The Monetary Authority of Singapore (MAS) has recently mentioned that they are keeping a close eye on the rising property prices at a media briefing on the MAS Annual Report on June 30th.
“Authorities will never tell in advance whether they are going to implement measures, because that defeats the purpose of implementing the measures. So stay tuned and just watch, and we hope the market will continue to remain stable.” stated Mr Ravi Menon, Managing Director from MAS.
With the real possibility of cooling measures being implemented on the horizon, many are wondering if they should be rushing to purchase their properties pronto, or hold back until after cooling measures have taken place.
In this write-up, Alex JD from TOP team will touch on how this potential upcoming cooling measure could affect buyers, sellers and property investors.
Before the previous round of cooling measures were implemented by the government in the third quarter of 2018, the PPI (Property Price Index) increased 9% year on year from the second quarter of 2017 to the second quarter of 2018.
Currently, from the first quarter last year to this year, the PPI has risen 6.6% year on year. Due to the relatively high rise in percentage, many are speculating and predicting the possibility of new or increased measures if the figure continues to move closer to a double digit percentage increase.
The following statements from government officials also lend strength to such predictions:
On Jan 18, Deputy Prime Minister and Finance Minister Heng Swee Keat said that the government is paying "close attention" to the local real estate market "to ensure that it remains stable". As the economic outlook remains very uncertain, he added that "we do not want to see the property market run ahead of the underlying economic fundamentals." (cr. The Straits Times)
If the PPI continues on its upward trend, the implementation of cooling measures could be getting closer to reality than we have anticipated.
Property cooling measures are regulations designed to reduce demand in the property market. After several huge fluctuations in the earlier years, the measures were implemented by the government to be used as a mechanism to stabilise market prices and contain volatility.
Before these measures were introduced, the market saw single downward and upward movements up to 40% and 60% respectively.
This was undesirable as a volatile market encouraged speculation and deterred sensible investments, at the same time making it difficult for homeowners’ to acquire properties for their own stay.
Maximum LTV (Loan to Value) reduction
The LTV ratio refers to the amount you are allowed to borrow in order to finance your home. The reduction was first implemented back in February 2010, going from an initial 90% to 75% today for your 1st loan, and from 90% to 45% for your 2nd loan.
There is also a further decrease in LTV if your loan tenure exceeds 30 years or extends past the age of 65. This allows the government to ensure that homebuyers do not take on too much debt in the pursuit of owning multiple properties.
Introduction of SSD (Seller’s Stamp Duty)
The SSD was first introduced in February 2010 as well, and it is a tax you have to pay if you sell your property within the 3-year holding period.
It has since gone through 3 rounds of adjustments throughout the years, and was aimed to limit property flipping for profit.
Introduction of ABSD (Additional Buyer's Stamp Duty)
This was implemented in December 2011, and has had 2 rounds of progressive increase over the years.
Due to the high demand in properties back then, the introduction of ABSD not only discourages foreigners from purchasing multiple properties (higher percentage levied) but also to ensure prices are kept affordable for locals purchasing properties for their own stay.
Implementation of TDSR (Total Debt Servicing Ratio)
First implemented in June 2013, the TDSR restricts the proportion of the homebuyer’s monthly income they can use to service their debts/loans to 60%. This standard applies to taking bank loans for purchase of private residential properties.
Previously, the market saw many over-borrowing exorbitant amounts to flip properties due to the lack of restriction. Similar to the LTV, this helps further ensure that homebuyers are not taking on too much debt.
Implementation of MSR (Mortgage Servicing Ratio)
The MSR was rolled out in December 2013, restricting the percentage of a homebuyer’s monthly income they can use to service mortgage loans to 30% when they are purchasing any public housing (HDB BTO, resale HDB or yet to privatise EC – Record-breaking Land Bids for ECs).
This was cut down from a previous offered amount of up to 40% of the borrower’s gross monthly income.
From a market trough after the global financial crisis in 2007-08, property prices increased at an accelerated rate of approximately 31% from an index value of 95.3 in the second quarter of 2009 and reaching 125.1 by the first quarter of 2010.
The government implemented 5 rounds of cooling measures as discussed earlier, from February 2010 to January 2013, by reducing LTV and increasing SSD and ABSD in a bid to prevent prices from going out of control.
Although the increase in property prices did show signs of slowing to the rate of 23.6% from the first quarter of 2010 (125.1) to the third quarter of 2013(154.6), the government still felt that intervention was necessary in order to stabilize the market.
More prudent borrowing was encouraged, and credit underwriting standards were enforced by financial institutions - leading to the introduction of TDSR.
From the peak in 2013, prices then steadily came down at a progressive rate of 11.6% over 15 quarters.
In the first quarter of 2017, the government made the decision to loosen measures by decreasing the SSD amount. This led to prices climbing in an upwards trend again, though at a tamed rate of 9.6% over 5 quarters.
In the third quarter of 2018, the ABSD was introduced to raise the entry barrier for foreign ownership/investors holding more than 1 property.
For homebuyers, unfortunately, whether the cooling measures happen or not will not make much of a difference if you need to find a roof over your head.
Although buying in a hot market may not be a favourable proposition, if cooling measures happen, it could result in your dream home becoming less affordable.
In this case, seek professional advice in finding fair valued properties in the current market situation and engage professional service if possible to negotiate on your behalf.
On the other hand, home sellers will find that a good time to sell your properties is during the hot market period.
Nevertheless, unlike other situations where you can make profit by selling high and buying low, in this case you might find yourself buying your next property at a high price too.
Home sellers will have to be certain to do proper planning as well as number crunching to ensure that they are able to afford their next property after selling.
Finally, seasoned property investors all know not to time the market. One should always go about investing in property sensibly, looking at an ideal time frame of medium to long term.
Time staying out of the market is a lost opportunity cost, thus it is a better strategy to get invested and stay invested.
Buyers or investors who are at the moment sitting on the sideline hoping for a bargain deal after cooling measures have been implemented, should be keen to note that there may not be a market correction as huge as what they are waiting for.
The measures in 2018 only resulted in a 0.7% correction for 2 quarters before prices moved up 3.4% again in the following 3 quarters. It is at best a speculation on how heavy-handed the government would be this time round if they were to implement any cooling measure.
At this point in time, no one can be certain whether cooling measures will be implemented or not.
In the meantime, it would be more helpful and relevant to determine whether the current price levels are supported by other market demand and supply fundamentals e.g. current level of unsold stock, land supply situation, availability of hot money liquidity and interest rates environment.
Most importantly, if all proper financial planning has been done in preparation to acquiring your dream home, it would be advisable for you to take action instead of waiting as it may result in your purchasing capacity being compromised.
Ultimately, we have to understand that cooling measures are not irreversible mechanisms destined to eradicate all market demand. Rather, it lends help in stabilizing the market, minimising undue speculation and price fluctuations; thus creating a safer environment for all parties involved.