After months of speculation, the Singapore government announced a package of measures to cool the private residential and HDB resale markets.
The private housing prices have gone up 9% and HDB resale flats have also gone up 15% since 2020 Q1.
The government learns over time. This time the cooling measures were announced near or at midnight so that no one can secure options to purchase (OTP) on the last day.
Just want to go through a few quick thoughts.
Singapore Property Cooling Measures Aimed to Increase Huddle Rate for Speculation and Growth
This infographic is rather comprehensive to educate us on the changes:
If you wish to read more, here is the official write-up by the Ministry of National Development.
In general, the additional buyer stamp duty (ABSD) will increase across the board except for first-time residential property buyers who are Singapore citizens and permanent residents.
ABSD will go up by 40 to 66% from previous levels.
The total debt servicing ratio (TDSR) will be reduced from 60% to 55%.
Lastly, if you are purchasing an HDB flat with HDB loans, your downpayment will increase from 10% to 15%. If you are taking private financial loans, the minimum downpayment is still the same at 25% for the first property.
If we look at the policy as a whole, if you wish to buy residential property for living, there is no effect. The biggest thing that will be affected would be the higher loan-to-value for HDB loans (TDSR does not affect HDB)
The ABSD increases the cost of capital or the huddle rate for the property deal to have high profitability for investors.
It reduces your margin of safety for property investments.
If we understand the Singapore property landscape, the market is very much controlled by the cooling and loosening measures, the levers that the government can pool to control the rate of growth.
The market may not collapse but the rate of growth would be highly controlled. You wonder if it can be higher than the rate of growth in Singapore.
A higher huddle rate and less margin of safety means that
- You got to search for mispriced deals to make sure you gain a good total return.
- You really need to separate the real quality new purchase from the new launches that masquerade as quality purchase.
The first cooling measure of this cycle started in 2013 (8 years ago) and it is still ongoing.
So what they are saying is that if you are a property investor or someone who wish to park money out of your home country and are willing to pay a higher cost of capital for a safe political climate, the stable SGD currency, then go ahead. We are not stopping you from investing.
If you are a Singaporean or PR that has the ability to purchase an investment property in this climate, then also go ahead.
Ultimately, the government might find that this is the best way to effectively collect wealth tax from the richer group of people.
In my previous posts explaining how to determine private property return, a common denominator to be used to compare against other investments is to measure your property based on the internal rate of return or XIRR:
The XIRR is the “compounded annual interest rate” that you earn over a period of time, where you invested a stream of cash outflow into an investment asset and gain a stream of cash inflow from an investment asset over a period of time. It is ideal to determine something like property investment where there is a stream of cash inflow and outflow.
The chart above was taken from the previous post and models a private property that grows at a 3% compounded rate of return with an initial net rental yield closer to 2.4% a year.
Notice that the XIRR in the initial year tends to be higher, then it starts going down and despite the time period, your XIRR stabilizes to 5% a year.
If your rate of return is lower at 1.5%, then your XIRR stabilizes to 3.5% a year. So the long term return of your property is very much tied to:
- Long term growth rate
- Net rental yield
The net rental yield is based on your purchase price, and the annual outlay that you have to put in to maintain the property, and the annual costs. You probably cannot change the growth rate much.
What the government is trying to do is to “flatten” that XIRR that goes from 8.4% to 5% fast.
The XIRR can be higher than 8.4% through:
- High leverage
- Greater discount versus fair value
- Lower initial costs
- Combination of the above
You can get the high XIRR by making an astute purchase with leverage when the environment is conducive in a short amount of time.
The government’s cooling measures are to stop this by:
- Reducing the leverage. If you purchase subsequent property, the downpayment is higher. TDSR also means you need to put in more money to reduce the loan amount.
- Raising initial costs. ABSD is to increase your initial costs.
As long as the government don’t pull off these two levers, it forces investors to hold the property longer.
The longer you hold the property, the XIRR you are going to get is the terminal XIRR (either 2% to 5% a year), which is greatly determined by the long term rate of growth and the net rental income dynamics.
Your property becomes a long term bond really because a long term bond has no capital appreciation and its return is greatly correlated by the growth of the country.
Decoupling as a couple to bypass ABSD looks like an Option still but How would a 5% Reduction in TDSR change?
The one thing that would really kill the market I feel is if government stops couples from bypassing the ABSD by decoupling.
This means for a married couple to sell their share of the private property to one spouse, and the other spouse can purchase property without paying ABSD.
It seems the government did not announce any measures to curb this. If they did, it will really dampen the demand.
However, the government did reduce the TDSR from 60% to 55% to encourage more prudence in our debt servicing.
If a couple were to decouple, either they have to pay a substantial amount of the property in cash (which kills the leverage yield, which is what the government want) or that the income of the spouse needs to be high enough.
Passing the TDSR now looks more daunting but how much would a 5% change?
Suppose we fixed the following variables:
- Interest rate: 3.5% (that is the interest rate used to calculate the TDSR)
- Your Gross Salary
- Loan tenure: 25 years
- Downpayment: 25%
Suppose we talk about 3 different bands of property prices: $1 mil, $1.5 mil, $2 mil:
|Property value||Loan (60% TDSR)||Loan (55% TDSR)||Difference in Loan||Minimum Salary|
|$1.5 million||$1.13 mil||$1.03mil||$100k||$9386|
|$2 million||$1.5 mil||$1.37mil||$130k||$12,515|
Given the same salary, you can take a lower loan quantum, which reduces the leverage factor.
It is still doable if you want to but it is equivalent to paying a higher downpayment.
The quantum of TDSR change does not look significant to deter those who are higher in income but for those who have lower income, it is tighter.
Perhaps this is what they want.
Would This Dampen Property Demand? Perhaps It Will Depend on Which Segment We are Discussing
It feels to me the ABSD is getting a bit crazy. And to be fair the government can always pull that down.
Some may feel that they should have listened to their agents and bought the property before the property measures are put in place.
By doing that, then they won’t be affected by the new ABSD and TDSR.
However, remember that to profit from the investment, you need a healthy demand to buy the property of you next time.
So the question is if you buy a property today, would your juniors 10 years younger than you have the earnings ability to buy the property off you?
That will depend on salary growth.
Some of my friends cannot fathom the next generation being able to afford a resale condo, yet they expect to be bullish on their property investment.
How is that possible?
I think there is still going to be a healthy demand from North Asian Money and Indonesian Money for certain property segments.
But for other segments, we may have an environment that most are unwilling to sell unless they are in profit.
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