Asian real estate: Curing the vertigo

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Asia is awash with liquidity. The impact of low global interest rates has been felt most keenly in the most open Asian economies –namely Hong Kong and Singapore – and most clearly in the real estate sector. Continued measures by authorities to cool the market may prove limited, given that the primary driver of the property market is the continued presence of global liquidity.

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Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Rock bottom rates: The foundation of it all

Amidst the uncertainties that have clouded the global economy in recent years, one of the more certain things has been the continued presence of low interest rates.

Major central banks, in their attempt to reflate their economies and secure more sustainable growth, have resorted to easing monetary policy – first by bringing short-term policy rates lower, and then by asset-purchase programs designed to push down longer-term yields.

The US Federal Reserve (Fed) first slashed its Fed Funds Target Rate in quick succession in 2007-08 to a range of 0-0.25%. Thereafter, it embarked on three rounds of quantitative easing (QE), including the current $85bn–a-month open-ended bond purchases.

While other major central banks have undertaken similar policies – with the Bank of Japan and the Bank of England seemingly poised to ramp up their QE programs– it is the Fed’s policy course that has the most influence on Asian interest rates, especially that of Hong Kong and Singapore.

In terms of Hong Kong, the four-decade-long peg of the HK dollar (HKD) to the US dollar (USD) necessitates a close tracking of domestic interest rates with the American ones. Similarly, given that the Singapore dollar is pegged to a basket of currencies, which likely
includes a significant portion of USD, the movement of US interest rates continues to heavily influence Singapore’s rates too. For instance, the three-month SIBOR rate – which is often used as the reference for floating rate mortgages in Singapore – fell from an average of 1.3% in 2008 to the recent level of around 0.4%.

The main FX story of 2013 has not been the survival of the euro (EUR), but the procyclicality of the US dollar

While interest rates in Hong Kong and Singapore stay at rock-bottom, there is a divergence since these Asian economies have performed a lot more robustly than the US. In the case of Hong Kong, its economy has stayed relatively resilient, owing to its close interaction with China. (So close, in fact, that there have been calls for the HKD to
be pegged to the Chinese renminbi).

Dizzying heights


The fact that interest rates have stayed low despite resilient economic growth has been the main driver of the recent boom in these economies’ property markets.

While house prices dipped in the immediate aftermath of the Lehman collapse, the pace of recovery has been rapid. In fact, since the start of 2009, Hong Kong residential prices have more than doubled. During the same period, Singapore’s house prices have risen by a relatively less breathtaking, but nonetheless lofty, 50%.

The forceful pace at which house prices have risen in recent years has prompted significant popular displeasure, particularly among first-time homebuyers who feel that they are being priced out of the market. For instance, according to leading consultancy Demographia, Hong Kong is the world’s most expensive property market, with homes costing, on average, 13.5 times the gross median household income. (Reference: 9th Annual Demographia International Housing Affordability Survey: 2013)

Fearing a political backlash, the respective authorities have had to appear to be doing something to alleviate the pressures. Given that the HKD peg to USD, and the Singapore dollar’s peg to a currency basket, are deemed sacrosanct – and hence the domestic base rates still have to track the (low) US rates – the authorities have been resorting to administrative cooling measures.

Trying to cool it down


As early as 2009 – not long after property prices started to inch up from post-Lehman lows –authorities in both countries had begun to adopt a series of tightening measures.

In October 2009, Hong Kong cut its loan-to-valuation (LTV) ratio from 70% to 60% for properties worth more than HKD20mn and reduced the mortgage limit for those higher loans with just a 10% down payment. Meanwhile, Singapore disallowed the Interest-Only Housing Loans and Interest Absorption Scheme for uncompleted private residential properties in September that year.

Figure 2: Housing prices (indexed to 100 at start of 2009)

It soon became apparent that such measures were not enough to dampen speculative activity in the market as prices continued to soar. This has led to a lengthening roster of measures. Singapore, for example, has enacted as many as seven rounds of easing measures to date. Looking into the details, we can see a general trend towards
increasingly punitive policies:

  • The first tranche of measures were intended to target short-term, speculative transactions in the market. These included:
  • Singapore’s ban on interest-only loans as early as 2009, as well as the introduction of a sellers’ stamp duty (SSD) later on. For property resales within one year, for example, Singapore first enacted an SSD of up to 3% in August 2010, and soon ramped this up as high as 16% by January 2011.
  • Similarly, in November 2010, Hong Kong introduced SSD of up to 15% for properties resold within six months, but later increased the amount to 20% in October 2012.


  • A second set of measures appears to be aimed at limiting the investment appeal of property as an asset class:
  • Along with the short-term SSDs applicable to houses sold within a year, Singapore rolled this out for longer tenures. 
  • By January 2011, for example, an SSD of 4% became applicable to properties resold within four years, whereas it was nonexistent previously. Tweaks to LTVs also became a preferred tool. Prior to February 2010, homebuyers could borrow up to 90% for their mortgages. This was gradually, but firmly, wound down to 50% for second home loans and as low as 20% for retirees pursuing third home loans by January 2013.
  • Hong Kong authorities are working from broadly the same playbook. SSDs were made longer in applicable tenure and harsher in amount, as well, throughout the last few years. In October 2012, for example, SSD was doubled from 5% to 10% for properties sold within three years.


  • In addition to attempts in limiting speculators and curbing investment activities, the respective authorities have also begun to put in more restrictions on property purchases by foreigners:
  • While the blanket increase in SSDs and the cut in LTVs inevitably hit all buyers, there has been additional considerations for foreigners too. In December 2011, a new acronym crept into property watchers’ lexicon in Singapore, as the government introduced a so-called ABSD (additional buyer’s stamp duty). This policy meant that foreigners purchasing Singapore’s property for the first time had to pay 10% extra stamp duty. By January this year, this rate had climbed to 15%.
  • Given its proximity to China, Hong Kong has seen a lot of interest from mainland homebuyers. It came as little surprise, then, that the first round of measures aimed at foreign buyers was targeted squarely at this group, with the 10% cut in LTV limits for mainland buyers introduced in June 2011. Later in October 2012, the authorities enacted a more broad-based measure by imposing a 15% ABSD on all foreigners.

Unintended consequences

Despite the long list of measures, the reality is that house prices continued to rise across both locales, calling into question how effective these cooling measures have been.

To some extent, these measures may have unintended consequences that work against the intention of limiting price gains. For example, while they may be effective in preventing investors from purchasing more properties now, they have also given them little incentive to sell, therefore, limiting the supply of available units.

By selling the current holdings, they would incur the substantial sellers’ stamp duties, and have to foot hefty additional taxes should they decide to roll the proceeds into new properties. After all, why face all of these extra transactional taxes when holding costs remain low, given that mortgage payments remain affordable due to the low interest rate environment.

Tellingly, the number of property transactions in Singapore came down significantly, dropping by 65% month on month, to a 14-month low in February, after the latest (and harshest) round of cooling measures. There is, however, little sign that prices are coming down, and such concerns have prompted the country’s deputy prime minister and finance minister Tharman Shanmugaratnam to say that the property market is still “in the wrong part of the cycle” and there remains “some way to go” before prices are at an acceptable level. For good measure, he added that “some correction in prices will not be out of order”. (Reference: “Singapore Avoids Stimulus as Minister Acts on Bubble Risk,” Bloomberg, 1 March 2013).

What next?

Given that the authorities still appear keen to avert the relentless rise in property prices, there is a strong likelihood that more cooling activity may be adopted.

Looking at the nature of how the measures have evolved over the past few years, any new policies would probably be targeted at dis-incentivizing property investors, in the name of helping first-time buyers with genuine demand. In particular, measures aimed at limiting property purchases by foreigners might be deemed necessary.

Moreover, it is increasingly possible that the authorities will take a closer look at the holding power of property owners. Interestingly, in its latest budget, the government scrapped the property tax refund scheme for vacant homes. In addition, the marginal tax rates for these investment properties will also be increased, from a flat rate of 10%, to a progressive scheme with marginal tax rates of 12% to 20%.

On top of that, changes to the mortgage rates may be in the pipeline. Even though we do not expect the US Fed Funds target rate to head up in the next two years –hence there is little likelihood of a marked increase in base rates for Hong Kong and Singapore – there are increasing signs that the era of extraordinarily low mortgage rates may be behind us.

In the case of Singapore, even though the SIBOR floating rate at which most home loans are based have remained low, the additional margins that banks charge appear to have started to nudge up. According to our colleagues at Barclays Investment Bank Research, this is, in part, due to tighter systems liquidity, with Singapore’s aggregate loan-to-deposit ratio standing at 97%, its highest level since 1999. Moreover, they argue that there is a possibility that the Monetary Authority of Singapore may introduce a risk weighting floor, which could essentially limit the availability of housing credit in the overall system.

Such measures have indeed been adopted by their earlier counterparts. In February this year, the Hong Kong Monetary Authority increased the risk weighting floor on new mortgages to 15% (from 10% previously). As a result, banks must provision 50% more capital on new housing loans compared to before, raising the costs of housing loans for them. Since then, some banks have felt the need to compensate it with an increase in their mortgage rates to borrowers. For example, n 14 March, Standard Chartered and HSBC announced that their mortgage rates will be raised by 25 basis points, for example.

Not quite up to them

All in all, it remains to be seen whether the renewed effort to dampen the property market – including by coaxing banks to increase mortgage rates – will have any sustainable effect. In the case of Hong Kong, for instance, prices did drop by a sizable 6.5% after banks raised their home loan charges by six times in 2011. Instead they soon resumed their upward trajectory.

In the near term, it appears that the most likely scenario will be for prices to hold, but for the number of transactions to fall at the same time. The latest transaction numbers for Singapore showed that home sales dropped to 708 units in February, from more than 2000 in January, taking in the impact of the seventh – and in many ways the harshest – round of cooling measures.

As mentioned earlier, the fact that the holding power of property investors remains strong works against the authorities’ attempts to curb the price uptick, and that remains a function of ample global liquidity and still-low domestic interest rates at the end of the day.

Given that the Fed does not appear to be in any hurry to take the monetary stimulus off the table – in order to secure growth in the US – it is likely that the Hong Kong and Singaporean governments may have to plan for yet more cooling measures still.