16th December 2021 was an interesting day, as we saw a new round of cooling measures in Singapore kicked in. However, you may have noticed that there isn’t a big reaction, unlike previous rounds. Did you wonder why not? Well, let’s just say that – compared to what we’ve seen in the past, this last round of measures is quite mild. It’s unfortunate for first-time home buyers though, as it also means that a drop in prices is unlikely. Here’s why:
There are three main changes involved:
Let’s look at what these changes mean, and their probable impact:
Note: This change is only relevant to the HDB Concessionary Loan. Bank loans are not affected, and continue to have the usual LTV limit of 75 per cent.
The LTV cap is the amount of financing you can get from a home loan. It is based on the lower of the price or valuation of the property (for new properties, the valuation and price are the same).
Before 16th December, an HDB loan had an LTV limit of 90 per cent, meaning you could borrow up to 90 per cent of your flat’s price or value. For example, if the flat cost $350,000, you could borrow up to $315,000.
With the new measures, the limit has been reduced to 85 per cent. So for the aforementioned flat, you could only borrow up to $297,500.
Almost none, for most flat buyers.
Consider a Singaporean who sets aside $630 a month in CPF (this is roughly what you set aside if you earn $3,700 a month, the current median age).
Let’s say you contribute from the age of 25 to 30, before buying your flat. At an interest rate of 2.5 per cent, you would have close to $39,700 at the point of purchase. If your spouse is also working and earning about the same amount, the both of you would have around $79,400 in your combined OAs.
This is more than enough to make the downpayment on a $500,000 flat; even after the reduction in LTV. Given that most first-time home buyers are purchasing cheaper flats (e.g., 4-room flats at around $430,000 before subsidies), this is hardly an obstacle to most of them.
2. Similar decrease in the Total Debt Servicing Ratio (TDSR)
Note: This change is only relevant to buyers of private properties, or buyers using bank loans. HDB properties already impose a Mortgage Servicing Ratio (MSR), which caps home loan repayments to 30 per cent of your monthly income.
The TDSR restricted your monthly loan repayments (inclusive of all debts) to 60 per cent of your monthly income. The cooling measure has revised this down to 55 per cent.
If the borrowers have a combined income of $10,000, for example, the monthly home loan repayment – inclusive of other debts – cannot exceed $5,500.
Note that for the purposes of TDSR calculation only, an interest rate of 3.5 per cent is used (the real interest rate is much lower, at around 1.3 per cent).
The typical home loan amount to purchase a condo is around $1 million (this assumes the total cost of the condo is about $1.3 million to $1.4 million). Even at the rate of 3.5 per cent, the monthly loan repayment is around $5,000 to $5,500, well within the TDSR cap.
Bear in mind that, for HDB upgraders, the total loan amount is likely even lower, as the sale proceeds from their flat can allow for a bigger downpayment. This will mean they’re even more likely to fall under the TDSR limit.
This is only a factor to overstretched buyers. I advise home owners not to purchase a unit if the monthly loan repayments would take up more than 30 per cent of their monthly income (this is a prudent amount, and it’s why HDB enforces it on buyers). To be blunt, if you are busting the TDSR cap, there’s a real chance you’re taking on a unit that’s beyond your budget.
As most buyers are not comfortable with debt ratios above 30 per cent anyway, this will not affect too many buyers.
3. Increase in Additional Buyers Stamp Duty (ABSD)
For Singapore Citizens, ABSD has been raised to 17 per cent of the price or value (whichever is higher) on the second property. ABSD is 25 per cent on the third or subsequent property.
For Permanent Residents (PRs), ABSD is five per cent on the first property, 25 per cent on the second property, and 30 per cent on the third and subsequent properties.
For foreigners, ABSD is now a flat 30 per cent.
There’s also higher ABSD on developers, but this is a subject I will cover elsewhere, as it doesn’t directly impact buyers.
For first-time home buyers, there has been no change in ABSD rules, so they’re unaffected. ABSD is only a major concern for those buying investment properties; particularly Singapore citizens buying the third or subsequent home (a 10 per cent increase is really steep!) PRs are likewise dissuaded from owning more than one home.
This is indirectly good for first-time home buyers: by dissuading investors from buying up more properties, first-time home buyers will face less competition in the market; if they’re very lucky, it may even slow the pace of increasing prices.
So is it the end for aspiring property investors?
Well no. There are ways (legal ones) to avoid ABSD when purchasing a second property in Singapore. I’ve covered 5 methods here –> How are some property buyers able to avoid ABSD in Singapore
The change to LTV ratios doesn’t have much stings, even for buyers of resale flats. The TDSR limit, even with cooling measures, is already set higher than what most buyers will reach.
The only part of the cooling measures with real “bite” is the ABSD; and even so, we can see that it affects a small buyer demographic: only foreigners, or the most affluent buyers who can afford multiple properties.
This must be coupled with two clear facts:
There are fewer new launches in 2022, with most of the developments from the 2017 en-bloc fever now completed and sold. In Q3 of last year, the volume of unsold homes stood at 17,140 units – the lowest level of supply in four years.
In the resale market, both resale condos and HDB flats continue to see surging demand, with resale flats now at their highest price point in around a decade. This is likely to continue due to Covid-19, which has seen a higher number of construction delays; besides this, Work From Home arrangements are creating an urgent need for available housing. Most buyers do not have the time to wait for new BTO construction, or even new launch construction.
This combination of facts suggests that, cooling measures or not, anyone hoping for a discount will probably be disappointed. Sellers have absolutely no reason, in 2022, to lower their prices – not when demand is surging, and supply of homes is dwindling. The best we can hope for, at this point, is a knee-jerk reaction to slow rising prices, as buyers adopt a wait-and-see approach.
However, I would suggest that, if you’re a first-time buyer, you should temper your expectations this year. While cheap homes are definitely not easy to find right now, there may be exceptions out there. Do let me know what sort of property you’re searching for, and we may still be able to find something that fits your budget. Arrange an appointment with me, or contact me directly on Facebook.