By this time all the major news channels have reported on details of the most recent round of cooling measures in 2018 that caught almost everyone off guard including listed developers whose share price tumbled 15-20% the day after. Indeed no one saw it coming.
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First for benefit of those who haven’t quite figured out what it all means, we gave a brief summary referencing the press release from MAS’ website:
The key changes would be:
- Loan-to-value (LTV) for residential properties lowered by 5% points across the board. In general, banks can only lend up to maximum 75% of a property’s valuation (this also applies to HDB properties unless the loan is from HDB). This means that all buyers of residential properties would need to fork out 5% more equity in the form of likely cash, or CPF before they can buy a property.
- Those buying a 2nd property for investment would need to fork out even more cash, as the additional tax (ABSD) goes up from 7% to 12% for Singaporeans. This means the total stamp duties payable for a 2nd property would be BSD 3-4% plus 12% or almost 15-16%. BSD (Buyer’s Stamp Duty) has been earlier revised up as well from 3% to 4% for residential properties valued at $1m and above.
- Those who are thinking of taking out a 2nd mortgage to buy an investment property would have to fork out a bit more cash as that LTV limit has also been cut by 5% from 50% loan previous to 45% now. But this impact will not be that substantial as most who are buying 2nd property as it is now would have already “de-coupled” on their 1st mortgage to get maximum financing. Still that means 75% loan after today and the cash quantum required has gone up.
- Developers are hard-hit by double-whammy this time as not only do they need to cough out more cash in terms of land costs for ABSD which has gone up from 15% to 25%, there is an additional new ABSD tax of 5% levied which is “non-remissible”. These measures are clearly designed to mute demand for land aimed squarely at enbloc fervour – the chief driver for the property upswing started since mid of 2017 and which continues to drive the market this year.
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My purpose for writing this blog is not to repeat what is already ubiquitously reported, but to give you our own unique interpretation on this round of cooling measures which many deemed as “too strong a hand” and what are some things you may want to take note of.
Profitting From Capital Appreciation Is Going To Be Harder
The Singapore government has repeatedly stressed that it has no intention to crash the property market, but needs to keep any exuberance in check by ensuring any increases in prices is in keeping with economic fundamentals and conditions and not a result of any speculative bubble.
Most property analysts are of the view that speculative element is largely absent from the market today. Still, the government has sited in its announcement that it took only 4 quarters for the PPI (Property Price Index) to recover back 9.1% of its total drop of 11.6% in the last 15 quarters or about 3.5 years! A pictorial view says it best:
What this tells us is that no matter how the Singapore property market is going to scale to new heights going forward, whenever price increases go too quickly, regulatory forces would be quite ready to be unleashed and make it snap back to roughly where it started. This puts a check or a ceiling on price increases. And objectively speaking, how much more increases can one expect or profit from here? Take for example, when a new leasehold development in the East like in Siglap is selling at average $2,000-$2,200 psf, how long would it take for the new owner to reap a profit at $2,500 upwards, if it happens. That would be a scenario when most prime district 9,10 resale properties would be selling at $3,000-3,500 psf and mass market condos would be out of reach of most Singaporeans at $2,000 psf (A typical family 3-bedder of 800 sqft nowadays would cost $1.6m with a loan of $1.2m requiring $400,000 downpayments and to service a monthly repayment of about $5,400 at average 2.50% interest over 25 years). And new ECs would have to be launched at $1,500 psf! Most first-timers could only afford a two-bedders.
We have argued in this blog before – property as an investment makes sense when seen more from a financial discipline perspective than capital appreciation perspective in today’s market. What we mean is – buying a property forces one to direct his hard-earned money into “forced savings” every month by paying down on a mortgage. In that sense, even when one manages to sell off the asset at the same price as what he paid for at end of servicing the entire mortgage (exclude inflation, taxes paid, and time value of money), he would have saved up a huge nest-egg for retirement. Otherwise our inate human nature will natural divert our earnings to capital consumption or consumerism, especially in a cosmopolitan city like Singapore.
Rental Demand Continues To Be Weak At High Vacancy Rate Above 7%
Ask any leasing agent and they will tell you the typical number of viewings it would take before a unit is successfully let and lament how it used to be half that average number. At a macro level, URA’s official vacancy rate has stayed stubbornly above 7% since 2014. Gone are the days when we are used to vacancy rate at halve that number at 3-4% as a base level. Official numbers is that there are 30,000 completed new units that are vacant. No wonder you still see many “dark” or empty units at night for new developments all over the island.
Now I also suspect, judging from the falling rentals I have seen at most new developments, this vacancy ratio would have been even higher if not for reduced rents over the years. Ask any landlord and they can also tell you what they used to be able to command as rental income.
The implication here is that location is vital in one’s purchase decision, in order not to get caught in a situation where there is long vacancy period and one needs to dig into his hard-earned money to service the mortgage interest. And when it comes to letting a unit, understanding the prospective tenant’s profile is important as well as good old factors like proximity to MRT stations and amenities like groceries and food.
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Cost Management Takes On More Significance
Since profiting from capital upside is going to be much harder (we are not saying impossible but it depends on your entry price), cost savings takes on a more integral role in the whole business of property investment. This is especially true when interest has just started moving up. 3-month SIBOR has hit fresh highs of 1.62% as at 4 July 2018.
Do you work with a professional mortgage consultant who is there to monitor market trends and watch over your back lest you pay a few more hundreds or even thousands a month to make your bank richer? You will be surprised, especially for loans above $1m, the costs of unnecessary delays in refinancing by a mere one month can come up to quite a bit. Contact us if you like to start a professional relationship with your own trusted mortgage consultant.
De-coupling Of Property Ownership Becomes Norm
Since 2013 when TDSR and tiered-LTV limits came into effect, we have seen a fair number of clients doing de-coupling of the property ownership at the same time when they refinance their mortgage. This makes perfect sense as de-coupling of a property is done like a sale from one spouse to another and requires full redemption of any existing loan. It also allows for defraying of some of the high legal costs involved when banks (not all) provide legal subsidy for the refinanced portion of the loan. Typically, such de-coupling or part-purchase could set one back by $5,500 to $6,000 as you need two sets of lawyers to act. Being a client of MortgageWise brings you special privileges like a special rate from our partner law firms that is even below market!
Now de-coupling of the mortgage is a lot easier but not many are aware of it. Once one of the owners’ name is taken out from the loan, it frees him or her up to get a new property at the new reduced 75% LTV as a 1st mortgage even though this is a 2nd property. However, as that still attracts ABSB which has gone up significantly by 5%, we do not see much benefit in doing just that.
Overall, with the new cooling measures, the concept of de-coupling will become more widespread and gain traction amongst Singaporean property owners going forward.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there. See their testimonials.
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