Residential Property Market: Income limit hike suggests hawkish stance ahead

Income ceiling to be raised. Yesterday afternoon, Minister Mah Bow Tan revealed that the income ceiling for new Build-To-Order (BTO) flats could be raised to $10,000 after the General Elections (GE). According to reports, a review of the income limit "would be conducted after the GE and was expected to be completed within six months." We also note Prime Minister Lee Hsien Loong indicated that couples who were about to exceed the current $8,000 ceiling may "get some relief." Given these sound-bites from both ministers in national media, we believe an impending rise in the income limit is likely this year.

A cooling effect on HDB resale prices. An increase in the monthly income limit would now allow first-time buyers and HDB up-graders in the $8-10K bracket to examine BTO flats as an option, whereas previously they could only choose between resale HDB flats, DBSS/EC or private residential units. With all else constant, as some demand shifts to the BTO space, we expect this to have a cooling effect on primarily HDB resale prices, though the timing and size of the impact is uncertain as of now. The resulting increased demand for BTO flats also means HDB is more likely to hit its target of supplying 22K new units this year (which is subject to demand) and keep up a strong pace of supply going forward (22K units in 2011, 16K in 2010 and 9K in 2009).

Hawkish stance on property prices to stay. More pertinently, we believe this event suggests the government would remain hawkish on residential property prices post-GE. This is important in reconciling what we believe are currently divergent views in the market about post-GE policy risks. A segment of the market believes that the cooling measures so far have been mostly pre-election moves and hence the GE could be a positive catalyst for property prices. Others think that the cooling measures were driven by fundamentals and hence policy risks remain unchanged post-GE. In our view, this event consolidated, to an extent, the market's views towards the latter perspective. Note that major developers such as City Developments (CDL) and CapitaLand fell strongly (-3.38% and -2.35% respectively) against the STI (-0.83%) yesterday on this news.

Remain neutral on residential sector. We believe the upside of private residential prices remains limited in FY11 due to policy overhang and would face continued headwinds from expected increases in interest rates and physical supply over FY12-13. We maintain a HOLD rating on domestic residential developer CDL with a fair value of $10.72 (at 10% discount to RNAV).

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