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Additional Buyer’s Stamp Duty rates and Loan to Value limits revised to prevent property bubble burst, says National Development Minister

The Singapore government has revised Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits on purchases made on residential property as a preventative measure against a catastrophic property bubble burst.

In a joint media release by the Ministry of Finance, the Ministry of National Development and the Monetary Authority of Singapore, titled Raising Additional Buyer’s Stamp Duty Rates and Tightening Loan-to-Value Limits to Promote a Stable and Sustainable Property Market, dated 5 July 2018, the Government stated that the adjustments were made as a measure to “cool the property market and keep price increases in line with economic fundamentals”.

“There is a large supply of units coming on stream and interest rates are going up. We want to avoid a severe correction later, which can have more destabilising consequences. Hence, we are acting now to maintain a stable and sustainable property market,” said National Development Minister Lawrence Wong.

Table 1 shows the revised ABSD rates for residential property. Source: Monetary Authority of Singapore

With the adjustments, ABSD rates for Singapore citizens buying their second home will be raised from 7 per cent to 12 per cent.

Rates for Singapore citizens buying their third or subsequent home will be raised from 10 per cent to 15 per cent, a 5 per cent increase from the original 10 per cent.

Singapore Permanent Residents (PRs) buying their second property will have to pay a higher ABSD rate of 15 per cent, which is also 5 per cent increase from the original 10 per cent.

Foreign residential property buyers will also experience a 5 per cent increase in the ABSD rates, from 15 per cent to 20 per cent.

However, there will be no change in ABSD rates for Singapore citizens or permanent residents buying their first property.

Table 2 shows the revised LTV limits on housing loans. Source: Monetary Authority of Singapore

LTV limits will be lowered by 5 percentage points for all housing loans granted by financial institutions.

However, these revised LTV limits do not apply to loans granted by the Housing and Development Board (HDB).

Previously, the LTV limit for a buyer’s first housing loan was 80 per cent.

The limit will be 60 per cent if the loan tenure was more than 30 years, or extended past age 65.

This limit will be cut to 75 per cent, or 55 per cent respectively.

Similarly, the limit for a second housing loan will be reduced from 50 per cent to 45 per cent.

The limit will be cut from 30 per cent to 25 per cent if the loan tenure is more than 30 years or extends past age 65.

There will be a transitional provision for cases where an Option to Purchase (OTP) has been granted by sellers to potential buyers on or before Thursday, and this OTP has not been varied on or after Friday.

For such cases, the previous ABSD rates, instead of the revised ones, will apply if the OTP is exercised within three weeks of the announcement or the OTP validity period, whichever is earlier.

The joint statement noted that private residential prices began rising in the third quarter of last year after declining gradually for almost four years between mid-2013 and mid-2017.

Stocks dropped shortly after the implementation of new measures

The day after the revisions to the rates and limits were announced, the Straits Times Index dropped 2 percent, according to Bloomberg.

Stocks including those of CapitaLand Ltd., Keppel Corp (owns Keppel land) and Wing Tai Holdings Ltd. also dropped.

Many of these are among developers that have added significantly to their Singapore residential landbanks, according to KGI Securities (Singapore) Pte. Ltd.

DBS, Southeast Asia’s biggest lender, fell 2.6 percent.

“This is a preemptive move by the government to cool down the market before it gets too hot,” Irvin Seah, an economist at DBS Group Holdings Ltd., said in an interview.

A flash estimate from the Urban Redevelopment Authority on 2 July stated that private residential prices rose by 3.4 percent in the last three months.

That builds on a 3.9 percent gain in the first quarter, which was the biggest gain since 2010.

Financial and property analysts “taken by surprise” by the adjustments

Some analysts found the Government’s latest measures regarding the property bubble issue surprising, as the property market is already showing some signs of slowing down, from their observation.

According to TODAY Online, analysts said that the introduction of an upfront cost for developers is targeted at the “euphoria” surrounding recent land acquisition bids, be it en bloc or government land sales, which have seen bid prices hitting record-highs.

Executive director of real estate investment firm ZACD Group, Mr Nicholas Mak said that “not only would the 5 per cent ABSD increase the cost of land acquisition, it would also reduce the bullishness of tender bids, and deflate the en bloc sale market”.

“To me, it is quite shocking,” said Christine Li, senior director of research at real estate services firm, Cushman and Wakefield.

However, Ms Li said that developers were not overly concerned about acquiring land, as generally they have no problem with meeting the five-year deadline of selling off all their units before applying for the remission of the 15 per cent ABSD.

“There will be a knee-jerk reaction in property stocks,” she said, according to TODAY Online.

“If this development continues, I think the property market would still go back to the price trajectory that the Government hoped for,” she added.

Others like Mr Ku Swee Yong, chief executive officer of International Property Advisor, said that they were more surprised by the timing of the measures, which were announced just a day after MAS’s managing director Ravi Menon sounded warnings on the property market.

On Wednesday, Mr Menon advised developers, residential private property buyers, and banks to act prudently amid “euphoria” in the current property market.

“We’re sounding cautions to everyone to be sober, to be balanced and exercise good judgement,” he said at a briefing on the central bank’s annual report.

Earlier on Thursday, DBS chief executive officer Piyush Gupta referred to Mr Menon’s remarks, and said that the possibility of the Government introducing cooling measures “can’t be discounted”.

“The MAS is getting nervous… And so, from my understanding, is the URA,” said Mr Gupta at a luncheon on the bank’s market outlook for the second half of 2018.

Other than what seemed to be peculiar timing, analysts were also taken aback by the severity of the cooling measures.

With the property market only beginning to recover, Mr Mak said “these draconian measures are like … strangling the baby in the cradle”.

Changes not entirely unprecedented, several analysts argued

However, several analysts believe that the adjustments made by the Government were not entirely unprecedented, and in fact, might be beneficial in safeguarding the stability of the property market in Singapore in the long run.

Mr Ku pointed out that there are some benefits, especially for the banking system, as “it prevents the banks from being overly invested in the real estate sector”.

Mr Desmond Sim, head of research for Singapore and Southeast Asia at CBRE, said that the new measures will hamper down speculative buying of residential private properties in the country, and will “curb exuberance on the land cost.”

Head of Asia Country Risk at BMI Research, Chua Han Teng said that “The move by the Singapore authorities to tighten macro-prudential measures on the property market is a clear sign that they believe that the current recovery is overextended, and we expect these policies to dampen speculative investment demand and weigh on prices over the coming months,” according to The Star Online.

“It’s definitely a signal by the government that they are serious about managing the property market,” said Joel Ng, an analyst at KGI Securities (Singapore) Pte. Ltd.

“The measures are there basically not to kill demand, but to make sure that the demand is genuine,” he added.

It is generally agreed upon by analysts that the new measures will halt the rise of residential private property prices in the near future.

However, prices would not decline immediately, said Ms Li, as the property market was already slowing down before the measures were announced on Thursday.

The Real Estate Developers’ Association of Singapore (Redas) said on 6 July that there is “no rationale” for the new measures that have been implemented with regards to the Singapore private residential property market, according to TODAY Online.

Sharing the same reasoning as Mr Mak earlier, the Association argued that this is because the local property market was already in the midst of recovery.

Redas said it also “does not see the rationale” of the additional non-remittable 5 per cent ABSD imposed on developers buying residential properties for development.

This is because developers are already limited by financial constraints and  “tough and unfriendly business policies”, such as the existing 25 per cent ABSD, which licensed developers can request to be remitted only if they manage to sell off all units within the five-year deadline.

Netizen Jay Lee supported the Government’s new measures, saying that:

I think the government is right. With a trade war looming over the horizon, it is very likely [that] the world economy might go into a deep depression. We certainly do not want people to over-invest in property, and later find [out] that they are unable to service their loan during a recession.