The measures are done to promote a stable and sustainable property market..
The Singapore government recently unveiled a package of measures to cool the private residential and HDB resale markets, amidst a super hot resale market since 2020. Furthermore, the measures for private residential are calibrated to dampen broad-based demand, particularly from those buying property for investment instead of owner-occupation.
In the grand scheme of things, the innate motivation of the government is good – to allow a level playing field such that Singapore Citizens (SC) and Singapore Permanent Residents (SPR) can afford their own homes to live in. The government also remains vigilant to the risk of a sustained increase in prices relative to income trends.
At the end of the day, we don’t want a housing bubble from expanding, as the consequences will be dire should the bubble pop.
Hence, by implementing tightened financial conditions to encourage greater financial prudence and debt undertaking, this would prevent folks from cracking under immense financial pressures.
This well-meaning move is to reduce household mortgage debt given the economic uncertainties caused by the pandemic and easy accessibility to low interest rate loans.
Here are the implications of the recent cooling measures being played out.
Increased Additional Buyer’s Stamp Duty (ABSD)
The ABSD is usually seen as a “wealth tax”. By increasing the ABSD for non first-time homeowners, this would slow down the flow of “adrenaline” money into the property market. Singapore has always been a well-known safe haven because of its political stability and strong rule of law. Despite travel restrictions, the number of foreigners (including Singapore PRs) buying homes has demonstrated a sharp increase in 2021, as compared to 2020. The jump in the number of companies buying private properties is worrying
This will be a welcomed relief for first-time home buyers, as slower price appreciation would likely indicate increased affordability.
There could be a knee-jerk reaction for the next 3-6 months as upgraders and buyers are soaking in the new measures, and reassessing their buying situation. Given the higher upfront taxes, investors will have to factor in an increasingly longer investment time horizon in decision making, and reduce short-term speculation.
As potential buyers of private property are taking a wait-and-see approach, this could potentially indicate good housing deals in the horizon.
There’s also increased likelihood for most SCs & SPRs selling away smaller units in order to consolidate and buy ONE LARGER Private Property (all thanks to no ABSD for first residential property for SC & SPR!)
There could be higher demand for larger Homes (i.e. 3-Bedroom & larger) due to increased potential for Capital Appreciation and higher growth of Capital Appreciation PSF.
Generally speaking, the entry price PSF is lower for 3-bedder & larger homes, as compared to 1-bedder and 2-bedder units. Essentially, there’s more “Bang for the Buck” especially if you have to pay the increased ABSD (if this applies to you).
Tighter Total Debt Servicing Ratio (TDSR) Threshold
The TDSR typically limits the amount of money a financial institution can lend to a borrower. With the new measures, the TDSR has been lowered from 60% to 55%. Lending of amounts that would raise their total debt repayments would be prohibited – including any other loans and credit card debts to exceed 55% of their gross monthly income.
This is a pre-emptive move is to encourage financial prudence in case of a sudden increase in interest rates, and preventing Singapore households from being financially stretched and burdened.
Nevertheless, buyers who have a significant amount of savings, assets or financial support can essentially opt to “free up their assets” (i.e. Assets Pledging). The Pledged Assets can be liquid assets such as Singapore dollar deposits, savings and other securities like stocks, bonds, foreign currency deposits and gold.
This strategy of property financing works when buyers have zero or insufficient income to support their loan application.
Assets pledging helps to increase their income to levels that are in line with the TDSR criteria, allowing them to qualify for purchasing property which they might otherwise not be able to do.
With this in mind, the resale volume for both HDB and private property may not significantly be affected as the 5% reduction can also be potentially covered with sales proceeds, savings or pledging or unpledging of funds. This isn’t a significant amount per se, especially when the buyer has liquitable assets.
Lower Loan-To-Value (LTV) Limit
For HDB Buyers, the maximum LTV limited for HDB-granted loans is lowered from 90% to 85%. The LTV limit for loans obtained from financial institutions to purchase HDB flats still remains unchanged at 75% (Subject to MSR 30% and TDSR 55%). Despite the LTV for bank loans remaining at 75%, new borrowers are also still subjected to more stringent credit checks and assessments.
The stance of the government embarking on this new policy still remains the same – to shield first-time homebuyers from new cooling measures especially when their intentions of genuine family formation are at play.
Also, the reduction in LTV ratio for HDB loans has minimal impact. As a matter of fact, most buyers would opt for a bank loan as the interest rate is much lower than HDB’s interest rate in the first place.