THE SINGAPOREAN-CENTRIC CALIBRATION OF THE PROPERTY COOLING MEASURES:
A Three-Pronged Approach
With rising prices and land sale activities, In July 2018, the government instituted its 9th round of property cooling measures, by raising the Additional Buyer's Stamp Duty (ABSD) and tightening the Loan-To-Value (LTV) limits on private residential property purchases. The ABSD rate was increased by 5 per cent for Singaporeans who are purchasing second and subsequent residential properties. While, the LTV limits were tightened by 5 per cent for all housing loans that are granted by financial institutions.
With the deployment of these measures, the overall private property price index moderated at the second half of 2018, reaching 0.5% and -0.1% (q-o-q) in the 3rd and 4th quarter respectively. Furthermore, this led to developers selling a total of 8,795 private new homes (excluding ECs) in 2018. This was a 16.8% year-on-year (y-o-y) decrease in the number of units sold as compared to 2017, which had a total of 10,566 private new homes being sold.
A multitude of underlying factors such as declining new mortgage loan applications, increasing pipeline supply of private residential units, a lack of executive condominiums (ECs) on the market and rising number of HDB flats that are reaching the minimum occupation period (MOP) are timely reminders that are prompting for a reasonable cause of action to be taken. Henceforth, we have formulated a three-pronged approach to address and alleviate these issues, with key recommendations for the recent property cooling measures. Our main objective is to prioritize Singaporean’s housing ambitions and ensure reasonable calibration to current cooling measures are made, to accommodate their needs and aspirations.
Three Key Recommendations for the Property Cooling Measures:
1. REMISSION of ABSD for HDB Upgraders
2. REVERSION of LTV limits for First Housing Loan
3. REVISION of ABSD rate for the purchase of Second Residential Property
1. Remission of ABSD for HDB Upgraders
• “For the purchase of an HDB flat or a new EC unit, ABSD is fully remitted if the purchaser or any of the joint purchasers is a Singapore Citizen.”
• “A married couple with at least one Singapore Citizen spouse is eligible for ABSD refund on their second property, if they sell their first property within 6 months after the date of purchase/TOP/CSC, whichever is earlier.”
• “Married couples are encouraged to start marketing of their first property as early as possible to ensure they can meet the 6-month sale timeline for the ABSD refund. To be fair and transparent to all Singaporean married couples, the refund conditions are consistently applied, and there will be no extension of the six-month timeline to sell the first property. Couples may wish to consider selling their first property before buying their replacement property to avoid incurring ABSD. “
• To treat Genuine HDB Upgraders who are purchasing their first private residential property, in a similar capacity as those who are acquiring an EC, through the allowance of remissions.
• To extend remissions for non-nuclear family dynamics such as Singles, Single-Parent Families and Singles living with Parents etc.
Source: PropNex Research
With the increase in the ABSD rate, it does not take into account the plight of Genuine HDB Upgraders, who are purchasing a private property for the very first time. As, due to the rule of purchasing a second property, they are liable for the 12% ABSD rate that is in place. This poses a great strain on their financial cashflow, as the buyers have to prepare the minimum 20% (Cash and CPF) in the initial stages, yet, they have to pay an additional 12% ABSD rate.
On the other hand, the current practices state that if the purchaser or any of the joint purchasers are Singaporeans and are able to meet the requirements of the income celling to purchase a new EC, are able to benefit fully from the remission of the ABSD rate. Additionally, we have observed the strong desire and aspirations of Singaporeans, as we have witnessed a progressive increase in the number of Singaporeans owning private properties in the form of condominiums and other apartments in the past 5 years.
Furthermore, growing number of HDB flats are expected to reach the Minimum Occupation Period (MOP) in the coming years. An estimated 30,169 HDB flats (comprising HDB and DBSS flats) are expected to reach MOP in 2019. With an expected average of 28,000 HDB flats to reach MOP annually from 2019 to 2022. Furthermore, the supply pipeline of ECs has been contracting since 2015. There was a 59.6% (y-o-y) drop in the number of EC units launched in 2018. Currently, there is only one expected EC development for 2019, which is located at Sumang Walk, consisting of 820 residential units.
Conversely, the number of uncompleted private residential units (excluding ECs) that are unsold, reached a total of 34,824 units as of 4th quarter 2018. A 14.3% increase in units as compared to 2017, in the same period.
Potential Scenario: HDB Upgraders purchasing their First Private Property worth $1 Million
For instance, an HDB upgrader is intending to purchase a private property, which is priced at $1 million dollars. On 1st March, 2019, the buyer has to pay a booking fee of 5%, which is $50,000 in this case and is then, issued with an option to purchase (OTP). Thereafter, in a 2-week time frame, by March 15th, the HDB upgraders are provided with the Sale and Purchase Agreement. Henceforth, the HDB upgraders have a 3-week timeline to exercise the OTP by returning the signed sale and purchase agreement, which in our example, would occur on the 5th April 2019. Once the HDB upgraders have exercised the option to purchase, they have 2 weeks to pay the 12% ABSD rate of $120,000 by 19th April. Simultaneously, the HDB upgraders have an 8-week time period to pay the next 15% of the purchase price by 26th April, which is based from the date, the buyer was issued with an OTP, which is 1st March.
According to the recent report published by Credit Suisse which was highlighted in the Business Times article, dated February 28, 2019, it was reported that, there was an increase in the number of re-issuances for option-to-purchase (OTP) for home buyers. This in turn, has led to the deviation of the developer sales being recorded. This occurs when the buyer does not exercise the OTP within the 3-week validity period and the OTPs are re-issued upon expiry by the developers. Based from our feedback on the ground, majority of the upgraders finding it a huge challenge to cough up the amount for ABSD. This is one of the reasons for the increase in request by buyers to developers to delay exercising the sale and purchase agreement, which has resulted in a rise in the re-issuance of option to purchase in recent times.
In order to qualify for an ABSD refund, the HDB upgraders must sell their existing HDB flat. There are two conditions to take note, If the private property that the HDB upgraders are purchasing, is a newly launched / uncompleted property, the HDB upgraders are required to sell their HDB flat within 6 months from the issue date of the Temporary Occupation Permit (TOP) / Certificate of Statutory Completion (CSC), whichever is earlier. On the other hand, If the private property that the HDB upgraders are acquiring, is a resale / completed property, they are required to sell their existing HDB flat within 6 months from the date of exercising the option to purchase.
In order to avoid paying the ABSD first and subsequently, applying for a refund, the HDB upgraders have to sell their HDB flat before exercising the OTP for their next private property purchase. In the process of awaiting, buyers succumb to the inconvenience of potentially becoming homeless or are compelled to search for an alternative interim accommodation, through rental or sharing of space with their parents, relatives or loved ones. These are not the most conducive situations for the families to raise their kids, as they must endure the inconvenience of multiple shifts in adhering to their interim housing, as well as adjustments to the environment, such as the schooling of their children.
Hence, we propose that all Genuine HDB upgraders, who are purchasing their first private residential property, as their upgraded home, whether it is a newly launched or resale development, should be allowed to undertake to the HDB, agreeing to dispose their existing HDB flat, within 6 months from the time of completion for resale properties or upon TOP date for newly launched properties. For the purpose of safeguarding the effectiveness of the policy, a penalty should be enacted. In the event of a breach of the 6-month undertaking to sell their HDB property, HDB will have the full right to repossess the HDB flat.
With the changing family structures in Singapore, it is essential for policies to be reflective of these transitions. In order to promote inclusiveness for all Singaporeans, we advise that the remission should be extended beyond the traditional family structures. We feel that the policy, should cater to Singles, Single-Parent Families and Singles living with Parents as well. As there have been a progressive rise across these segments over the last few years as well. The number of single-parent families had a 6.2% (y-o-y) growth in 2018, rising from 90,500 to 96,100 individuals. While, singles who are living alone, had a 10.4% (y-o-y) surge in 2018, growing from 167,900 individuals in 2017 to 185,400 in 2018. The overall number of singles across all age groups witnessed a 2.2% (y-o-y) increment in 2018.
2. Reversion of LTV Limits on First Housing Loan
“75%; 55% if the loan tenure is more than 30 years’ experience or extends past age 65.”
Reverting to 80%; or 60% if the loan tenure is more than 30 years’ experience or extends past age 65.
Source: PropNex Research
As a result of the latest property cooling measures, the LTV limit was lowered from 80% to 75% for first-time housing loans. According to the Statistics from Credit Bureau Singapore (CBS), the number of new mortgage loan applications have been on the decline, since the implementation of property cooling measures in July 2018. A closer inspection of 2018 as two separate halves, demonstrates that there was a 39.8% drop in the second half of the year. Further analysis showed that, there was a 54.0% drop in December 2018 as compared to 2017, in the same period. An indication of the impact of the property cooling measures, as the tightening of the LTV limit, conceivably deterred potential home buyers.
Before the implementation of the cooling measures, a 6th floor unit which is 62 sqm in size at Parc Botannia was transacted at a price of $827,000 on December 2017. Thereafter, in a one-year time period, a 5th floor unit of 62 sqm was transacted at a price of $877,000. Similarly, a 9th floor unit with the size of 91 sqm was transacted at a price of $1.26 million on December 2017 at Le Quest. While, in a one-year time period, in December 2018, a 12th floor unit with the similar unit size of 91 sqm at Le Quest was sold at a price of $1.39 million. It is apparent that the prices have increased between 2017 and 2018. While, the LTV limit was still 80% in 2017, for a first housing loan, the buyer had to pay the remaining 20% amount of the property price, in cash or CPF.
As reflected, the prices of the units for the similar properties had increased over the 1-year period. In Addition, after the property cooling measures were implemented, the LTV limit was lowered to 75% instead. The buyer must generate 25% of cash or CPF, to fund his purchase.
By comparing these two scenarios on the usage of a 20% cash / CPF outlay and a 25% cash / CPF outlay, it clearly shows that the buyers have to cough up, additional cash / CPF to fund their purchase. With reference to the table above, there is a significant percentage increase in cash outlay for both properties with 32.6% and 37.7% respectively, as a result of the latest round of the property cooling measures.
We feel that with the existence of the Total Debt Servicing Ratio (TDSR) framework is sufficient, in preventing borrowers from being overleveraged, as potential buyers have to adhere to the necessary requirements. The TDSR framework emphasizes on financial prudence for home buyers and investors. Hence, we propose that the existing LTV limit is reverted from 75% to 80% for a First Housing Loan. The main aim of our recommendation derives from the premise of ensuring that the aspirations of Singaporeans are fulfilled, by allowing first-time home buyers the ability to enter the market to purchase their first property.
3. Revision of ABSD Rates on Second Residential Property Purchase
Presently, Singaporeans do not incur any ABSD for their first residential property purchase. Whereas, Singaporeans are subjected to ABSD rates for their second, third and subsequent residential property purchases.
On the other hand, acquiring overseas properties is not subjected to ABSD, the allure of property purchases in a foreign land, attracts Singaporean buyers and investors. As such, they are prone to the risks of these overseas real estate investments, as a result of uncertain market conditions due to the economic, political and currency climate.
According to the Straits Times Article, dated January 30, 2018, $37.2 billion were invested in Overseas Real Estate in 2017. An increase of 40%, as compared to 2016. Despite the article, not specifically stating about the residential component, it mentioned that Singaporean investors both large and small, have been foraying into the foreign real estate market. An indication of garnering interest of Singaporeans towards overseas real estate investment.
Typically, novice investors tend to lean towards real estate investments as opposed to financial instruments and derivatives such as stocks, bonds and commodities, which are of complex in nature. The innate qualities of Singaporeans, embodies the asian values and culture, in relation to investing in brick and mortar. The appeal of a residential property for the benefit of the next generation and as well as for retirement purposes, serves as a desirable mode of investment for Singaporeans. In order to cater to these hard-working and prudent Singaporeans, we hope to pave their way for housing needs by minimizing hurdles and maximising avenues of opportunities . We feel that it is necessary for Singaporeans to have the ease of comfort in investing in their own country, instead of venturing into overseas options as a “push factor” due to hefty ABSD rates.
Therefore, we propose that the ABSD rate be calibrated for the purchase of a second residential property by Singaporeans. We feel that the ABSD rate for second residential property purchase to be either lowered to 5% or reverted to 7%. Our recommendation taps on the foundation that Singaporeans are treated fairly and have the assurance of available options that they can rely on, to build their retirement fund safely and encountering lesser risk from venturing abroad.
We acknowledge that the myriad of government measures that are in place, have been responsive and reliable in maintaining the balance and order of the multifaceted nature of the property market and its associated issues. However, in the long run, it is of utmost importance that the housing needs and aspirations of Singaporeans remains as a top priority. With Singaporeans having a sentimental attachment to residential homes, we sincerely hope that our suggested call for action are taken under advisement, as ultimately, one of the fundamental elements to the success of a nation, is a representation of fulfillng the aspirations of its citizens.