Managing the Risks of New Property Cooling Measures in 2021

One of the least discussed risks in real estate is policy intervention. The Singapore government tends to take on an interventionist role when it comes to housing. This is good overall, as the goal is to ensure that property in Singapore remains affordable for our children and our future generations. What’s not-so-good for the individual buyer or investor, however, are the risk of greater costs and limited financing. The possibility of new cooling measures looms in 2021, and there are some steps we can take to manage it:

Is there a real risk of property cooling measures in 2021?

The answer is “increasingly probable“, given the recent surge in property transaction volumes and prices. This is the reason why:

Take note of the transaction volume, between July 2018 and December 2020. In July 2018, when property cooling measures were announced, transaction volumes for private non-landed homes (excluding ECs) stood at 2,579 units.

Following July 2018, you can see that condo transaction volumes fell significantly, never quite reaching the same level. Towards the end of 2020 however, transaction volumes began rising again; and by December of last year, transaction volumes hit 2,080 units – close to the levels we saw just before the last cooling measures.

Remember that this is also in the midst of a pandemic economy, which is probably more disturbing to the authorities.

In terms of price, the average condo had a quantum of around $1.41 million in 2018, just before the cooling measures. Today, the average quantum is about $1.56 million.

The strong uptrend isn’t just confined to private property. Resale flats have also seen an enthusiastic surge:

You can see that, after the last cooling measures in 2018, resale flat transaction volumes never managed to hit 2,000 per month for many quarters. This changed in 2020, when over 2,000 transactions were recorded in June, July, August, and November; December came close at 1,909 units.

The average price of a resale flat, pre-cooling measures, was around $444,410. Today, it’s risen to around $479,000, along with Cash Over Valuation (COV) creeping back into the equation.

In short, you can see prices and transaction volumes are coming close to the same point where they were in 2018; and this often means a new round of cooling measures are looming.

The risk of cooling measures could already be contributing to a spike in new home purchases

New launch transaction volume was unusually strong in January 2021, up about 32 per cent from the month before (excluding ECs). This is more than double (a 159.5 per cent increase) from January 2020.

To be clear, this is due to a confluence of factors; including the strong sales from mega-projects like Normanton Park; this development alone accounted for at least 600 of the units transacted in January. However, another major driver is the fear of new cooling measures.

Investors are moving on the realisation that, if they don’t get their property now, new cooling measures could make it more difficult later on – they may have to buy with higher stamp duties, or with a bigger cash outlay.

While there’s nothing we can do about the imposition of new cooling measures, there are some steps we can take to mitigate the risk:

  • Avoid last-minute transacting
  • Brace for a higher cash outlay
  • Have a strategy and contingency plan
  • Consider alternatives like dual-key layouts
  • Don’t panic-buy out of fear

1. Avoid last-minute transacting

When cooling measures are passed, they often take effect from the next day. This means that buyers have until the last minute to complete their purchases; and it’s not uncommon to see buyers thronging show flats before the new cooling measures are in effect.

This is not an ideal situation in which to buy properties. There is a higher chance that, based on balloting, you may not secure the unit you want. For resale properties, there’s no guarantee that the seller is willing to rush the process, and get everything signed on that same day.

Perhaps the biggest problem is that this results in panic buying (see below). When you rush, you’re more likely to overlook certain issues, such as careful consideration of which stack to buy in, or go through thorough inspection (for resale homes).

So if you’re certain you want a particular unit, and have the finances ready, it’s best to initiate the process early. Start negotiating with the seller, or get your Approval In Principle (AIP); don’t wait until the last minute when cooling measures kick in, and then leave it to fate.

2. Brace for a higher cash outlay

Many buyers prepare for higher stamp duties, when new cooling measures are passed. We also tend to assume cooling measures will affect investors first, mainly those with multiple properties. These are both reasonable expectations.

However, cooling measures can affect first-time home buyers as well; and for many buyers, the bigger obstacle may turn out to be the required down payment, rather than the stamp duties.

For example, in July 2018, the cooling measures were accompanied by changes to home loans. One of the key changes was the reduction in maximum financing, from 80 per cent to 75 per cent. This translates to a difference of about $50,000 to $60,000, for a home that costs around $1 million. This applied to all buyers using bank loans, including first-time home buyers.

(The first five per cent of a property purchase must be in cash, and the next 20 per cent can come from CPF).

This means that, even if you don’t face Additional Buyers Stamp Duty (ABSD), you may have to pay more upfront for your first home. It’s important to brace for the added down payment, as loan curbs can and have accompanied cooling measures in the past.

3. Have a strategy and a contingency plan

Property investment plan

If you’re still uncertain whether to buy, I suggest you formulate an overall strategy and contingency plan first. This is to lay out what you will do, if and when new cooling measures strike. Having a plan prevents emotional responses to cooling measures, and prevents panic buying.

For example: say you have an established budget of $1.6 million, and are considering a unit at Normanton Park. You are not sure whether to go ahead and buy yet, and you suspect cooling measures may be coming.

You can formulate a plan, such as (1) deciding you will go ahead even after cooling measures, provided it still falls within the budget range, or (2) decide to look at alternatives like a smaller unit at One-North Eden instead, if cooling measures raise the cost to a certain level.

This is, of course, a simplified example of how to develop a plan. For a more detailed strategy, let me know your situation by messaging me, and I can help you to develop a coherent plan.

That said, do remember that you need to stick to any established plans! There’s no use formulating a plan, and then ignoring them when the cooling measures happen.

4. Consider alternatives like dual-key layouts

If cooling measures do kick in, you may want to be open to certain alternatives. One example is the choice of dual-key units – these are single units that are split into two, thus allowing you to live with parents or tenants with greater privacy. The advantage of these units is that, because they count as a single property, you would not incur ABSD on an additional unit.

(That said, there are drawbacks to dual-key units, like living space being traded for functional space, and often higher cost per square foot. Message me regarding the development in question, so I can give you the details).

There are even alternatives that go beyond the property itself; such as possibly transferring ownership of your current property to your spouse, so you can purchase another unit without incurring ABSD. However, this method requires legal consultation and careful cost-counting, so it’s best to work out the viability of such a move early on.

Take the time to gather all the relevant information, and use it to develop a plan (see point 3).

5. Don’t panic buy out of fear

If we’re to compare worst case scenarios, it’s often better to lose out on imagined gains/rental income, than to panic-buy and then absorb real financial damage.

Bear in mind that, once you purchase a property, you must hold it for at least three years to avoid incurring Sellers Stamp Duty (SSD). The SSD imposes a tax of twelve, eight, and then four per cent respectively, on the sale proceeds in the first, second, and third year.

If you’re forced to sell the property during the SSD period – such as you bought a property which you later realise you can’t afford – you’re likely to incur losses. A property that turns out to be bad for rental can become a liability, locking up your capital until the SSD is up.

Your property is supposed to protect or grow your wealth, not be a financial headache for years. It’s better to miss out on some gains out of caution, than to end up with a massive liability.

Cooling measures or no cooling measures, we should remember the fundamentals of property investing

These are the basics such as cash-on-cash return, research on transaction histories, and understanding the location. New cooling measures may require us to change our choice of property, and the time in which we choose to buy or sell; but it should not distract us from the basics of  smart asset progression.

For more on the situation as it unravels, follow me on RonChongProperty.sg.

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