Tuesday, September 14, 2010

Draconian Property Rules

This is probably only my second post on property, as I am still a greenhorn who is observing the market and trying to understand the intricacies of this very interesting investment class. The reason for this (timely) post is mainly due to the recently announced new property cooling measures by Mr. Lee Hsien Loong at the National Day Rally on August 30, 2010. These measures were the direct result of the relentless increase in property prices since the middle of 2008, when the global financial crisis had hit the Singapore economy with full force. The Government had witnessed HDB resale prices moving upwards and hitting new all-time highs, even as manufacturing and output dropped off a cliff. This apparent dislocation between economic stagnation and property price rises had more than one person complaining bitterly, while speculators were eagerly loading up on properties with the hope of making a quick buck. In spite of two rounds of cooling measures implemented by the Government in the last 1.5 years, including increase the Minimum Occupation Period (“MOP”) for resale HDB flats from 1 year to 3 years, prices continued to escalate and for 2Q 2010 had hit new all-time highs. The cacophony of voices (mainly from young couples who were getting married and were buying HDB for the first time) asking for some action to be taken grew louder as the months passed; which culminated into the new measures announced close to the tail end of August 2010.

So just what are these measures? First off, those who are holding a private property have to sell it off within 6 months should they buy a non-subsidized HDB flat; and this is one of the most stringent laws which I had heard of to date. This effectively shuts people out from buying a resale HDB flat if they own a private property, as they will then be “forced” by the law to dispose of their private property. I guess this rule was intended to chase out speculators who intended to purchase resale HDB flats for investment or rental, rather than for genuine occupation purpose. However, this creates problems for people with genuine intentions to buy another flat for their parents or children to stay in, for example. Under such a rule, they thus cannot register the resale HDB under their name or they would be forced to give up their private property. Hence, the resale HDB flats have to be purchased in another person’s name. This can be onerous and troublesome even if the funds are not coming directly from the registrant’s account, and would cause headaches for those intending to buy non-subsidized HDB for their relations (assuming their income busts the S$8,000 ceiling).

There is also an extension of the 3-year minimum occupation period (“MOP”) to 5-years for non-subsidized HDB flats to dampen demand for those who are not in urgent need of housing. This in turn was an increase from the 1-year period and is the second increase in MOP in as many years. This move is pretty drastic as it means that speculators or “flippers” will need to hold for at least 5 years before they can dispose of an HDB flat, which may frustrate their attempts to “make a quick buck” from the transaction (one year is not a long period). However, this may also penalize those families who wish to upgrade to private property and are “barred” from selling their resale HDB flat which they had purchased within the five-year MOP. These may be genuine upgraders who need more space for their growing family or even to stay together with their parents. So this knife is double-edged in that it will slice through speculators’ plans as well as those of genuine home-buyers.

The seller’s stamp duty holding period has also been increased from 1 year to 3 years. Note that previously, the Government had acted to cool the property market by imposing a seller’s stamp duty if the property were to be bought and sold within 1 year. Originally, there was no such stamp duty payable and only the buyer’s side would be paying stamp duties; but the Government wants to make it more difficult for speculators to profit from such short-term transactions and so has narrowed the margin for profit with the imposition of this tax. Incidentally, there were some articles written in Straits Times (I think it was a Sunday edition) which compared the potential profits from buying/selling a property before and after the stamp duty rule kicked in. Since most property speculators use leverage to magnify their gains, a stamp duty of say 3% may significantly reduce profits and magnify losses when leverage is employed.

And the final, probably most drastic measures involve those of financing and LTV (Loan to Value) limits. If you have an existing housing loan, and intend to take up another to buy another property, the minimum cash payment you would have to cough up increases from 5% to 10% of the valuation limit; and the LTV limit goes down from 80% to 70%. What this means, in simple layman terms, is that buyers have to cough up higher cash amounts as compared to before, and they can only borrow up to 70% of the property’s value, which also implies higher cash/CPF upfront payment. To give an example, suppose a buyer would like to purchase a S$1 million condominium. Under the old rules, the buyer would be able to borrow up to S$800,000 and would have to pay S$200,000. Of the S$200,000, just S$50,000 needed to be in cash while the remainder (S$150,000) can be in CPF. Under the new rules, however, just S$700,000 be borrowed, while the other S$300,000 has to be paid up front by the buyer. Of the S$300,000, S$100,000 needs to be in cash while the other S$200,000 can be from CPF OA. So this represents an increase of S$50,000 cash and another S$50,000 in CPF OA needed under the new rules. Assuming a person is cash rich and has a good CPF balance, this should not pose a problem. However, for those who purchased and intend to flip, they may not wish to cough up the additional requirements; and it may also erode their ROI as the gains (if any) are now divided by a larger denominator!

So I would conclude that the latest set of measures do seem to be harsh on speculators, and it is likely (but not completely certain) that housing prices are poised to fall as a result. However, Singapore being Singapore, we might just witness a further rise in housing prices for whatever reasons; and the Government may need to mete out even more forceful measures to stem the relentless price increases.

10 comments:

Market Uncle said...

HDB flats are probably majority Singaporeans' one and only asset. Its not easy to prick a bubble while preserving their value at the same time. Even harsher rules can be implemented if the bubble can't be tamed, e.g. even higher cash downpayment.

Musicwhiz said...

Hi Market Uncle,

I've read your excellent articles on HDB, housing and property too, keep it up!

Yes, I think the Govt will probably resort to that if the current measures still do not work. Higher down payment and the dreaded capital gains tax will put a swift dampener on prices, I believe.

Cheers,
Musicwhiz

IMSavvy said...

Hi Music Whiz,

I am wondering if you are interested in blogging for our financial webpage. Appreciate if you can revert to my email address: wendy.wl_poh@cpf.gov.sg.

Thanks!

Drizzt said...

jackpot bruther! blog for cpf! i sarpok u

Drizzt
Investmentmoats.com

Musicwhiz said...

Hi IMSavvy @ Wendy,

Thanks for the offer! Have dropped you an email at the address which you specified.

Warm Regards,
Musicwhiz

Musicwhiz said...

Hi Drizzt,

Haha! You are quite funny lor.... :P

Let's see how it goes, shall we?

Thanks for the encouragement!

Musicwhiz

Drizzt said...

nothing funny about that brudder. been reading ur posts often and it shapes my buying decisions as well. cheers.

IMSavvy said...

Hi Musicwhiz,

I apologise, please kindly send me an email to wendy_wl.poh@gov.sg. Please pardon me for typing too fast.

Musicwhiz said...

Hi Wendy,

There seems to be a missing portion in your email address. You typed @gov.sg which is incomplete, I think. Kindly clarify thanks.

Regards,
Musicwhiz

Musicwhiz said...

Hi Drizzt,

Ok, no worries. Thanks for visiting and also for the support!

Regards,
Musicwhiz