Property cooling measures are not something new for Singapore property market. Since more than a decade ago, the government have implemented a series of different cooling measures to keep our property market stable and to prevent a property bubble from forming. These cooling measures are put in place to ensure that property in Singapore remains affordable to its residents.
With the price index of the property market continue to rise over the last 4 quarters, there are talks that new cooling measures could be implemented to keep the property market stable.
In this article, let us explore:
- Why are cooling measures necessary?
- What kind of cooling measures can be implemented and how does it affect you?
- What should you do now?
Why are cooling measures necessary?
In my opinion, I feel that the cooling measures are necessary for a few reasons:
- Keep property affordable to the residents
With cooling measures, it can prevent a speculative. Especially for residents who have genuine needs and are buying for their own stay. For example, the introduction of higher ABSD for foreigners and citizens buying 2nd or more properties, this can dampen sentiments for those buying property to rent as they will have to pay more for the same property purchase price.
- Prevent over leveraging by buyers
In a bullish property market, buyers can feel overconfident and purchase a property beyond their affordability. They could overextend themselves in their finances.
However, the market can correct in a crisis. In the global financial crisis, the property market in Singapore has corrected sharply. Those who has over leveraged in themselves during that period may land themselves into serious trouble.
One such measure to prevent over leveraging by buyers is the implementation of Total Debt Servicing Ratio (TDSR). It has ensured buyers to be more prudent in their loan and borrowings. Together with the lowering of Loan to Value (LTV), buyers will also be taking lesser loan and thus exposing themselves to lesser financing risk.
- Preventing a sharp and painful price correction later
If a red-hot property market is left unchecked, prices can rise sharply and result in a property bubble. Property prices may rise beyond the affordability of its residents. In the event of a crisis, this bubble can burst and caused a very sharp price correction, resulting in many property owners to be in distress.
What kind of cooling measures can be implemented and how does it affect you?
Let us explore this topic by looking from the past some of the cooling measures implemented:
| Effective 6 Jul 2018
| · ABSD for citizens buying second residential property increased to 12% · ABSD for citizens buying third and subsequent residential property at 15% · ABSD for permanent residents buying second and subsequent residential property at 15% · ABSD for foreigners buying any residential property at 20% · Loan to value capped at 75% or 55% for home loans from the bank if more than 30 years or extends past the age of 65. · LTV capped at 75% for borrowers without existing housing loan · LTV capped at 45% for borrowers with existing housing loan |
| Effective 9 Dec 2013
| · Mortgage servicing ratio (MSR) for EC reduced to 30% of gross monthly income · 2nd timer applicants of EC required to pay a resale levy |
| Effective 27 Aug 2013
| · Singapore Permanent Resident Households need to wait three years from obtaining SPR status, before they can buy a resale HDB flat. · Maximum tenure for HDB housing loans is reduced from 30 years to 25 years. · The Mortgage Servicing Ratio (MSR) limit is reduced from 35% to 30% of the borrower’s gross monthly income. |
| Effective 29 Jun 2013
| · Total debt servicing ratio (TDSR) of borrowers should not exceed 60% of gross monthly income |
If history is a good guide, we can reference from some of these past cooling measures and see what are the ways that the cooling measures could be implemented.
- Increasing the stamp duty (BSD or ABSD)
This will require buyers to pay more stamp duty when buying a property, thus decreasing the intention or ability to purchase another property.
How does it affect you?
Let say ABSD is increased by 3%, for every $1M property, you will have to pay an addition $30,000 more.
- Reducing the maximum loan tenure.
By reducing the maximum loan tenure, this will mean that you can only borrow for a shorter duration to finance your property. This will effectively lower the amount of loan you can get.
Or if you want to loan the same amount now with a shorter loan tenure, your monthly mortgage instalment will be higher.
How does it affect you?
For example, under the current TDSR calculations, if you are employed and earning $6,000/month income.
If your loan tenure is 30 years, you can borrow up to $810,702.
However, if your loan tenure is lowered to 25 years, you can only borrow up to $719,103
- Reducing the Loan to Value
With the lowering of the loan to value, you will have to come up with more down payment now. More down payment means that you may have to save up more money for the down payment. Lower Loan to Value may also resulted in lesser buffer funds for you.
Moreover, less leverage may also affect the leveraged returns in buying a property. Especially for property investors who intend to use the maximum property leverage to enhance the returns from their property investment.
How does it affect you?
If you intend to buy a $1M property and you have $300,000 of funds for the purchase.
If loan to value is 80%,
| Down payment | $200,000 |
| Loan | $800,000 |
| Funds left after the purchase (Buffer) | $300,000-$200,000 =$100,000 |
If loan to value is 75%,
| Down payment | $250,000 |
| Loan | $750,000 |
| Funds left after the purchase (Buffer) | $300,000-$250,000 =$50,000 |
Note: if you are curious to find out why less leverage can affect your investment returns, you can reach me by using the form below.
- Lowering the loan servicing ratio
Looking at the previous implementation of TDSR/MSR ratio, the amount of income that you can use for towards the payment of your property will be reduced. The loan that a buyer can take up to finance a property will be reduced with lower loan servicing ratio. Buyers may find themselves no longer be able to afford to buy the same priced property with lower loan servicing ratio.
How does it affect you?
If you are employed and earning $6,000/month income and your loan tenure is 30 years:
If the loan servicing ratio is 60%, you can borrow $810,702.
However, if the loan servicing ratio is reduced to 50%, you can only borrow $668,085.
- Increasing the Seller Stamp Duty (SSD) period
This will mean that buyers must hold out longer to cash out of their property to avoid paying the seller stamp duty. Or if they sell within the seller stamp duty period, they will have to pay the SSD and decreasing the returns from the sale of their property.
How does it affect you?
You may have to hold on longer for your property investment. If you are a speculative buyer, holding out longer may mean investment opportunity cost to you.
- Change in housing policies
For example, in one of the previous cooling measures, Singapore Permanent Resident Households need to wait three years from obtaining SPR status before they can buy a resale HDB flat.
How does it affect you?
You may find yourself no longer eligible to buy certain property under the new policies.
So, what should I do now?
The expectation of an impending cooling measure sends a mixed signal to different property buyers. On one hand, some buyers do not want to miss out their opportunity to invest in a property should any of the stamp duty increase or policies were to change. On the other hand, there is a group of buyers thinking that a cooling measure may cause the market price to adjust and by waiting out is a better choice. So, which is the correct way?
Let us understand that no one can know exactly when the next cooling measure may be implemented (if at all) except the government. We can at most speculate.
In spite of this, if we were to closely study the property market after each and every cooling measures being implemented, you will discover that there are properties which are making profit even after the cooling measures are being implemented. Of course, the opposite is also true, where property prices declined after the measures are being implement.
I do believe the key question here is not whether the cooling measures is coming or not. But rather, can I find and buy a property that will increase in value over time no matter the impending circumstances may be.
From an advisory point of view, if you can do a proper financial planning, risk management, strategy planning and detailed property selection before purchasing, you should be able to find a property that can appreciate over time. If you are curious to find out how such planning can be done, you can reach me by using the form below. Looking forward to everyone making sound investment decisions.