Say you’re hosting a party and you’re all out of ice and it’s not convenient to head down to a 7-Eleven or a supermarket to buy more. Instead, you put as many containers of water in your freezer as you can and lower the temperature to as far as it can go. Impatient, you keep checking every few minutes to see if the water’s frozen yet. DON’T DO THAT.
Every time you open the freezer to check, you end up stalling the process, and the water will end up taking longer to freeze. You have to be patient. It’s the same thing with Singapore and the property cooling measures introduced over the past two years.
But… the property market has cooled!
No one’s debating that. Singapore’s private home prices have dropped for a seventh consecutive quarter. That means prices have been dropping steadily for almost 2 years – the longest streak since 2002. But they’ve not fallen enough.
Remember, before the cooling measures were introduced, property prices had ballooned 60% over just 3 years. Analysts are saying it prices need to drop further – by about 15%. Currently, prices have only dropped 6.7% since 2013, so there’s still a long way to go.
So, if we can’t remove them, can we at least tweak them?
Well, first we’ll have to see why the cooling measures were implemented in the first place. Only by understanding what they were intended to do can we be objective in suggesting changes. The three measures we’ll be looking at are: Seller’s Stamp Duty, Additional Buyer’s Stamp Duty, the Mortgage Servicing Ratio and the Total Debt Servicing Ratio. Let’s go through them one by one.
1. Seller’s Stamp Duty
The Seller’s Stamp Duty, or SSD, was tweaked in January 2011, increasing the penalty of selling a residential property anytime between the first and fourth years of purchase. Right now, the SSD works as follows:
- Why was it implemented? To discourage speculation and flipping of residential properties.
- Has it worked? Definitely. The best indicator that speculators are fleeing the Singapore residential property market is the consistent drop in the number of sub-sales. Sub-sales are essentially purchases that happen before a private property is constructed and ready to be occupied. Currently, sub-sales make up about 3.9% of all sales transactions, compared to 9.1% in 2010 and 11.6% in 2009.
- How should it be tweaked? Ultimately, it depends on whether waiting for 5 years before selling a property would be considered too long a wait. One suggestion would be to reduce the SSD period to only apply to the first three years, but increase the stamp duty rate for the first and second years. This way, it’s clear that only speculators are being penalised, not residents who have the ability to upgrade in a shorter time.
2. Additional Buyer’s Stamp Duty
The Additional Buyer’s Stamp Duty or ABSD was introduced in December 2011. It penalises the purchase of additional properties by Singaporeans, as well properties purchased by Permanent Residents and foreigners. This is how it currently works:
- Why was it implemented? To discourage foreign investors from buying residential properties in Singapore and inflating prices, as well as to discourage Singaporeans from buying multiple properties.
- Has it worked? Yes. The ABSD continues to significantly reduce the volume of property transactions. Only 495 private homes were sold in August, compared to 1,611 in July.
- How should it be tweaked? Because the ABSD is mainly supposed to discourage foreign investment, some are calling for the ABSD rates to be relaxed for Singaporeans. However, there’s a danger that any change in the ABSD, even removing the penalties for Singaporeans, would still end up affecting Singaporeans in general.
3. Mortgage Servicing Ratio
The Mortgage Servicing Ratio or MSR was implemented to prevent buyers of HDB flats and Executive Condominiums from purchasing units that were beyond their financial means. It does this by limiting your monthly mortgage repayment to 30% of your monthly income, regardless of whether the loan is from HDB or from the bank.
- Why was it implemented? To ensure that home buyers and sellers aren’t able to inflate prices of HDB flats and ECs on the resale market. By reducing the loan amount that a potential buyer can access, sellers weren’t able to include high Cash-over-Valuation amounts on their property, because then they’d run out of potential buyers.
- Has it worked? Yes, but perhaps a bit too well. Together with the Total Debt Servicing Ratio, which we’ll talk about next, it’s essentially restricted home buyers from being able to choose a home from a larger pool of options.
- How should it be tweaked? With the greater number of flats being launched across the island, increasing the MSR from 30% back to 35% – what it was in 2013, would go a long way in giving more Singaporeans the ability to choose their HDB home. As it is, more Singaporeans are cancelling their flat applications because of the MSR.
4. Total Debt Servicing Ratio
Arguably the most effective cooling measure over the past two years since its implementation, the Total Debt Servicing Ratio or TDSR framework prevents Singaporeans from overextending ourselves financially. We are only allowed to borrow up to 60% of our monthly income, and not just for our home loans, but for all our outstanding loans and debts, including car loans, credit card debt and renovation loans.
- Why was it implemented? To avoid the kind of property crisis that has happened in other countries, the TDSR prevents Singaporeans from borrowing what they cannot realistically repay. This prevents Singaporeans from getting to too much debt and risk losing their homes.
- Has it worked? Extremely well. The introduction of the TDSR saw property prices dropping as more and more buyers had their options restricted.
- How should it be tweaked? The TDSR should definitely be here to stay. Encouraging financial prudence in Singaporeans will go a long way in avoiding the repercussions of debt and bankruptcy. The argument here could be defining what makes up a person’s monthly income. Currently, only 70% of bonuses, commissions, rental and other variable income can be included in monthly income calculations.