Originally published in Today, this article is posted here with the kind permission of the author Ku Swee Yong (guest contributor), founder of real estate agency International Property Advisor, which provides services to high net worth individuals.

UPDATE: On 13 Jan 2011 the government announced a fourth round of policy measures. Read the summary and my take on the impact of theses measures on Singapore property here.

The housing policy measures introduced on Aug 30 2010 have sidelined many buyers, including owner-occupiers who have out-grown their current apartments and are seeking newer, bigger or better located homes.

A typical case: Mr. and Mrs. Tan have lived in their five room HDB flat for 12 years. They have worked hard, invested wisely and their three children are doing well in primary school. The HDB flat is worth about $500,000 and there is a loan of $100,000 remaining. Having accumulated over $200,000 in cash and CPF, the couple is ready to buy a larger sized condominium, with three bedrooms and a maid’s room, up to about $1 million in value. Their children would love the facilities and they would be nearer to school. That was what they had planned up till August.

Now, under the new policy, the Tan’s options are:

(a) Pay down the HDB loan completely so they can take a loan on their new property at up to 80 per cent Loan To Value (LTV) ratio. This will reduce their current cash and CPF positions and limit their choices for the next property.

(b) Sell the HDB unit they are staying in and then buy the apartment they like. This means they can take a loan of up to 80 per cent and will also have more cash for renovation after the proceeds from the HDB sale are received. However, they have to be prepared for the inconvenience of moving into a rental apartment for a few months.

(c) Wait another two to three years while they scrape together an additional $100,000 in cash and CPF to buy the million-dollar condominium. In the meantime, their accumulated cash is earning interest income at below inflation, so they have to invest it carefully. If property prices continue to rise, their targeted new home may cost over $1.1 million by the time they accumulated a surplus of $300,000.

New measures sideline many buyers

This segment of the market is not small. The new policies affect mainly Singaporeans because foreigners do not qualify for 80 per cent LTV, nor do half of the permanent residents buying residential properties. Data from January 2007 to date show that an average of about 4,300 private residential transactions per quarter are classified as purchased by Singaporeans.

If we conservatively assume that a mere 20 per cent of these Singaporeans bought the properties to stay in and require a second loan for the interim period till they sell their first property, then we can expect that, going forward, about 860 transactions per quarter, or 3,440 per year, may not happen. Not at least until their savings accumulate and, hopefully, accumulate faster than the pace of price increases for private homes.

The market has felt the impact of these measures. Immediately after the announcement, some buyers chose not to exercise their options. And across the month of September 2010, there were fewer transactions and enquiries as active investors retreated to the sidelines. Now, only those buying a property to stay in and investors who have sufficient equity are looking. And, of course, the foreign investors.

The prices of HDB and mass market segments will cool somewhat. But as the 12- to 18-month outlook on interest rates remains soft, holding costs should remain low and current owners will not hurry to sell. Therefore, I expect prices to stagnate at current levels: Sellers do not need to lower prices as they can hold, while affordability for buyers has gone down as they are strapped for the 30 per cent of equity required. Let’s see who blinks first.

While sellers may be more accommodative to price bargaining, particularly in the mass market and mid-tier segments, prime property prices should remain stable as the proportion of foreign owners is high and foreign investors do not take more than 70 per cent LTV. Landed housing prices will continue to increase, as this segment rarely gears up to 80 per cent LTV and there is negligible new supply of landed homes.

The likelihood of a price decline in 2011 will be higher but that will not be attributed to the new policy measures, but rather to the increase in residential supply outstripping demand. The price decline should not be broad-based as many gems await those who are diligent with their house search homework.

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