It seems that the government had thrown yet another hand grenade to the private property market by announcing further housing cooling measures (ABSD) on 5 July 2018, after the closure of the stock market.
On hindsight, the government may be forced to implement new ABSD rates because developers had refused to lower the prices for private properties even after the Qualifying Certificate and Developer ABSD were implemented several years ago. As entities, developers are also subject to the ABSD rate of twenty-five percent, an increase from the previous fifteen percent. Developers may apply for remission of this 25% ABSD, subject to conditions (including completing and selling all units within the prescribed periods of 3 years or 5 years for non-licensed and licensed developers respectively).
Though I am not planning to buy a second property nor am I vested in any SGX stocks, the latest round of cooling measures certainly came as shocking to me. This is because the new cooling measures also targeted existing private property owners through the revised LTV ratios. Whether the new measures that included an increase of ABSD rates and lower LTV ratios would be effective or is well-intended is beside the point. The issue is the timing.
99-to-1 Tenancy in Common
The stunning new ABSD rates certainly roiled the stock market, with major property stocks like Oxley, Capitaland, UOL and City Development all suffering from meltdowns in share prices. Bank stocks like DBS and OCBC were not spared either as they are the market leaders for local home loans. It seems that the ones who got the last laugh are those who opted for 99-to-1 Tenancy-in-Common as no matter what the ABSD rates would be, they would be immune.
Previously, I have written an article on 99-to-1 Tenancy-in-Common. Those who have structured their Manner of Holdings for their current property can opt to leverage on this strategy and buy back their partner’s minority share. In doing so, their partner can then proceed to buy another property without having to pay the ABSD.
Although there are obvious benefits in 99-to-1 Tenancy-in-Common, there are significant risks to look out for. They are covered in that article. Those who wish to know should sign up as member of SG Wealth Builder and access the content. Always remember that when it comes to investment, the golden rule is to make money at the point of purchase, not at the point of selling.
Too fast, too furious?
Indeed, private property prices had gradually declined for 4 years and rebounded only in third quarter of 2017, increasing by 9.1% over the past one year.
However, the bottoming out of the private property market merely reflected a recovery of the market. Frankly, it should not be seen as a formation of a property bubble. Nothing like the Hong Kong property market for sure.
Furthermore, given that the period for the run up of the private property prices was only nine months, the need to implement new curtailing measures is quite questionable. It raises the question on whether it is too early to implement pre-emptive strikes to tame the market sentiments.
To be specific, does the following graph from URA reflect a sign of housing bubble or recovery? I leave it to you to draw your own conclusion.
In my view, it is too premature to claim that the private property market is overheated and thus warranted further cooling measures. In any case, I do think that the existing framework of Total Debt Servicing Ratio (TDSR) is adequate enough to mitigate the risks of excessive borrowings among Singaporean home-buyers. So I do think that the latest round of cooling measure is a bit of regulatory overdrive.
Source: Ministry of National Development
For Singaporean buyers of second property, the ABSD would rise by 5% to 12% and for third and subsequent property, the ABSD would increase by 5% to 15%.
Any form of tax is a dead-weight loss to the supply and demand curve. Therefore, the hike in ABSD would surely depress the demand side of the house. According to URA, as at the end of 1st Quarter 2018, there was a total supply of 40,330 uncompleted private residential units (excluding ECs) in the pipeline, compared with the 36,029 units in the previous quarter.
With the expected drop in demand and looming supply glut, the private property prices would likely to dive again.
Source: Ministry of National Development
The Blame Game
The new ABSD rates would certainly rile the property industry players, though they were likely to have been briefed on the changes. As the stock market had been lacklustre in recent months, the timing of the new ABSD is really bad as it would surely knock the wind out of property and bank stocks.
But who is to be blamed for this fall out? After all, for the government to raise the ABSD rate, they must have basis. From the housing data, it certainly seems that the basis is there for the government to act. Thus. the developers only have themselves to blame for not biting the bullet by lowering the selling prices of their existing completed projects. Now, they are paying the price for their greed.
Another aspect of the new policy is the lowering of Loan-to-Value for all housing loans. Effectively, regardless of whether it is the first or subsequent property, you can borrow 5% lesser from the banks. The tightened LTV limits will apply to loans for the purchase of residential properties where the OTP is granted on or after 6 July 2018.
While the reduction of the LTV is unlikely to significantly impact borrowers at the moment, it could impact the home loan market. Thus, the collateral damage would be on the local banks. Among them, DBS is the leader, with market share of 31%.
With the additional housing cooling measures, property and bank stocks would come under scrutiny and are likely to face pressure when the stock market opens. In the next few articles, I will do another more in-depth analysis on the fall-out from this unexpected housing policy. Till then, sit back and enjoy the show.
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