Knight Frank’s latest Asia-Pacific Residential Review looks in more depth at the cooling measures that have been brought in across the region over the last few years, examining the type of policy used and the impact they have had on both the mainstream and prime residential markets.
Latest cooling measures
• Given policy maker’s records over recent years, few were overly surprised about the new rounds of government intervention in China, Singapore and Hong Kong. Residential prices have continued to go up, standing 61%, 52% and 108% above the post Lehman troughs in China, Singapore and Hong Kong respectively.
• In Hong Kong, the doubling of stamp duty for all property over HKD 2 million to up to 8.5% and the Hong Kong Monetary Authority (HKMA) decided to order banks to increase the amount of capital they hold against new residential mortgages led to an increase in interest rates of around 0.25% by the major banks. Mainstream prices increased 23.6% in 2012.
• In Singapore, cooling measures were introduced to the non-residential sphere for the first time, with an exit stamp duty introduced on industrial property sold within four years from the date of purchase. The recent budget has also set out an increase in property tax for high-end residential real estate, set to be phased in over 2014-15.
• China launched a set of “five rules” including a capital gains tax of 20% required by local authorities to be fully implemented. Many buyers were looking to exit before these measures are enforced, most notably in Shanghai, which saw an increase in volumes transacted in March.
Analysis
• If we start by looking at annual price growth in the major markets, we can see that in Malaysia, prices have flattened considerably over the last 12 months, perhaps also due to the “wait and see” attitude in light of the upcoming election. In China, Singapore and Hong Kong, the success of the cooling measures in actually reducing price inflation is more mixed. Singapore has seen a reduction in annual price growth, but not perhaps the reduction policy makers expected after the 5th round of cooling measures. China saw prices drop in 2011, but they rebounded in 2012. Hong Kong stands out as continuing to see price inflation in the first quarter of 2013, buoyed by the low interest rates and tight supply.
• Singapore will see a significant amount of new supply come to the market over the next two to three years, while in Hong Kong supply will remain tight over the same period. As the respective currencies are pegged to the USD, interest rates are likely to remain low until 2015. In China, it is increasing incomes, historic levels of urbanisation, smaller family units and the lack of alternative investment options which are essentially driving the market. None of these are drivers are likely to change in the medium term.
• The protectionist measures introduced into Singapore and Hong Kong have led to a reduction of purchases by foreign buyers. Singapore saw a drop of 23.5% in 2012 from 2011 (for PR and non-PR). Hong Kong has seen the proportion of mainland Chinese buyers drop from around 30% in October 2012 to only 9.4% in January 2013 (in the Hong Kong luxury market).
Unintended Consequences
• International buyers weigh up their options - Property investors in cooling markets are increasingly looking overseas. The UK has seen a large influx in interest from markets impacted by cooling measures, with Asian buyers making up nearly half of all purchasers in the new build market. Similarly Thailand, Philippines, Australia, New Zealand, the US and Canada have all seen an uptick of interest from Asian buyers.
• Movement to commercial real estate - The qualities of prime commercial real estate, especially in this time of economic uncertainty has proved attractive for investors as they search for a safe haven, as well as yield and capital appreciation.
Conclusion
• We believe that the latest measures will however have an impact on volumes and pricing. While every market is different, we believe that prices will soften in Singapore by an average of 5% and Hong Kong by no more than 10% over the next 12 months. In China, there is likely to continue to be price appreciation in Tier 1 cities, while we could see drops in some of the Tier two and three cities. Finally, Malaysia is likely to see a rebound in activity following the upcoming election.