7th Round of Cooling Measures – The Anvil to Smash the Camel’s B

January 15, 2013

By Mr. Propwise

As I had discussed previously, skyrocketing residential and industrial property prices dramatically increased the risk of additional government measures to prevent a destabilizing property bubble from forming. And this time, no punches were pulled. On 11 January 2013 the Ministry of Finance, Ministry of National Development, Monetary Authority of Singapore and Ministry of Trade & Industry issued a joint press release to announce a large slew of measures, aiming to break the back of the stubbornly bubbling market.

Summary of the latest round of measures

One of the distinctive features of this round is the sheer quantity of measures announced, with a broad reach covering public housing, private residential and industrial property, and targeting the supply, demand, financing and taxation of property.

While there’s been tons of media coverage of the measures, I’ve not seen a succinct and easy-to-read yet detailed summary of the measures, so here’s my attempt to capture everything’s that been announced.

Effective 12 January 2013:

Private Residential Property Measures

1. The Additional Buyer’s Stamp Duty (ABSD) will be raised by 5% to 7% and will be imposed on Permanent Residents (PRs) purchasing their first and Singaporeans purchasing their second residential property:

i. Singaporeans will pay 0%/7%/10% of ABSD on the first/second/third property onwards respectively

ii. PRs will pay 5%/10% ABSD on the first/second property onwards respectively

iii. Foreigners and non-individuals (companies) will pay 15% ABSD from the first property onwards

2. The Loan-to-Valuation (LTV) on housing loans will be reduced for non-individuals and individuals with at least one mortgage:

i. For individuals obtaining their second mortgage, the LTV is lowered to 50% or 30% if the loan is longer than 30 years or extends beyond 65 years of age of the borrower

ii. For individuals obtaining their third or greater mortgage, the LTV is lowered to 40% or 20% if the loan is longer than 30 years or extends beyond 65 years of age of the borrower

iii. For non-individual borrowers, the LTV is lowered to 20%

3. The minimum cash downpayment for individuals applying for the second or subsequent loan is raised from 10% to 25%

Public Housing Measures

1. The Mortgage Servicing Ratio (MSR) will be reduced to 30% for bank loans and 35% for HDB loans

2. PRs who own HDB flats cannot sublet their whole flat

3. PRs who buy a private property will have to sell their HDB flat within 6 months even if they have fulfilled the Minimum Occupation Period (MOP)

Executive Condominium (EC) Measures

1. The maximum strata floor area will be capped at 160 square meters

2. New dual-key ECs will only be sold to multi-generational families

3. Government Land Sales (GLS) EC sites can only be launched for sale 15 months from the date of award or after completion of foundation works, whichever is earlier

4. Private enclosed spaces and private roof terraces will be counted as “bonus” GFA and subject to extra charges

Industrial Property Measures

1. Seller’s Stamp Duty (SSD) will be imposed on industrial properties and land sold within three years from date of purchase: 15%/10%/5% for first, second and third year respectively

What is the government thinking?

You can sense a level of frustration in the Government over the property market – despite multiple rounds of cooling measures since September 2009 to moderate housing price increases, property prices have stubbornly climbed upward, albeit in a generally decelerating speed, until the pickup in the last few quarters. This seventh round of measures represents their most serious (desperate?) attempt to throw as many darts as they can to burst any sector that looks bubbly.

Ironically, there’s little they can do to treat the fundamental cause of the rise in property prices – sustained extraordinarily low interest rates, and the expectation that they will remain low for the foreseeable future. As Singapore has chosen to keep an open capital market and manage its exchange rate (in a “dirty float” system), it has to give up control over its monetary policy (part of the “impossible trinity” of Economics) – in other words, interest rates in Singapore are dependent on global monetary conditions, and there’s not much the Government can do to control it.

So they can only put together a package of administrative measures to discourage property ownership for investment, keep foreign buyers out with punitive taxes, cap borrowing limits, and curb excesses in the market especially in public housing (e.g. from the uproar created over a $2 million 4,300 square feet “public housing” penthouse).

Impact of this round of measures on the property market

In my opinion, the most potent measure in this round is the implementation of ABSD for Singaporeans buying second homes (7% for the second home and 10% for the third and subsequent one) and for PRs buying their first home (5% for the first home and 10% for the second home and beyond). This will basically kill investment demand for residential property by Singaporeans and curb end user demand by PRs.

As an investment vehicle, residential property will make much less sense. With the implementation of the measures, a Singaporean looking at buying a second home will have to pay close to 10% in stamp duties! But given the low interest rate environment and the negative real interest rates if you leave your money in fixed deposits, investment demand will likely flow to other assets with good yields, such as commercial property (e.g. retail shops and office units) and high dividend equities such as REITs.

For PRs and foreigners, the “buy or rent” equation will shift markedly towards renting and thus rental demand could strengthen. This will partially ameliorate concerns over who will be renting the large supply of completed properties coming onto the market in the next few years. For foreigners, the hike in the ABSD to 15% will no longer make buying Singapore property relatively more attractive than Hong Kong, thus preventing the further inflow of hot money.

Will property prices fall in 2013?

Overall, I believe that the marginal demand for property will fall significantly, leading to a drying up of liquidity in the market and a fall in the number of property transactions this year. Note that this does not mean that property prices will fall. Rather, the “bid-ask spread” between what property sellers want for their property and what property buyers are willing to pay (especially after imputing the increased taxes) will widen, leading to fewer transactions being closed. Unless you are specializing in rentals, it could be a tough year to be a property agent.

A significant fall in volumes due to the severity of the seventh round of measures could cause significant market disruptions. The Government is aware of this, and have hedged themselves by calling the current round of measures “temporary”, giving them the leeway to lift these measures if market conditions deteriorate significantly.

For Singapore property prices to fall, I believe we’ll need to see some sort of external shock (what I call a “black swan”, using Nassim Taleb’s terminology) that will lead to an increase in interest rates and/or unemployment rates. The cause could be anything from rising inflation rates, to a recession, to an epidemic. Only then will see forced sellers and “blood on the street”.

By Mr. Propwise, a Chartered Financial Analyst and resident expert at PropertyMarketInsights.com, a site to help property owners and investors make profitable decisions in uncertain times.