Impact of cooling measures introduced on 11 Jan 20

[Cecil Lee]

Impact of cooling measures introduced on 11 Jan 2011

18th January 2013

Summary For those smart people who do not want to waste their time reading all the details:

The Singapore Property Market has become one with very low upside potential in the medium term (3 ? 5 years), but with quite significant downside risks. Low upside because: The govt is committed to not letting the prices to go up significantly. High Downside because: Huge supply (200 k units), and lower demand (reduction of foreign labour).

Possible course of action if you agree with the above analysis : If you do not have any sentimental or intangible value for your apartment, it is perhaps a good time to sell and take profit. Rent for a year or two and get into private property after 2014. For those who have nothing better to do than derive some pleasure from reading the below:

This is one of the most Comprehensive set of measures covering
1. ABSD: Increasing upfront cost in the form of higher stamp duties even on Singaporeans who are potential HDB upgraders.
2. LIQUIDITY: Reducing significantly the quantum of financing available to 50% for those who already have one loan and more significantly, increasing the quantum of upfront cash to 25% from 10%
3. PR HDB: Virtually squeezing the PRs out of the HDB market by not allowing subletting and 5% stamp duties on purchases.

These measures have been taunted as anti cyclical measures to calm the market until the long term structural measures such as increasing the supply get the required time to play out its impact.

Let us look at the impact of these measures Mid and High end (above 1.7 million) :

ABSD: this market has already been impacted since Dec 2011 and with the further increase to 15% for foreigners , 5 to 10% for PRs and 7 to 10% for Singaporeans, all the buyer segments are significantly affected. I do not see many Singaporeans who do not own any property to be potential buyers of this segment (the only exception being investors who have cashed out in anticipation of measures and market crash)

LIQUIDITY: Buyers in this segment need to come out with 50% cash, which in absolute quantum is around 1 million out of which 500 k could be cpf.

Overall the investors in this segment are likely to be savvy and would stay away from the market which is what they have been doing. The property price in this segment has been virtually flat for the past 2 years and the rentals are under pressure.

The existing landlords will have the resources to hold on even if the rentals fall by 20%. No major distress selling except by those speculators who bought in 2010 and later and would desperately need a tenant to make the emi payments.

Mass market (800 k to 1.7million)
ABSD:
The key buyer group in this segment are the HDB Upgraders, high income first timers, and middle income investors who are looking at rental income.

There is no impact on the high income first timers. They will have a lot to choose from.

HDB UPgraders who earlier had the option to move into a condo and rent out their HDB Flats at a good rental yield of 8 to 10 %, now face a ABSD of 7%. On a 1.2 million property, that amounts to 84k upfront cost. They can choose to sell the HDB to avoid the ABSD, but that is exactly what the GOVT wants to increase the supply of resale HDB flats and bring down the resale prices.

The psychology of this group of people would be rather to hold on to their HDB flats. This would result in lesser demand and developers would be forced to lower prices or offer big discounts. (check out this has already started to happen)

The middle income investors are likely to be already having one or two properties and will be subjected to high ABSD OF 7 to 10%. The savvy ones were already in the sidelines. The gullible ones in this group will have lesser opportunity to be gullible as they will not be able afford the ABSD and higher cash requirements.

On top of this, the PRs who are currently renting a place and looking for resale apartments in the mass market, would also be better off renting because of the higher ABSD and lower financing. A PR buying a 1.2 million property, will have to come out with 60k in ABSD , 30 k in BSD, 240k in cash or CPF Upfront, and around 4.5 k a month in EMI.

Most potential buyers in this segment will be squeezed resulting in significant reduction in demand and consequently lower prices from developers.

The current landlords are unlikely to sell in panic. They are enjoying a nice rental yield and they will continue to hold even if the rental yields drop a little. If they sell, getting into the market would be very costly under the current regulations.

One unintended consequence of this policy is that the supply of resale private apartments will be lowered significantly.

HDB resale apartments
The government?s key objective is to arrest the price inflation of HDB resale flats. They have so far not been successful because very few owners are willing to sell. This round of measure aims to correct the supply imbalance partially. PRs will be forced to sell because they cannot sublet. Some HDB UPgraders will sell to get a refund of the 7% ABSD. And some of the savvy ones may sell because they can the see the deluge of pubic and private housing that is being built, and expect prices and rentals to head south.

On the demand side, ABSD on the PRs will dampen demand from this segment. HIGH income PRs are generally not in this segment as they are likely to have some private property in their home country and so are not eligible. For the low to mid income PRs, the 5% ABSD is quite steep. On a 500k, HDB flat, it amounts to an extra 25k. And they cannot sublet it in the long run and so it loses its attraction as an investment opportunity.

Demand from the HDB second timers will also decrease because of the more than 23K BTO flats that will be on offer this year. The above will certainly put downward pressure on the HDB resale prices.

Possible course of action if you agree with the above analysis:

SINGAPOREAN
First timers : no hurry to buy. You will have plenty of options. Bid lower aggressively and ask developers for steep discounts(20%). Their margins are one of the highest in the world, and can afford to bring down the pricing.

Current HDB owners and Upgraders: if you do not have any sentimental or intangible value for your apartment, it is perhaps a good time to sell and take profit. Rent for a year or two and get into private property after 2014. Point to note: Once you sell your HDB, it is quite difficult to get back into public housing.

Private property owners:
If you do not have any sentimental or intangible value for your apartment, it is perhaps a good time to sell and take profit. Rent for a year or two and get into private property after 2014.

Private property investors (assuming you already own one property):
Currently you are subjected to the ABSD, which is a cyclical measure and is likely to be reversed when the market comes down. So just wait for that to happen. No need to rush. If you can?t sit on your butt quietly, the go and bid lower aggressively.

PRs
HDB owners: owner occupiers can continue to stay at low cost housing. For those who live in private property and are renting out their HDB, will have to decide between selling the HDB or moving into it because they cannot rent it out legally.

Private property owners: for those with long term plans, owner occupiers are better off staying put. If you sell, you need to pay 5% ABSD to get back into the market increasing the overall transaction cost to 10% (ABSD, BSD, brokerage, small renovation)

Private property investors with one property and getting a good rental yield has the most difficult decision to make..if you sell, you lose the rental yield, and buying back will make sense only if there is a significant downturn (more than 15%), as the overall transaction cost around 10% quite high (5%ABSD, 3% BSD, 2% brokerage, small renovation). If you don?t sell, you will be subjected to 10% ABSD when you want to buy another property in the event of a downturn.

Private property investors who own more than one property are better off not selling, as they will be subject to 10% ABSD to buy back which makes the overall transaction cost (ABSD, BSD, brokerage, small renovation) around 15%.

PR First Timers: no hurry to buy. You will have plenty of options. Bid lower aggressively and ask developers for steep discounts(20%). Their margins are one of the highest in the world, and can afford to bring down the pricing.

Foreigners:
Private property owners: for those with long term plans, owner occupiers are better off staying put. If you sell, you need to pay 15% ABSD to get back into the market making overall transaction cost 20%.

Private property Investors:
Private property investors are better off not selling, as they will be subject to 15% ABSD to buy back which makes the overall transaction cost (ABSD, BSD, brokerage, renovation) around 20%.

Foreign First Timers: Run away unless you have so much money that you need to park it somewhere safe for the long term and do not mind paying 20% transaction cost.

Every one knows that these are temporary measures which will be reversed when the market hits a low and when the supply comes in. It makes absolute sense to wait and not incur these heavy upfront costs.

Property Hobbyist

Ref: Impact of cooling measures introduced on 11 Jan 2011