In an attempt to moderate private residential property prices, the MAS has since 2009 implemented a series of restrictions on financial institutions and property owners. In Sept 09, interest absorption loans were removed and buyers were required to start paying mortgages on their uncompleted properties at the time of purchase. Feb 2010 saw the imposition of the Sellers Stamp Duty for properties sold within the first year of purchase and the lowering of the Loan-to-Value ratio for all loans disbursed by financial institutions. In August that year, the SSD was extended to properties sold within 3 years of purchase and LTV for second loans decreased to seventy from eighty percent.
Despite that, property prices continued on their upward trajectory and just five months later, the SSD was slapped on for transactions of up to four years and increased by more than five times to 16% for properties bought and sold within a year. LTV was reduced by a further ten percent and a loophole was plugged when the LTV for non individual purchasers was reduced to 50%. On the 8th December 2011, in a move hailed by many as the most drastic ever, the MAS imposed an Additional Buyer Stamp Duty (ABSD) of 10% on all foreign buyers, and 3% on all second property transactions for PRs and third property transactions for Singaporeans.
The PAP Government walks a tightrope on the issue of housing in Singapore. Its policy of allowing citizens to purchase flats at subsidized prices has resulted in a home ownership rate of 88.6% home ownership for the nation, one of the highest in the world. At the same time, an asset enhancement policy has seen the price of public housing, and consequently the net wealth of people, increase many folds over the past decades. The conundrum is this – a drop in house prices will see many owners in negative equity, but an unmoderated, runaway increase will see many citizens being priced out of the market, resulting in a host of unhealthy social issues and unhappiness on the ground. Neither situation is desirable, and timely intervention is required to keep market forces in check.
This reality is made more tricky by the appointment of Ben Bernake as the Chairman of the US Federal Reserve. Also known as ‘Helicopter Ben’ after he swore by Nobel Prize winning economist Milton Friedman’s ideology that deflation and economic anemia could be starved off by printing and dropping more money onto the population by a helicopter, he was the responsible for the series of Quantitative Easing measures. By purchasing Government bonds from institutions, corporations and pension funds, the Fed is able to increase demand for bonds, thereby reducing their yield and hence making savings less attractive and spending more so. At the same time, the Fed hopes that the new found ‘wealth’ of these institutions will filter down to masses, reduce the unemployment rate, boost overall confidence, and eventually for the people to spend their way out of a recession. Unfortunately, with the US economy still spluttering along and the perpetually weakening US dollar, many institutions and individuals remain unconvinced and cynical about investing their new found wealth in the United States. They flee the continent with money still warm from the printing presses in search of more attractive yields and safer harbors. The woes of the EU ensured that a sizable portion of this ‘hot money’ ended up in Asia and our shores. Money flowing into our economy inevitably ended up in the property market.
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As punitive as it might seem, the ABSD that was conjured up in Dec 2011 to contain the effects of QE2 barely made a dent in buying interest and all it had to show for after 9 months was the additional $500 million in the Government’s coffers. After a period of muted activity, foreigners have returned to the market with a vengeance. On 1st October 2012, URA announced flash estimates for the residential property index. The index rose from 206.9 at the end of the Q2 2012 to 208 at the end of Q3. This represented an increase of 0.5%, a tad higher than the previous 0.4% increase in Q2. Despite transaction volumes falling by 7.3%, which could be attributed to the ‘Hungry Ghost Month’, non landed resale home prices increased by 3.2% to reach $1156. This situation will be exacerbated in time to come, with the Fed announcing on 14th Sept that an additional 40 billion usd will be ‘printed’ every month and injected into the system for as long as it is required to give the American economy a boost, effectively kickstarting QE3.
On 6th October 2012, the Monetary Authority of Singapore (MAS) announced the following cooling measures for the property market.
1. The absolute limit on all residential loans tenures will be 35 years.
2. Residential loan tenures exceeding 30 years or extending beyond the borrower’s 65th birthday will be subjected with significantly tighter Loan-to-value limits. The LTVs are 40% for a buyer with no outstanding loan and 60% for a buyer with an existing home loan.
3. LTVs for non-individuals will be reduced from 50% to 40%.
This set of new regulations comes as a radical departure from the norm. All previous editions of the cooling measures have tried to address and arrest the issue of speculative demand driving up the market. The implementation of SSD prevented punters from flipping properties for a profit indiscriminately. Constant downward revision of LTVs for subsequent purchases and non-individuals reduced the purchasing power of property investors and at the same time give first time (genuine) owners a slight advantage in terms of financing assistance. The ABSD took that to a higher level and made a robust attempt to contain foreign money inflow.
A LTV penalty on loans more than 30 years in tenure will have an immediate impact on all homeowners, be it a first timer buying for his or her own stay and to start a family, or a seasoned property investor looking for greater yields and capital appreciation. Imagine a scenario where a couple aged 25 are looking to buy their first property. While previously they could afford extend the loan to 35 or even 40 years, they now have to contend with a 30 year loan should they want to borrow up to 80% of the purchase price. Their options now look like this.
For a $700, 000 purchase at interest rates of 1.5%.
Before 6 October 2012
1. 40 year loan, 80% LTV. Monthly $1552 Cash upfront $140 000
After 6 October 2012
1. 30 year loan, 80% LTV. Monthly $1932 Cash upfront $140 000
2. 35 year loan, 60% LTV. Monthly $1286 Cash upfront $280 000
With the newest implementation, assuming the buyers can only afford a 20% downpayment on their property, monthly installments grow by 25% with a ten year reduction in loan tenure. The alternative would be to stump up another 20% of the purchase price and taking out a loan for the remaining 60%, hence reducing the monthly repayment. Both would be seen as more prudent financing for a property, but neither options would have genuine home buyers jumping with joy. The end result is a reduction in nett demand.
The move is unprecedented because it is the first time MAS regulations are affecting initial home owners. I am not advocating incriminate extension of loan period with blatant disregard for financial prudence. I am not saying that a 40 year loan tenure is necessarily good. The point of contention here is that the MAS, via it’s policy, decided not to spare this group of buyers from the measures when they could have easily inserted their usual caveat to exclude first time home owners. Much has been said about HOW the measures will affect the property market but few have tried to delve into the WHY (other than to counter QE3), and the justification for the MAS to temper with genuine demand. If we look from that direction, we can extract a few inferences.
1. The MAS has lost the plot – they have implemented this policy without proper considerations of all factors and have overlooked this segment of the market.
2. The government has given up on curtailing the influx of foreign investments. It is almost as if they throw their hands up in the air and say we give up, we cannot control foreigners coming in, they are going to outspend us no matter what we do and it is better for the economy as a whole to keep foreign interest strong rather than have them withdraw. But on the other hand we cannot let prices run to an obscene level so let us work on all the other segments. And if first timers are a contributing factor to the price increase, we will rein them in – to hell with genuine demand.
3. A property bubble is forming. With the information and data they have, they see that Singaporeans are over-stretching themselves and committing to too much debt. The low interest rate environment have made many complacent with their purchases. They see that five sets of measures to curtail speculative activity have only achieved limited success and with the situation growing more dire day by day, the authorities have decided to apply more broad based policies – in part to dampen demand, and in part to protect against an ugly outcome if the economy decides to go belly up or when there is an exodus of hot money from our shores. The noble intention really is to prevent buyers caught up in the frenzy right now from being left standing naked after the tide recedes.
Personally I think it is a combination of all three. What’s your stand?