A Yuletide Chill For Local Property Investors

December 22, 2021
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Yes! You’re probably surprised when you woke up this morning to find out about the latest front-page headlines on the latest property cooling measures. If you haven’t, do check out this graphic from the joint statement by the Monetary Authority of Singapore (MAS), the Ministry of Finance (MOF), and the Ministry of National Development (MND).

Source: Joint Statement (MOF,MAS, MND)

As you can see that under the new measures, the Additional Buyers’ Stamp Duties (ABSD) have generally increased for all nationality groups with the exception of Singaporean, and Singapore Permanent Resident (SPR) first-time home buyer groups, whose ABSD rates remained unchanged at 0 percent and 5.0 percent respectively.

As for the Total Debt Servicing Ratios (TDSRs), this has also been narrowed from 60 percent to 55 percent under the revised regulations, along with the Loan-To-Value (LTV) limits for Housing & Development Board (HDB) loans which have been reduced by 5.0 percentage points to 85 percent from the previous 90 percent as shown in the following graphic illustration from the website of the Ministry of National Development (MND).

Why Now?

According to joint statement by the three government ministries, the authorities have been closely monitoring the property market for several quarters. It cited in the joint statement that the private residential and HDB resale markets have been buoyant, despite the economic impact of COVID-19.

The joint statement noted that private housing prices have risen by about 9 percent since 1Q2020, while HDB resale prices have also jumped significantly by about 15 per cent since 1Q2020. These price trends, along with their observation that there has been a clear upward momentum in price-to-income (aka Price-to-earnings (P/E) ratios used to value public-listed equities), even though the measure continues to remain below their historical averages.

The joint statement went on to note that even in a low-interest environment, coupled with the COVID-19 situation, transaction volumes in the private housing market and HDB resale market remain high.

These observations expressed by the government are real and have also been brought up in the latest Financial Stability Review (FSR) report published by the Monetary Authority of Singapore (MAS).

Source: Ministry of National Development (MND)

So, how would it impact your next home purchase

Well! First of all, you must ask yourself, do you think this is the year 2021 or next year in 2022, you should be acting in a haste and go all out to “flip” homes, or is it time for your household to tighten the purse strings and be prepared for a volatile year ahead.

Take for example, under the new TDSR  (Total Debt Servicing Ratio) changes where the rates will be reduced from 60 percent to the new TDSR rate of 55 percent, a combined joint income of S$10,000 per month (60 percent) previously would have set his/her TDSR cap rate of S$4,000 per month.

However, with a reduction of the TDSR limit to 55 percent, he/she needs to set at least S$5,500 per month after taking into account his/her outstanding mortgage loans, credit card loans, personal loans, and other loan obligations. This could be one of the harshest requirements which are being implemented so as to ensure one spends within his/her means, and not get too overleveraged. These risk concerns were also being communicated by the Monetary Authority of Singapore (MAS) through its annual FSR report published almost a week before the new measures were announced. Therefore, if you have missed it, you would have been given ample warning.

If you can also recall that in July 2018 when the last round of property cooling measures was being implemented, MAS officials also sounded their concerns about the runaway property prices a week before the measures were announced.

Another significant impact is the raise in the new limits for ABSD which are designed to minimise speculative behaviours, particularly for those seeking to invest in multiple properties and then “flip”. It also targeted at HDB upgraders who might want to think twice of seeking for a new home, without planning properly for their household living needs.

In all, there is no shortcut route to riches. One needs to be thrifty and exercise responsibility when it comes to home purchases. They must think of the long-term benefits and costs when investing in real properties, rather than to try to adopt any short-term approaches towards their retirement planning. There is no quick and easy route to riches, and everyone, especially the younger folks, needs to spend discretely and save prudently in order to reap future returns.

What is the term “Land” anyway?

As per the Singapore’s Council of Estate Agencies (CEA) Real Estate Salesperson (RES) Examinations latest syllabus (January 01, 2019), the definition of land means “the surface of any defined parcel of the earth, so much of the subterranean space below or much of the column of airspace above the surface whether or not held apart from the surface as is reasonably necessary for the proprietor’s use and enjoyment, and includes any estate or interest therein, and all vegetation growing thereon and structures affixed thereto.”

So, with that, the question comes into mind of investors out there, especially those who are into owning digital land plots on platforms such as Decentraland, which is touted as the latest and most recognisable platform when it comes to buying and selling of digital land plots. As a real estate professional, one of my concerns is whether do you own a piece “Land” in the first place? Does Land in Metaverse world qualifies as real estate or are you merely owning pieces of assets digitally?

What to do now post cooling measures

Good question. Now that the so called “food” which describes the measures has been “cooked”, how do you serve up the “dish” for your own interests. By “dish”, we are referring to the underlying benefits, if there are.

Sounds complicated? We like to disagree. Actually, with the introduction of these latest measures, it is a good addition to your end-of-year financial planning. Think about it, with the year-end approaching, you might be eagerly anticipating your year-end bonus. Wait! Before you try to spend it all during this holiday season, why not set aside a substantial part of it to pay down your outstanding mortgage loan or to top-up your Central Provident Fund (CPF) retirement account. You could also set aside for good causes such as for charity giving.

By paying down your debt now, you could be on your way to saving for your next dream home. Yes, even though the latest cooling measures, especially the ABSD, and TDSR rates might set many homeowners back, you can save yourself the trouble by starting to plan for your next home purchase wisely. As the common saying goes, having set aside the cold hard cash, rather than to borrow for your next choice, is probably the best choices to minimise your exposures to the approaching higher mortgage interest rates, along with future cooling measures that might leave you with limited options.

For example, if you are looking to purchase a S$450,000, 4-room HDB resale home, and using the revised loan-to-value (LTV) limit of 85 per cent, you can borrow up to a maximum of S$382,500.

Then, if you have set aside some cash savings of approximately S$100,000, you could see your loan principal amount be reduced to S$282,500. At 2.6 per cent interest rate for a HDB loan on a 25-year mortgage period, your monthly mortgage payments could potentially be reduced to approximately S$1,281 compared S$1,735 on a S$382,500 loan principal amount and with the similar HDB loan terms.

Therefore, having that extra cash set aside could potentially result in greater monthly savings of your overall monthly cash payments. What’s more, if you are using your CPF moneys to substitute the monthly cash payments, you could potentially be footing up close to zero upfront cost.

A caution to note in the calculations

Please note that this is just a relatively simple illustration of how one could potentially save on the mortgage payments just by increasing the cash portion of the upfront costs. However, we have not dealt with other payment options like using bank loans where it is still calculated based on a 75 per cent LTV limit, along with a couple could decouple themselves for the purposes of saving on the mortgage payments and other risk management strategies.

In summary, if you are seeking for your next dream home, please plan carefully, allowing adequate buffers, and not to be too overextended in your mortgage. If you exercise prudence and responsibility, these latest government cooling would probably not significantly impact your financial loan obligations.

However, if you continue to practice ignorance, the chances of edging closer to financial troubles cannot discounted, owing to more higher mortgage loan exposures, and higher mortgage interest rate environment.

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