Bank Stocks Tumble on New Cooling Measures

a) The new cooling measure would facilitate the recovering of residential property market which will increase the prices. There has been heavy sale of property and banking shares in Singapore as investors reacted to the sudden news of fresh cooling measures which were announced a day before. Local prices see the immediate negative knee-jerk reaction (SRX, 2019).

The new cooling measure would facilitate the recovering of residential property market. It also signals that the government may not favour any further rise in residential property prices. The rise in stamp duties for developers creates a barrier to entry and restrains developers' buying sprees’. The cash expenditure by developers for any project is likely to increase by 15-20% if they are taking financing. Rising interest rates reveal an attempt of the government to warn property buyers to avoid over-leveraging. The developer bids on land may be more conservative because of increased costs on land acquisition. Additional Buyer's Stamp Duty price by 25% and a new load to value limit at 75% and this affects the category of buyers (Finko, 2018).The cooling measure by Singapore is an economic intervention to address the issue of housing markets and broaden the economy.

Thus, in economic terms the new policies tend to raise prices for the property and reduce demand for houses which means market equilibrium disturbs (Jhinghan, 2016). It can be shown with the help of a diagram. As earlier equilibrium is at E when prices rise the new equilibrium is at E1.

Effects of Price on Quantity Demanded

b) The consequences as a result of the new cooling measure will be the new stamp duty increments will reduce investment demand for second property purchases. There is likely a fall in the demand for owner-occupied first time home buyers (Finko, 2018). However, these changes are only expected in the short to medium run. In the short run, home loan growth is likely to fall. In the mid to long run, demand and supply should adjust itself to be again in equilibrium.

c) With the real estate market booming in Singapore, the government is trying its level best to stabilize the property prices which will address the issue of diminishing affordable conditions especially in the city of Singapore. The cooling measure by Singapore is an economic intervention to address the issue of housing markets and broaden the economy (Deng et al, 2019). The above text has explained and used both the macro-level of data and macro-level house transaction datasets which has made the three large banks to experience losses but in the short run as the issue is not very much serious and the banks will make profits soon and in the long run. House prices in Singapore have fallen by at least 10-15% both in the private and public sectors. It's clear that the cooling measures have not caused significant damage in the larger economy. The government's move to hike stamp duty and tighten loan limits as a cooling measure with an aim to control the escalating prices, have forced the analyst to slash target prices, property, and bank stocks. These measures are going to significantly impact the high-end projects which will reduce their transaction volumes and prices (Singapore Expats, 2020). It is believed that these measures are going to impact the developers who have a large bank of Singapore's unsold land with them. Therefore, the problem of increasing land prices because of hoarding by some developers is expected to be solved by these measures. The falling stock price of the three major banks is another problem which has a solution in the long-run. Today, tightening of credit rules have reduced demand for loans but in the future, increase in the rate of interest will benefit the banks.

d) The debates in this topic are not of very much significant relevance. Since, the economy of the country is not at a very bad state despite the drops in shares by most of the companies. The cooling measures could be relaxed anyway since there has been a drop in the housing prices in the economy. The prices fall of the private sector has not fallen drastically however and thus the cooling measures will be removed incrementally only. Also, there are debates presented by the following (Channel News Asia, 2018):

Andy Wong (Analyst of Oversea-Chinese Banking Corporation Investment Research). He is apprehensive about the near-term benefits of the cooling measures adopted by the government. He downgraded the Singapore residential property sector from 'Overweight' to 'Neutral'.
Vijay Natarajan (RHB bank analyst). A knee-jerk reaction is expected on the property sector shares and developers holding huge acres of land.
Leng Seng Choon (RHB bank analyst). UOB is highly involved in the housing loans, so out the three banks, its shares are going to be most impacted by the measures.

e) There will be minimal consequences in the future as the cooling measures will have reduced and most of the companies will be back to making profits. The major problem is that the private sector will not be very much willing to reach the 15% house fall in prices. Some cooling measures will be removed from the equation however and some cooling measures will still remain (Deng et al, 2019). Also, according to Mr. Andy Wong's statement, the impact of cooling measures can be seen after 37 months as well, as in the case of 2013 cooling measures. According to the article, demand for land from the genuine buyers is not expected to drop much. The long-term consequence of falling prices can be that long-term investors will buy the bank stocks today at low prices.

References for Singapore's Cooling Measures

Channel News Asia. (2018). New property cooling measures announced: Higher ABSD rates, tighter loan limits. Retrieved from https://www.channelnewsasia.com/news/singapore/singapore-property-cooling-measures-higher-absd-rates-loan-limit-10502710

Deng, Y., Gyourko, J., & Li, T. (2019). Singapore's cooling measures and its housing market. Journal of Housing Economics, 45, 101-573.

Finko. (2018). Timeline of Singapore’s property cooling measures. Retrieved from https://www.finko.com.sg/articles/housing-loan/property-cooling-measures

Jhinghan, M.L. (2016). Microeconomic theory. New Delhi: Vrinda Publications.

Singapore Expats. (2020). Property market cooling measures in Singapore. Retrieved from https://www.singaporeexpats.com/resources-in-singapore/articles/214/property-market-cooling-measures-in-singapore.htm

SRX. (2019). Singapore’s property cooling measures. Retrieved from https://www.srx.com.sg/cooling-measures#:~:text=8%20December%2C%202011-,1.,and%20subsequent%20property%20pay%203%25.&text=LTV%20lowered%20to%2060%25%20from%2070%25%20for%20second%20property.

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