It’s all over the media – the government has just announced another round of cooling measures for the property market.
Summary of the new measures
Here’s a summary of the measures:
1) The holding period for Seller’s Stamp Duty (SSD) to be imposed has been increased from the current three years to four years.
2) Seller’s Stamp Duty (SSD) rates have been increased to 16%, 12%, 8% and 4% of selling price for residential properties which are bought on or after 14 January 2011, and are sold in the first, second, third and fourth year after purchase respectively.
(This is currently 3%, 2% and 1% for properties sold in the first, second, and third year after purchase respectively.)
3) The LTV limit has been lowered to 50% on housing loans for property purchasers who are not individuals (e.g. companies)
4) The LTV limit has been lowered from 70% to 60% for purchasers who are individuals with one or more outstanding housing loans at the time of the new purchase.
These measures will take immediate effect on 14 January 2011.
My take on the likely impact of the measures
The increased Seller’s Stamp Duty is very harsh. To just breakeven if you’re selling within the first 3 years, your property price has to go up by at least 15-20% (taking into account transaction and interest costs). This basically means that most buyers are forced to hold for at least 3 (if not 4) years.
Also the SSD is a tax on your selling price regardless of whether you made money or not (unlike a capital gains tax). If property prices stay flat and you are forced to sell your house for whatever reason (loss of job, need liquidity etc) you will immediately make a loss of 4-16% (not including transaction and interest costs) on the total home price. Assuming you took a 60% loan, you could lose up to 40% of your capital due to the impact of leverage even if home prices stay flat.
I believe the net impact of these measures is that transaction volumes will fall significantly. Buying demand from investors and speculators will be heavily impacted, while even end users are likely to take a “wait and see” attitude in the hope that prices fall more.
But at this juncture I don’t think prices will fall significantly in the short to medium term. Home owners and developers still have strong balance sheet positions and are not likely to sell at a loss. We will need to have a recession and retrenchments before these two groups start to sweat.
This new measures does not have impact on those who bought their houses before today. It will only affect the buyers now. However, there may still be a chance that we can find a good value at discounted price.
Before this cooling measures, people has been rushing to buy incomplete properties that started to built 2 to 3 years ago. Once these properties TOP this year, there will definitely be some owners of investment properties whom have to let go of their property at a price lower than when they have bought, this will start the downward trend.
Why do these people have to sell? Well, they followed the crowd, afraid to miss the boat, so bought a new property from developer because their monthly loan repayment for the first two years are very low. Once the project TOP, they may realise that their CPF are totally wiped out and they have to use cash to service the loan.
With the 4 year holding period, buyers now will have to consider seriously before buying. When there is no demand with a lot of supply out there, the prices have to come down.
In my blog, http://investwithjac.blogspot.com, I feel that if we are value investors, this recent cooling measures will be a chance for us to strike to buy an undervalued property instead.
I have also mentioned in my book “Route to Successful Property Investment in Singapore”, that we are looking for undervalued properties to invest in, and grow our savings through rental and future sales. Therefore, these cooling measures will not affect us, even if the holding period is increased to 4 years.