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COMMENTARY

Policy tweaks to ensure a softer landing

By Lee Liat Yeang

21 Nov


THE calls to ease the property cooling measures affecting the Singapore residential property market have gained intensity amid news of tepid property sales and falling prices. Although the government has said that prices have yet to reach a "meaningful correction", it may be worthwhile considering recalibrating some of the cooling measures, to ensure a sustainable property market in the long run and a softer landing for the real estate sector.

Already, private property prices have declined in the past four successive quarters. Further, anecdotal evidence suggests that prices have fallen more significantly in the high and mid-end segments. If the trend continues and gains momentum next year, it may create a diminishing wealth effect which can translate to hurting consumer confidence and spending.

In view of these, here are some suggestions on possible tweaks to existing policies.

Financial control measures

These comprise Total Debt Servicing Ratio (TDSR) framework of rules and Loan-To-Value (LTV) limit rules.

The TDSR framework regulates banks' approval of all property loans by requiring that the borrower's monthly total debt obligations do not exceed a specified percentage (now set at 60 per cent) of his total gross monthly income. While the TDSR framework should stay, the government should consider relaxing some ancillary rules within it. For instance, the government should allow 100 per cent (instead of the maximum 70 per cent) of the monthly rental income received by the borrower to be considered as part of his gross monthly income. After all, monthly rental income is contractual and non-discretionary and therefore should be accorded no less significance than monthly employment income.

The current LTV limit rules impose a LTV limit of 80 per cent on a borrower with no outstanding housing loan, a LTV limit of 50 per cent on a borrower with one outstanding housing loan, and a LTV limit of 40 per cent on a borrower with two or more outstanding housing loans. It is humbly submitted that the government should bring the relevant LTV limit up to 60 per cent and 50 per cent (if not higher) for those borrowers having one and two (or more) outstanding housing loans respectively. The TDSR framework has already limited the power to borrow, thereby rendering the earlier imposed LTV limits somewhat over stringent.

The current LTV limit rules do not permit a bank to allow a drawdown of an 80 per cent housing loan before a full redemption (upon sale or otherwise) of the borrower's existing housing loan. Many genuine home buyers would prefer to purchase their new home before selling their existing home so that they can plan a smooth move. The government should consider allowing such home buyers to borrow and drawdown on a second 80 per cent housing loan conditional upon them selling their existing home within six months to redeem their existing housing loan. The case in support of this indulgence is even stronger in the event that such a borrower is able to afford the instalments of two 80 per cent loans within the 60 per cent TDSR.

Stamp duty measures

The Sellers Stamp Duty (SSD) was introduced to deter speculation of residential properties. In January 2011, the government increased the SSD period and quantum, with the maximum SSD of 16 per cent upon sale within first year of purchase, 12 per cent upon sale within the second year, 8 per cent upon sale within the third year, and 4 per cent upon sale within the fourth year. Since second quarter of 2011, sub-sale transactions have been plummeting. According to published URA statistics, just 136 units were sub-sold in the third quarter of 2014, or a mere 4.6 per cent out of the total residential units sold in that quarter. In view thereof, I would suggest a reduction of the SSD period from four years to three years. This move will allow affected owners, who have owned their property for a significant three-year period, to sell their residential property without this penalty. More owners of vacant residential properties will need to sell to free themselves of loan liabilities especially when interest rates start to rise and they cannot rent out these properties in the wake of a large number of newly completed properties.

The highlight of these measures is the Additional Buyer's Stamp Duty (ABSD). The current rules impose ABSD of 7 per cent on purchase of a second residential property by a Singapore citizen, and ABSD of 10 per cent on purchase of a third or subsequent residential property by a Singapore citizen. Singapore permanent residents pay ABSD of 5 per cent on purchase of their first residential property and 10 per cent on their second. Foreigners and entities would have to pay ABSD of 15 per cent on purchase of any residential property. I suggest that the ABSD rate for Singapore citizens buying their second residential property should be brought down to 3 per cent, and the ABSD rate for Singapore citizens buying their third or subsequent residential property should be reduced to 5 per cent. At such rates, a Singapore citizen will not, whether in his second or subsequent purchase, pay a higher ABSD rate than the minimum ABSD rate that a Singapore PR has to pay. This is a privilege that I am arguing for Singaporeans.

There are many Singapore citizens who have extra money for investment. While they can invest their money in foreign properties, they should not be discouraged from investing in another piece of real estate in their beloved Singapore, so long as such investments are done within their financial abilities, already safeguarded by TDSR and LTV limits.

The current rules allow for application for refund of ABSD paid by a married couple (with at least one Singapore citizen spouse) subject to them selling their current residential property within six months from date of new purchase or TOP (Temporary Occupation Permit) of new property (whichever is applicable). The government should extend this privilege of a refund of ABSD to Singapore citizens who are not married couples, subject to them meeting all other relevant conditions. There is no good reason to disallow valid requests for refund of ABSD from Singapore citizens who either own residential properties singly or co-own them with their parents/siblings.

The writer is a partner at Rodyk & Davidson LLP and part of the firm's Real Estate Practice Group. The views in this article belong to the writer and do not necessarily reflect the views of his partners and his colleagues in the firm