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Talk intensifies of more property cooling measures: Any cause for concern?

As Singapore shows signs of economic recovery, there has been talk of additional property cooling measures to ensure that the market remains stable...
Glimpses of economic recovery in the pandemic-induced recession have since propelled the property market back into media spotlight with both HDB resale and private homes prices up by at least 2%.
Credits: The Straits Times

Yet on the back of more than 57% increase in the sales of new private homes back in December 2020, there has been too much chatter on the streets and and movement in the property market to even suggest a recession in today’s economy.

Words usually travel way faster than most things can. And of course, chatter creates noise, noise attracts interests, interests attracts people; and when people gathered in masses both on and offline in today’s pandemic world, it attracts people of authority.

Credits: The Business Times

With good traction of private property market sales emerging from a challenging year in 2020, it is no wonder the Singapore government has eyes on the property market to ensure that it does not spiral out of control.

The introduction of the new covid vaccine has possibly injected (pun intended) new confidence into the overall economic outlook and people are spending more within the country due to travel restrictions. Not only is it increasingly difficult to book a seat at your favourite sushi restaurant, it could be increasingly difficult to own a private property in the near future.

Credits: The Business Times

The article above expertly summarises some of the key factors that drives property purchases in Singapore.

But we ain’t got time for all of that.
The factors that most probably apply to Singaporeans alike are HDB upgraders, Cheap Debt (in other words, low interest rates) and En Bloc Purchases.

HDB Upgraders

HDB flats are categorically subsidized units by the Singapore government to make homes more affordable for its people. Therefore the word, subsidized, comes with its very own set of terms and conditions unique to flats subsidized by the government. One of this very supposedly harmless condition is called the Minimum Occupation Period (MOP) where its owners have to live/own their unit for 5 years upon completion of ownership.

As a general example, a flat bought on 1st January 2015, will have met its minimum occupation period on 31st December 2019. So what happens when this condition is met?

Well, this means that you, as a HDB home owner, will be eligible to list and sell your flat in the open market as a HDB resale property. At this point of time, homeowners would usually see their prices of HDB property be at one of its peak (for newly Build-To-Order units only) due to the newness/age of their property. In addition to that, homeowners who have been working consistently for 5 years during that period of ownership, would have a relatively significant amount set aside in their CPF Ordinary Accounts (OA) on top of their personal savings.

Having met the MOP conditions, the house is therefore ready to be sold, ergo giving the homeowners access to more dollars in their CPF OA; and for some, potential in Cash Over Valuation (COV). This then creates the demand to purchase another property off the market for investment or stay.

Cheap Debt (Low Interest Rates)

Talk is cheap, but interest rates are cheaper (for now).

The article mentioned that the lowest SIBOR-based rate as at 14 Jan 2021 was 1.25%. But what does this actually mean?

By definition, SIBOR or Singapore Interbank Offered Rate is in other words, the interest rate that banks charge to one another in Singapore. Banks often borrow money from other banks and this rate that they adhere to is referred to as SIBOR.

In another context, SOR or Swap Offer Rate, is like a mirror of SIBOR that reflects the exchange rate between SGD and USD. This is particularly preferred between local and international banks operating in the country.

The Association of Banks in Singapore (ABS)SGD SIBORSGD SWAP OFFER
Overnight0.09940
1 Month0.250000.12792
3 Month0.405360.19586
6 Month0.591950.19386
1 Year
According to The Association of Banks in Singapore (ABS), the table above shows the SIBOR and SOR rates on 14 January 2021. Banks often price mortgage loans based off SIBOR and SOR rates. So if a mortgage loan is priced at 3-month SIBOR + 0.85%, this means that 0.85% is the profit margin of the loan after paying the 3-month SIBOR back to the lending party.
Floating Rate SIBOR Example
Year 13 Month SIBOR + 0.85
Year 23 Month SIBOR + 0.85
Year 33 Month SIBOR + 0.95
Year 43 Month SIBOR + 0.95
Year 53 Month SIBOR + 0.95
Future3 Month SIBOR + 0.95
So how are we as people of the “general public” are affected by this? To keep things simple, we as borrowers will benefit from the lower interests rates if SIBOR and SOR are kept low as banks generally use them as benchmarks to determine fluctuating loan rates.
Do you even math?

Return of En Bloc Fever

The article states that the number of unsold residential units under development fell to 26,000 in Q3 of 2020 and there is a conservative release of residential supply under the Government Land Sales (GLS) programme in the first half of 2021. The article also mentions that the start of the previous en bloc cycle was in Q2 of 2016 when inventory fell to 23,300 units and lasted to about 2017-2018.

With GLS supply very limited and highly sort after, it will be tougher especially for smaller developers to compete.  In addition, developers who have applied for the remission of Additional Buyer Stamp Duties (ABSD) can receive their 25% back, subjected to the complete sales of their projects within the prescribed period of 3 or 5 years for non-licensed and licensed developers respectively.

This shows that their possible deadlines to be around 2022 – 2023 (from the previous en bloc cycle during 2017 – 2018).  This creates the urgency for developers who might be looking to replenish their inventory. En bloc sales can be one a quick way to do so and at the same time, give more flexibility in terms of location for any developers.

These factors are likely to drive developers to renew their interests in the collective sales market.

And imagine if interest rates were to remain low, more people or entities will be encouraged to borrow. This can include developers as well. If the possibility of en bloc cycle were to become a reality this year, developers can be encouraged by this as possible fuel to engage in the collective sales market.

So with developers being driven to replenish their land banks and homeowners having to relocate due to en bloc sales, there could be a surge in the number of sales of property which the government would be keen to contain in order to ensure that prices are in line with economic fundamentals.

So what’s with the buzz?

So with the Singapore government keeping a close watch on the property market as the articles suggests, is there any real cause for concern?

In previously cooling measures imposed by the Singapore government, we have seen the increase in Additional Buyer Stamp Duties (ABSD) and tightening of Loan-to-Value (LTV) limits. We have previously covered the core components of the basics of owning a private property in Singapore. However, that article does not cover other fees such as stamp duties. So how does ABSD and LTV affect you in your purchase of a property?

Buyer Stamp Duties (BSD)

Before we can actually touch on ABSD, buyers have to realise that they would have to pay Buyer Stamp Duties (BSD) for any property they wish to purchase in Singapore. By definition, BSD or Buyer Stamp Duties is the tax paid on documents signed when you buy or acquire property located in Singapore.

Purchase Price or Market Value of the PropertyBSD Rates for residential propertiesBSD Rates for non-residential properties
First S$180,0001%1%
Next S$180,0002%2%
Next S$640,0003%3%
Remaining Amount4%
BSD is rounded down to the nearest dollar, subject to a minimum duty of $1.
For purposes of this demonstration, we will be covering two BSD examples for Residential Properties only.
Example 1: Purchase price of Property: S$950,000

Purchase price of Property: $950,000BSD Rates for residential propertiesTotal
First S$180,000(1% x S$180,000)S$1,800
Next S$180,000(2% x S$180,000)S$3,600
Next S$640,000(3% x (S$950,000 – S$180,000 – S$180,000))S$17,700
Remaining AmountNot applicableNot applicable
Grand TotalS$23,100

The total BSD payable would amount to S$23,100.

OR

To simplify things for properties with prices below S$1,000,000, there is an industry short-cut frequently used which will bring you to the same result:

(Purchase Price x 3%) - S$5,400

Therefore, with application of the above formula to this example:

(S$950,000 x 3%) – S$5,400 = S$23,100

Example 2: Purchase price of Property: S$1,950,000

Purchase price of Property: $1,950,000 BSD Rates for residential properties Total
First S$180,000 (1% x S$180,000) S$1,800
Next S$180,000 (2% x S$180,000) S$3,600
Next S$640,000 (3% x S$640,000) S$19,200
Remaining Amount (4% x (S$1,950,000 – S$180,000 – S$180,000 – S$640,000)) S$38,000
Grand Total S$62,600

The total BSD payable would amount to S$62,600. OR To simplify things for properties with prices above S$1,000,000, there is an industry short-cut frequently used which will bring you to the same result:

(Purchase Price x 4%) - S$15,400

Therefore, with application of the above formula to this example: (S$1,950,000 x 4%) – S$15,400 = S$62,600

Additional Buyer Stamp Duties (ABSD)

Well, ABSD as the name suggests, is the additional duties incurred when you are buying a property. Yes, that is right. This is on top of the BSD mentioned earlier and it takes into effect in a few scenarios.
Profile of BuyerABSD Rates from 8 Dec 2011 to 11 Jan 2013ABSD Rates from 12 Jan 2013 to 5 Jul 2018ABSD Rates on/after 6 July 2018
Singapore Citizens (SC) buying first residential property Not applicable Not applicable Not applicable
SC buying second residential property Not applicable 7%12%
SC buying third and subsequent residential property3%10%15%
Singapore Permanent Residents (SPR) buying first residential property Not applicable 5%5%
SPR buying second and subsequent residential property3%10%15%
Foreigners (FR) buying any residential property10%15%20%
Entities buying any residential property10%15%25%#
Plus additional 5% for developers^
(New, non-remittable)*
# As entities, developers will also be subject to the ABSD rate of 25% for entities. Developers may apply for remission of this 25% ABSD, subject to conditions (including completing and selling all units within the prescribed periods of 3 years or 5 years for non-licensed and licensed developers respectively). Details are provided under the Stamp Duties (Non-licensed Housing Developers) (Remission of ABSD) Rules and the Stamp Duties (Housing Developers) (Remission of ABSD) Rules.

^ Developers refer to entities which engage in the business of construction and sale of housing units.

* This new 5% ABSD for developers is in addition to the 25% ABSD for all entities. This 5% ABSD will not be remitted, and is to be paid upfront upon purchase of residential property.

The table above shows the additional stamp duties that you might incur as a buyer depending on whether you are a Singapore Citizen , Permanent Resident or Entity.

As shown in the information above, there has been the increase in ABSD rates over the years. The main takeaway here is that stamp duties may be adjusted as one such property cooling measures in Singapore; making it more expensive for people and developers to purchase residential property.

Loan-to-Value (LTV) Limits

The Loan-to-Value (LTV) limit is basically a limit of how much you can loan from banks to finance a property. It is a ratio in which the Singapore Government has put in place to determine the maximum loan amount you can obtain from banks or HDB as well as the downpayment component of it. This is defined in the following table:

Revised LTV Limits on Housing Loans Granted by Financial Institutions
1st Housing Loan2nd Housing Loan3rd Housing Loan
Individual Borrowers
LTV LimitExisting Rules before 6 July 2018
80%; or 60% if the loan tenure is more than 30 years* or extends past age 6550%; or 30% if the loan tenure is more than 30 years* or extends past age 6540%; or 20% if the loan tenure is more than 30 years* or extends past age 65
Revised Rules on/after 6 July 2018
75%; or 55% if the loan tenure is more than 30 years* or extends past age 6545%; or 25% if the loan tenure is more than 30 years* or extends past age 6535%; or 15% if the loan tenure is more than 30 years* or extends past age 65
Minimum Cash Down Payment No change to existing rules
5%; or 10% if the loan tenure is more than 30 years* or extends past age 65 25%
Non-Individual Borrowers
LTV LimitExisting Rules before 6 July 2018
20%
Revised Rule on/after 6 July 2018
15%

As you can see, the latest revision of the LTV limits were back in 2018 with 5% difference seen in most scenarios. However, we need to take note that the LTV ratios are also subjected to the period of loan (loan tenure) and the age of the borrower. The following charts show a guide to the LTV ratio with respect to age and loan tenure:

Government intervention in the form of revisions in ABSDs and LTV ratios are some examples of cooling measures that can be implemented to simply “make it harder” to afford your first and subsequent properties. This in turn helps to control property market sentiments and prices from a massive buying and selling spree.

Possible Increases in Land Prices

So, should the return of an en bloc wave spark a developers rush replenish their inventory happen in the near future, it could also mean that there would possibly be an increase in land prices.

Usually developers entice home owners to participate in collective sales by offering them a higher value on their homes as compared to what they can receive if they were to list it individually in the open market.

This seemingly act of generosity comes around in a full circle. If a developer were to pay SGD 1 million per unit for a plot of land consisting of 20 units, they would have to pay a total of SGD 20 million apart excluding taxes and duties in totality. If there are plans to level the entire land area and rebuild from scratch, additional cost will be incurred for infrastructure, amenities and more which will have to be clawed back in some manner. And that manner is a more expensive cost per square foot.

Another closely related example that is relevant in today’s context is the announced hike in the Goods and Services Tax (GST) which will likely to happen between 2022 and 2025. As quoted by Deputy Prime Minister Heng Swee Keat in his Budget 2021 speech on 16 February 2021, “Without the GST rate increase, we will not be able to meet our rising recurrent needs, in particular healthcare spending.”.
It is what it is

Should you be worried?

Now that we have had a mini crash course on some possible cooling measures that could be implemented, these actions could directly impact buyers who are looking to purchase any property (be it their 1st , 2nd or more). Although the 5% revision does not seem like much, but 5% of 1 million Singapore dollars is already a whopping 50 grand.

So here we are in a situation somewhat similar to the unanswerable question of what comes first? Was it the chicken or was it the egg that came first?

The snapshot of the articles above show the mad rush in prospective buyers rushing to show-flats in an attempt to purchase their unit(s) before the cooling measures took effect back in 2018. We vividly remember the mad rush that very evening when the government announced the revision a few hours before it took full effect over midnight back in 5 July 2018.

In short, it is pretty much out of anyone’s control to be honest, whether or not government intervention can happen sooner rather than later or vice versa. A very clear example from experience was the hectic events which happened back in 2018.

Any take-aways from this experience?

Well, yes and yes.

To put things bluntly, we miss all the shots we don’t take. To be capable of taking action sooner rather than later, can reduce chances of missed opportunities or in cases like these, additional costs monetarily. Then again, where we are today is because of our decisions made in the past. Fast forwarding to 2021 and here we are, not having a choice but to accept the current rules revised back in 2018. So yes, whether or not there will be talks of cooling measures being implemented, someday in the future, there will definitely be that time where it will be regarded as the new normal.

To the new normal.