	Percentage change in URA PPPI from Q1 to Q4	Transaction Volume
2007	25.13%	39427
2010	11.31%	38627
2011	3.57%	35131
2012	1.07%*	33544
2009	18.44%	32997

Source: URA (*for the first 3 quarters only as the URA PPPI for 2012Q4 has not been released)

This simple analysis shows us that during times when there were not a lot of government measures in place (i.e. 2007, 2009 & 2010), years that had high number of transactions also saw a significant increase in PPPI and prices.

While we cannot use this to say conclusively that the government cooling measures had been effective, it would be fair to say that without these measures, property prices would have sky rocketed in 2011 and 2012 as the demand is evidently still there. Based on this, it would not be too unreasonable to conclude that the government measures have, on the whole, been fairly effective.

Redefining the measure of success

With homeownership rates of Singaporeans and PR at 88.6% in 2011, I do not think any sound-minded government would want to drive property prices to the ground. While some may feel that the cooling measures are only considered successful if a significant price drop occurs, perhaps the more appropriate measure of success is whether the cooling measure can ultimately lead to a sustainable real estate market – something that we are experiencing right now.