January 1, 2015
The calls to ease the property cooling measures affecting the Singapore residential property market have gained intensity amid news of tepid property sales and falling prices. This article explores the possible ways which these property cooling measures can be recalibrated.
These measures can be divided into three categories, namely, the financial control measures, the stamp duty measures and the supply measures (which include the Government’s land sales programme). I shall focus on the first two measures.
Financial control measures
These comprise the total debt servicing ratio (TDSR) framework of rules (enunciated in MAS Notice 645) and loan-to-value (LTV) limit rules (and related rules in MAS Notice 632).
The TDSR framework regulates the banks’ approval of all property loans by requiring that the borrower’s monthly total debt obligations do not exceed a specified percentage (now set at 60%) of his total gross monthly income. While the TDSR framework should stay, the Government should consider relaxing some ancillary rules within it. For instance, the Government should allow 100% (instead of a maximum of 70%) of the monthly rental income received by the borrower to be considered as part of his gross monthly income.
The current LTV limit rules impose a LTV limit of 80% on a borrower with no outstanding housing loan, a LTV limit of 50% on a borrower with one outstanding housing loan, and a LTV limit of 40% on a borrower with two or more outstanding housing loans. It is humbly submitted that the Government should bring the relevant LTV limit up to 60% and 50% (if not higher) for those borrowers having one and two (or more) outstanding housing loans respectively. The TDSR framework has already limited the power to borrow thereby rendering the earlier imposed LTV limits somewhat over stringent.
The current LTV limit rules do not permit a bank to allow a drawdown of an 80% housing loan before a full redemption (upon sale or otherwise) of the borrower’s existing housing loan. Many genuine home buyers would prefer to purchase their new home before selling their existing home so that they can plan a smooth move. The Government should consider allowing such home buyers to borrow and drawdown on a second 80% housing loan conditional upon them selling their existing home within six months to redeem their existing housing loan. The case in support of this indulgence is even stronger in the event that such borrower is able to afford the instalments of two 80% loans within the 60% TDSR.
Stamp duty measures
The seller’s stamp duty (SSD) was introduced to deter speculation of residential properties. In January 2011, the Government increased the SSD period and quantum, with the maximum SSD of 16% upon sale within first year of purchase, 12% upon sale within the second year, 8% upon sale within the third year, and 4% upon sale within the fourth year. Since the second quarter of 2011, sub-sale transactions have been plummeting. According to published URA statistics, just 136 units were sub-sold in the third quarter of 2014, or a mere 4.6% out of the total residential units sold in that quarter. In view of this, it is suggested that the SSD period be reduced from four years to three years. This will allow affected owners, who have owned their property for a significant three year period, to sell their residential property without this penalty. More owners of vacant residential properties will need to sell to free themselves of loan liabilities especially when interest rates start to rise and they cannot rent out these properties in the wake of a large number of newly completed properties.
The highlight of these measures is the additional buyer’s stamp duty (ABSD). The current rules impose ABSD of 7% on the purchase of a second residential property by a Singapore citizen, and ABSD of 10% on the purchase of a third or subsequent residential property by a Singapore citizen. Singapore permanent residents (PR) pay ABSD of 5% on the purchase of their first residential property and 10% on their second. Foreigners and entities would have to pay ABSD of 15% on the purchase of any residential property. I suggest that the ABSD rate for Singapore citizens buying their second residential property be brought down to 3%, and the ABSD rate for Singapore citizens buying their third or subsequent residential property be reduced to 5%. A Singapore citizen buying his second or subsequent residential property should not pay the same or more ABSD than any Singapore PR buyer. There are many Singapore citizens who have extra money for investment. While they can invest their money in foreign properties, they should not be discouraged from investing in real estate in their beloved Singapore, so long as such investments are done within their financial abilities, already safeguarded by the TDSR and LTV limits.
The present rules allow for the application for a refund of ABSD paid by a married couple (with at least one Singapore citizen spouse) subject to them selling their current residential property within six months from the date of a new purchase or TOP of a new property (whichever is applicable). The Government should extend this privilege of a refund of ABSD to Singapore citizens who are not married couples subject to them meeting all other relevant conditions. There is no good reason to disallow valid requests for a refund of ABSD from Singapore citizens who either own residential properties singly or co-own them with their parents or siblings.
Concluding remarks – time to recalibrate
The Government has hinted that property cooling measures are not likely to be rolled back anytime soon since property prices have not yet seen a “meaningful correction”. Published URA statistics indicate that private property prices have descended for four successive quarters in the last 12 months. Further, anecdotal evidence suggests that prices have fallen more significantly in the high and mid end segments. In the interests of all, it is imperative that the Government recalibrates the property cooling measures so as to ensure a sustainable property market in the long run and a softer landing for the real estate sector.
*An edited version of this article first appeared in The Business Times Singapore on 21 November 2014.