About 11 years ago – I was assisting clients to sell their private properties. The property market was buoyant with soaring prices.
- Both local and foreign Investors back then regarded Singapore property as a safe haven. They were flooding the property market.
- You are able to invest 2 or more properties without having to incur additional buying stamp duty (ABSD)
- You just needed to be a guarantor and show the banks the available funds to qualify for a mortgage loan.
- In those days – you are also able to make a quick profit and exit the market in the shortest possible time without having to incur seller stamp duty (SSD).
As shown in the graph, between Feb 2010 and Jan 2013, the cooling measures back then has little impact to cool the heated property market.
That was until Additional Buying Stamp Duty (ABSD) was introduced in 12th of Jan 2013 combined with Total Debt Servicing Ratio(TDSR) introduced on the 29th of Jun 2013 started to make significant impact.
As shown above, maintaining the the price index is the line that the government is working. It is a careful balance.
- Global uncertainties exists that will shake up the market.
- On the other hand, there are also global funds inflow to push the market prices up. This has to be balanced though – too much of anything is no good.
- The good thing is there have been a lot of market stabilizers along the way.
- It is no longer like during the Asian or Global Financial Crisis where there were not many structural measures to safeguard the property market and that’s probably the reason why the market went through major corrections.
In the event of worst case scenarios – the safety net is there and available.
The safety net in this context is the economic stimulus and heating measures.
- This is what the government is currently doing to boost the economy with three rounds of stimulus packages pumped in to ease the current covid-19 outbreak.
- In the event that the property prices show signs of spiralling downwards, you can bet that the government has other tools to use – like easing the cooling measures. For example, easing of the SSD or ABSD rates or increasing the LTV limits to stimulate demand.
- Temporary Relief measures that were recently introduced
Now what are the cooling measures to help the government? There were lots of them introduced especially in Year 2013.
Total Debt Servicing Ratio (TDSR)
As shown above is a summary of the rules of Total Debt Servicing Ratio (TDSR) which were introduced in 29th of June 2013 whereby other debt obligations are taken into account by Financial institutions before they grant property loans till today.
Here’s a simple example:
Assuming Borrower(s) with household income – $11,000 therefore under the TDSR framework , 60% of $11,000 = $6,600
Assuming Total Variable incomes (For e.g bonus or self employed income). With a 30% hair cut for variable income , 70% of it will be allowed to use for loan repayments.
Assuming Total bonuses received – $11,000, Bonus Per month – $11,000/12 months = $916.67, therefore
60% of (70% of $916.67)= $385
Assuming there’s other debt loan repayment monthly (For e.g Car loans – $1,200 , credit cards minimum payment amount – $250 ),
Total debt monthly repayment – $1,450
Therefore the amount that the individual allowed to take for a mortgage mthly loan repayment up to $6,600 + $385 – $1,450 = $5,535
As clearly seen on the above scenario and calculations, you are only eligible to take a loan up to 1.132 million to invest in a 1.5 million property.
In comparison with 1st TDSR calculation – the debts accumulated for this 2nd calculation are much higher $1,400 + $350 = $1,750 which will result in lower borrowing amount, $5,235 meaning you have to prepare more cash up front in order to invest in a 1.5 million.
One of the ways is to clear some of your debts especially those with a significant amount (for example, your car loan) before you take up a mortgage loan
The above calculation examples is also based on the following criteria
- you have no existing housing loans which means you are eligible to loan up to 75% based on the “Loan to value limit” (See Loan to Value Limit chart below ).
- The loan tenure is less than 30 years based on the individual Income Weighted Average Age (IWAA) which for this case is 65 years – 39 years = 26 years.
TDSR Calculators are easily available online and therefore you might to want to punch your numbers to gauge the amount of monthly mortgage loan that you are eligible for. This way, you are prepared and expectations are better managed before you approach a banker or a realtor to work out your sums.
With this measure in placed since June 2013 – people are a lot more prudent and cautious because they can’t just buy and take any loan they wish to.
As a result, you can imagine all these current property owners have better holding power than before.
Before 2013 – there were very little checks and balances. So people were able to over leverage by taking up more loans.
That was probably the reason why some people were badly hit with high bankruptcy rates during the Asian and Global Financial Crisis.
Back then, a lot of properties went under the hammer and many fire sales happened as owners tried to liquidate their assets to stay solvent.
Additional Buying Stamp Duty
The government’s aim for implementing this cooling measure is to prevent foreigners and singaporeans pouring all their funds into the property market , preventing them from over leveraging that might trigger a mortgage crisis and to cool soaring property prices.
For example – if you were to invest a $1.5 million property back in 2009:
Assuming one own an existing fully paid 5 rm HDB flat whom he/she wishes to keep, rent out their flat to collect passive income, intend to buy another private resale condominium for own stay before year 2010
3% of Buying Stamp Duty(cash/cpf) payable – $5,400 = $39,600
This is the amount of Stamp Duty you need to incur to invest a $1.5 million property in those days.
However with the current cooling measures, there will be an additional buying stamp duty cost incurred
4% of Buying Stamp Duty (cash/cpf) – $15,400 = $44,600
Additional Buyer Stamp Duty(cash/cpf) (12% of 1.5 million) – $180,000
Therefore total stamp duty payable – $224,600 (You can send 2 children to university with this money…)
Of course you can use your CPF funds if there’s sufficient funds in your Ordinary account but please bear in mind
- First of all, you have to understand this ABSD payment is something you will not be able to claim back from the government.
- Secondly it’s a lot of money to pay upfront first.
- Thirdly, reimbursement is only allowed when the property purchase is a matrimonial home which means you need to sell your existing matrimonial flat
- Fourthly, the amount of ABSD paid will determine the end result of your purchase.
All I’m saying is that you need to be aware of the consequences as you are using a huge amount of funds to invest a property that might not give you the best return or worst case scenario, you might break even or even make a loss.
In my previous blog article ‘Why paying ABSD Maybe a Wise Decision’ , it was based on the assumption of a certain level of inflation rate – with a long-term view.
With Covid-19 being an unprecedented event – which means taking a more careful strategy in the short-term.
Loan to Value Limits
Assuming the above HDB flat example and as shown in the chart, the HDB flat is now with an existing mortgage loan instead of fully paid loan , you will be only eligible to take up a loan of up to 45% on your next property purchase which is a 1.5 mil.
25% of 1.5 million cash component – $375,000
30% of 1.5 million down payment (cash/cpf)- $ 450,000
Assuming there’s CPF funds enough to pay off the stamp duties (ABSD + BSD)
Total cash funds required – 55% of 1.5 million = $825,000
It’s a massive amount.
The question is – will you fork out $825,000 million in cash just for a 1.5 million property investment assuming you have the means to finance the monthly mortgage?
This is most unlikely scenario that will happen in my opinion as clearly the risk far outweigh the benefits.
Seller Stamp Duty (SSD)
Seller Stamp Duties (SSD) is also another cooling measure that i will like to touch on that was introduced since 20th of Feb 2010 to regulate property prices and curb speculation.
Back in 2007 , flipping sale options were easily available thus drove the property prices sky high with many same properties bought and sold within a couple of weeks.
Ever since with seller stamp duty revised upwards since 14th of Jan’11 onwards , it literally make speculation come almost to a full stop.
Based on the latest seller stamp duty rates ,
Assuming you bought a 1.5 million private property in January 2018 and for some reason you need to sell it within 3 years. Assuming based on the market value in January 2020 , your property is valued at 1.6 million therefore
Seller Stamp Duty Payable – 4% of 1,600,000 = $64,000 (can only be paid in cash)
Apart from the payable SSD, you need to factor in the following costs to determine your net profit
- Agent fees
- Legal fees
- Early loan redemption penalty (if any)
- CPF refund with accrued interest (if any)
- Buying Stamp Duty previously paid
- ABSD fees previously incurred (if any)
- Mortgage loan interest previously paid
I will not go in deeper with the calculations and you probably know where i’m coming from . Just want to put across to all of my readers how Seller Stamp Duty can affect your capital gains if you need to liquidate your property within the 1 to 3 years timeframe .
I am sure there will be fire sales in the resale market
This is one of the common beliefs that everyone will have. There will definitely be fire sales in the market. The question here is – will there be more fire sales as compared to the previous crisis?
In any black swan event according to history records – there will be bound to have fire sales.
But i believe in this current pandemic, there will be less distressed sellers in the resale market.
- They can refinance their properties and enjoy low interest rates
- With the cooling measures in place – most people now have better holding power and are more financially savvy
- Investors who depend on rental income can apply for mortgage loan deferment to ease some pressures from the banks
- For investors who own 2 or more properties before the implementation of cooling measures, they will hold it for the longer term.
- Multiple property investors will not risk themselves by unloading their properties and re-enter the market as they will be subjected to TDSR and ABSD
Owners can always sell their properties when the market conditions improve and when it becomes favourable to them. There’s hardly any pressure to sell it way below market value.
Developers will give out discounts
Yes it’s possible the developers might decide to offer discounts for some units in the near future – especially for those new launch developments that took more time to sell as they have to meet ABSD deadlines.
But you need to understand the developer’s pricing strategy. Not all developers will adopt the same strategy.
One of their strategy is price averaging.
Below is an example of a development that was launched before the circuit breaker period.
$1,841 psf is the amount that the developer is needed to break even.
Hence you can expect the developer to launch at a higher psf in order to make a profit.
For this development, the units were sold an average of $2,254 psf.
The question here is can the developer sell 3% or even 5% lower of $2,254 psf? Yes. Why ?
Because they can afford to do so , so long as the developer is able to achieve $2,254psf on average in overall sales.
But can the developer sell lower at break even price which is $1,841 psf? Obviously not or else they will be making a loss as it is their margin of safety .
For this development, some of the units were sold lower than $2,250psf and some at $2,300 psf or even higher
All i’m saying – do pay close attention with new launches with some units being offered discounts as it might not be as ideal as it seems. You need to choose carefully.
With the good intentions of the government and with 8 rounds of cooling measures implemented – their objective to have a slow and steady growth in the property market and also preventing over leveraging and speculation were clearly met .
These 4 cooling measures will be the reason why the property market prices will remain stable for a while. As such the residential market may not see a sharp drop in prices as compared to previous crisis.
In any decision-making process – one need to exercise financial prudency with a safety net in mind before entering the market.
It has to be a long term investment with an exit strategy in mind to achieve your retirement goals.
It is totally fine if you decide not to invest in any property and sit on the sidelines.
Sometimes doing nothing is better than making a wrong move that could have a financial impact on you and your family .
If you need clarity on something that you are unsure of with regards to your property, drop me a whatsapp or fill up the form to arrange for a no-obligation consultation session.