Appraisal Time: How good a job did the cooling measures do?

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Many will remember how property prices in Singapore surged 62.2% between the second quarter of 2009 to the second quarter of 2013, triggering debate and concern about Singaporeans about the affordability of homes in the future. 

To address these concerns and reassure Singaporeans, the government implemented a series of "property cooling measures" such as the Additional Stamp Buyers' Duty (ABSD), the Loan-to-Value limit (LTV), the Total Debt Servicing Ratio (TDSR), the Mortgage Servicing Ratio (MSR) and the Sellers' Stamp Duty (SSD). These were designed or repurposed from existing measures, to apply pressure on strategic points of the market, slow it down and dampen the rise in prices. 

Nearly a decade later, it is clear that the fundamental objectives of these measures have been reached—the surge has been dampened and prices have stabilised considerably. However, this has also led to many stakeholders questioning the continued need for these cooling measures, especially given the current pandemic recession. 

Are the cooling measures still relevant today? Did they do what they were intended to do? Let’s recap some of the key cooling measures and analyse how effective they’ve been through the years. 

 

Additional Stamp Buyers' Duty (ABSD)

Perhaps the most well-known and oft-debated property curb, the ABSD is a tax levied on foreigners who own one or more properties, and Singaporeans who own multiple properties in Singapore.  By exempting Singapore citizens with only one property, it benefits locals who only want to purchase a property to live in. 

Buyer profile 

ABSD payable 

Singapore Citizen buying first property 

No need to pay ABSD

Singapore Citizen buying second property 

12% 

Singapore Citizen buying third and subsequent properties 

15% 

Singapore Permanent Resident (PR) buying first property 

5% 

Singapore Permanent Resident (PR) buying second and subsequent properties 

15% 

Foreigner buying any property 

20% 

Entities (company or association) buying any property 

25% (additional 5% if entity is housing developer) 

The ABSD was first introduced on 7 December 2011 and has since seen upward revisions in January 2013 as well as July 2018. In the 2013 revision, entities such as companies were also added to the list of parties required to pay ABSD.

The ABSD has done much to cool down the market, especially in its function of reducing foreign speculation. However, while no one seems to be calling for an adjustment of the ABSD for foreigners, our Consumer Sentiment Study in H2 2020 found that some 65% of Singaporeans  hope for lower ABSD for themselves, as it has also created barriers for locals trying to engage in property investment. 

Property as an asset still remains highly popular in Singapore, and demand remains high, with spikes in demand occurring periodically, including as recently as June 2020 for both public and private housing. While it is still unclear whether this is the beginning of a trend or a temporary anomaly, measures like the ABSD have been effective thus far, and will continue to be needed to keep a lid and prevent any potential bubbles from forming. 

 

Loan-to-Value (LTV) Limit

When you take up a home loan to buy a property, you’re bounded by something called the Loan-to-Value (LTV) limit. The LTV limit sets the maximum home loan amount a bank can grant a borrower, defined as a percentage of a property's market value. This limit was tightened by 5% for loans from financial institutions in July 2018, during the most recent round of cooling measure revisions. The LTV is intended to discourage buyers from overleveraging and buying above their means by compelling them to front more cash for payment.

None

75% or 55%

5% (for LTV of 75%), 10% (for LTV of 55%)

1

45% or 25%

25%

2 or more

35% or 15%

25%

Source: MAS 

The LTV's relevance has been questioned on the grounds that leverage has been the key means by which lower wage owners can seek to break through their wealth ceiling early, and participate in a market traditionally seen as only affordable to the wealthy. Limiting loans could indirectly have the effect of increasing income inequality as a segment of society would be kept out of reach of this investment asset. 

Studies of other countries with hot property markets like Hong Kong which have implemented  LTVs have shown that the LTV has effectively protected both banks and borrowers and reduced systemic risk associated with boom-and-bust cycles. Given that it is worse to lose what you already have than to just lose the opportunity to gain more, it certainly seems like the LTV is performing a similar function here too.

 

Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR)

Similar to the LTV, the TDSR and MSR limit the amount that can be loaned to a borrower by taking into account other debts he/she is already servicing. The MSR takes into account the borrower's existing housing liabilities, while the TDSR takes into account the sum of all liabilities.

How it’s calculated

(Monthly debt repayments)/(Gross monthly income)

(Home loan repayments)/(Gross monthly income)

The figure that cannot be exceeded

60%

30%

Applicable property types

All properties

HDB flats and ECs

For more help in working out your potential home loan, do reach out to chat with our Home Finance Advisors here. You may also find our Mortgage Affordability Calculator useful. 

While the MSR has been in existence for many years, it was tightened from its historical 40% to 35% for HDB-issued loans and 30% for bank-issued loans in January 2013. In August 2013 it was revised to 30% across the board. In December 2013, the MSR was also introduced for bank-issued loans for ECs bought directly from developers. 

Unlike the MSR, the TDSR was only introduced in June 2013, and was capped at 60% of the borrower's total income. It was revised in September 2016 to exempt homeowners from the 60% rule if they are refinancing their mortgage, and to permit the same exemption to borrowers seeking to refinance their investment property loan if they commit to a debt reduction plan and pass their bank's credit assessment. In March 2017, the TDSR was revised once again, no longer applying to mortgage equity withdrawal loans with a LTV ratio of 50% and below. 

By limiting total debt to a percentage of the borrower's income, it ensures that his total debt is manageable on his income. In this way, the ratios prevent potential buyers from overestimating their ability to pay, and prevent them from opening themselves to financial damage in the event that interest rates rise unexpectedly, as they should theoretically be able to sustain any rise in mortgage payments as they ought to have spare cash remaining. 

The benefit of having the TDSR and MSR in place are obvious, and indeed, as early as 2014, industry experts at Singapore's annual National Real Estate Congress have opined that they have been so effective in cooling demand that they may have made older cooling measures like the ABSD unnecessary. Whether or not that is the case, the effectiveness of the TDSR and MSR cannot be denied.

 

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Seller's Stamp Duty (SSD)

Property speculation—with investors "flipping" properties by buying and selling them quickly for profit—was a key factor of the skyrocketing property prices of the last decade. To discourage this, the Seller's Stamp Duty was put in place to tax property owners who tried to sell their properties before the holding period (reduced to 3 years after 2017) was up.

First introduced on 20 February 2010, the SSD was made payable at 3% on properties sold within a year of purchase. The holding period was quickly raised to within three years of purchase in August 2010, with tax rates decreasing from 3% to 1% the longer the property had been held. In January 2011, the holding period was further raised to 4 years, and the tax rate also dramatically increased to 16% for properties sold within a year and 4% for properties sold within the 4th year. 

The most recent SSD revision in 11 March 2017 has seen the holding period reduced to 3 years again, with a rate of 12% within the first year, decreasing to 4% within the 3rd year.

SSD Rates Applicable for Purchases from 2017 onwards

Seller’s Stamp Duties for purchases and/or change of zoning/use done on and after 11 Mar 2017

Holding Period

SSD Rate (on the actual price or market value, whichever is higher)

Up to 1 year

12%

More than 1 year and up to 2 years

8%

More than 2 years and up to 3 years

4%

More than 3 years

No SSD payable

For SSD rates for properties purchased before March 2017, please refer to IRAS here. 

As a cooling measure, the SSD has been very effective, with private home prices falling to their lowest level in six years at the end of 2017, before the holding period was reduced. The continued presence of the SSD helps prevent a resurgence of speculation-driven price rises, while also acting as a valve to regulate price trends in the property market. It is therefore a measure that continues to be relevant today.

 

Free the Market?

Although a case has been made for the reconsideration and recalibration of the cooling measures, there is no denying that the measures themselves, and their intended effects, have been effective in preventing a repeat of 2009 to 2013's price surge.

Singaporeans aspire to grow their wealth and constantly upgrade their properties over the years with shrewd investments and purchases, and seek the freedom to pursue profit with property assets. However, at the same time, they also desire affordable homes and that they not be priced out of their own market. There is a delicate balance to be maintained here, and the cooling measures that regulate our market are in service to that balance. Hence, it’s likely that they will continue to be relevant for at least the foreseeable future. 

Remember, while they may be seen as obstacles to some, they could also be a gateway of opportunity for others. 

 

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