Should We Expect New Property Cooling Measures in 2021?
Contrary to expectations, the recession has not taken the wind out of the property market’s sales. According to PropertyGuru’s Singapore Property Market Index Q1 2021 report, sales at the end of 2020 did not experience their customary seasonal dip. In fact, the PropertyGuru Property Price Index (SPPI) rose by 0.98% to 113.5 points, making Q4 2020 the third consecutive quarter in which non-landed property prices rose.
Q1 2021 is expected to follow suit: Last week (1 Apr 2021), the Urban Redevelopment Authority (URA) released flash estimates of a 2.9% rise in prices for Q1 2021, which is the highest growth since Q2 2018.
Amidst the unexpected property ‘boom’, the government has been dropping hints since the start of the year, suggesting that cooling measures might be on the way. If you remember, July 2018 was when the most recent round of property curbs were implemented too.
The property market is being watched closely by the government “to ensure that it remains stable”, which could be a sign that they are waiting for the right time to impose new rules again.
In parliament on 5 Apr 2021, Senior Minister and Chairman of the Monetary Authority of Singapore (MAS) Tharman Shanmugaratnam brought up the issue again, encouraging home buyers to "exercise caution in their property purchase decisions".
Buyers, sellers and analysts alike are now concerned about which property curbs we can expect the government to introduce and when they will be announced.
About the Current Property Curbs in Singapore
Numerous property curbs have already been put in place in previous years with the goal of discouraging speculation and ensuring that buyers do not over-extend themselves. It is likely that the government’s new measures will include a tightening of existing curbs.
If you aren’t already familiar with the existing regulations, the current property curbs include:
Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR)
The Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) were introduced to deter buyers from taking on excessive levels of debt.
- Under the TDSR, a financial institution is not allowed to lend to a borrower an amount that would cause repayments for his or her total monthly debt obligations to exceed 60% of his or her gross monthly income. Monthly debt obligations include all types of loans and credit card debt.
- The MSR is specifically for HDB flat and EC buyers only, and prohibits financial institutions from lending to a borrower amounts that would cause his or her monthly home loan instalment to exceed 30% of his or her gross monthly income (based on an interest rate of 3.5%).
Loan-To-Value (LTV) Limits
The Loan-to-Value (LTV) limit requires financial institutions to restrict their home loans to a certain percentage of the value of the property. LTV ratios have been periodically revised over the years, and were last tightened in 2018.
- For a first home loan taken out at a bank, the LTV is currently capped at 75%. Of the 25% that is not borrowed, at least 5% must be paid in cash.
- The LTV for home loans taken from the HDB is currently up to 90%. If the flat is purchased directly from HDB, there is no compulsory cash payment portion, which means that the remaining 10% can be paid fully with CPF savings if the buyer wishes (and the other CPF usage conditions are met). For resale flats, $5,000 cash is typically required.
Additional Buyer’s Stamp Duty (ABSD)
Additional Buyer’s Stamp Duty (ABSD) was introduced in 2011 to make it more expensive for buyers to purchase multiple residential properties in a bid to curb demand from investors. ABSD rates were revised upwards in 2018.
- For Singapore citizens, ABSD rates are currently 12% for a second residential property and 15% for third and subsequent residential properties.
- Permanent Residents must pay 5% ABSD on a first residential property and 15% on second and subsequent residential properties.
- Foreigners buying any residential property must pay 20% ABSD, while entities are charged 25%, with an extra 5% for housing developers.
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What Are Some Possible Cooling Measures That We Can Expect in 2021?
According to Paul Wee, Managing Director (FinTech) at PropertyGuru, upcoming property cooling measures are likely to further make it tougher for purchases of residential properties for investment purchases, rather than those for owner occupation.
“The government tends to differentiate between properties for owner occupation and those purchased for investments,” he said. As such, the government may implement a marginal reduction in LTVs for first loans, a more aggressive reduction in LTVs for second and subsequent loans, higher seller stamp duties, and/or longer seller stamp duty periods.
Dr Tan Tee Khoon, Country Manager (Singapore) at PropertyGuru, has also identified LTV and MSR as measures that may be further tightened due to the current ease of access to affordable credit in a low interest rate environment.
Jason Tan, Senior Associate Executive Director at OrangeTee & Tie, agrees as well. “If stabilising the property market is what the government is aiming for, tightening the borrowing limit will definitely be one of the considerations. This will be a wise decision as it provides more prudence to purchasers in such uncertain economy conditions,” he said.
In addition, there is a possibility that the government will decide to implement HDB-specific property curbs, according to Dr Tan.
“The ‘sales spike’ in the HDB resale market appears to be more ‘disconcerting’, and HDB sellers are the upgrader base for developers’ new launches and the private residential market. Just two months into 2021, HDB resale volumes already hit 4,667, which is 31% more than the same period last year (pre-COVID), and 36 units transacted were above $1m in contrast with the whole of 2020, when 82 such units were sold,” he said.
Justin Kwek, Associate Group Divisions Director at PropNex Realty, shared something similar: "What (I think) they would be focusing on is the resale HDB market. With the longer duration needed for BTOs, a lot of buyers are turning to resale flats, especially with the various housing grants at their disposal," he said.
He added that this time, the market is dominated by Singaporean buyers, so it is unlike the past few rounds when the Government cooled the market by introducing ABSD to target foreign investors and developers.
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What Are Some Key Indicators to Monitor?
The government appears to be monitoring certain market indicators while waiting for the right time to implement a new raft of cooling measures.
Price growth and land sale prices are likely to be some of the key indicators being tracked. However, the big question is how long the government will wait before stepping in with new regulations.
Dr Tan has observed that the government appears to watch price trends for a year before intervening in the property market.
The first tranche of cooling measures, which came on 20 February 2010, was on the back of four quarters of price increases in 2009 due to speculative activity. The most recent tranche on 6 July 2018 came after four consecutive quarters of price hikes to 9.1%.
So, if history is to repeat itself, then the current quarter is an extremely important one. If prices were to increase in Q1 2021 — which, given URA’s flash estimates, is highly likely — it would be the fourth consecutive quarter of growth since Q2 2020.
Dr Tan has also observed that past cooling measures have tended to be implemented in the second half of the year. About 7 out of 10 measures were announced in June, including the implementation of the TDSR on 29 June 2013.
Grace Cheong, Senior Associate Marketing Director at PropNex Realty, shares similar sentiments: “If property prices continue to rise quarter-on-quarter, then another round of cooling measures is very likely. It’s hard to say exactly when to expect these measures, but I think it may be some time in Q3 2021,” she said.
Adding to that, Mr Wee shares that “the government tends to fire warning shots before changing policies, something they have started doing at the beginning of 2021,” indicating that the government’s recent hints are likely to result in concrete measures.
When new measures are implemented by the government, it is likely that they will come swiftly with little advance notice.
“The announcements for the 2013 cooling measures were made a day before their effective date and usually around 7pm. So property market stakeholders had very limited time to react,” said Dr Tan.
Mr Wee expects a spike in sales before the cooling measures kick in. “The previous cooling measures actually resulted in a last-minute sales spurt, with buyers lining up at showflats, as well as the rushed signing of the Options to Purchase for resale properties,” he said.
Sometimes, the implementation of cooling measures may also result in unsavoury behaviour. It was recently reported that two property agents were charged for illegally backdating options to evade higher stamp duties.
Conclusion: If Property Prices Continue to Rise, We Can Expect Tighter Property Curbs in H2 2021.
Based on past experience, the government is likely to act swiftly and decisively when putting in place new property curbs without giving the market much time to react. There is a good chance the measures will be announced in the second half of 2021 if price continues to trend upwards in the next two quarters.
Measures affecting loans, such as MSR and LTV, are likely to be tightened, and there is also the possibility of rules targeted at HDB transactions.
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This article was written by Joanne Poh. A former real estate lawyer, she writes about property and personal finance and spends her free time compulsively learning languages and roller skating in carparks.