Looking ahead at impact of property cooling measures

Sales volumes may slow moderately in the short term as buyers adopt a wait-and-see attitude

Christine Sun

Jan 23, 2022

Pandemic-fuelled demand coupled with a depleting housing supply drove property prices in Singapore to new records last year.

Based on the latest flash estimates released by the Urban Redevelopment Authority and Housing Board, both the private residential and HDB resale price indexes for last year registered their fastest annual growth since 2010.

This led the Government to introduce fresh measures to rein in the housing market. The additional buyer's stamp duty (ABSD) rates were increased, and the total debt servicing ratio was tightened to temper demand.

Developers will likely be more cautious in land acquisitions as they must pay higher ABSD for residential property purchases.

But how will the latest property chill affect you?

Investors, PRs and foreigners most affected

The new measures will impact many buyers. Investors holding multiple properties, permanent residents (PRs) and foreigners bear the biggest brunt as they face the most significant ABSD hikes.

For instance, Singaporeans buying a third property and PRs purchasing a second property will experience a 10 percentage point increase in ABSD, a steeper rise than the 5 percentage point adjustment during the last round of cooling measures in 2018.

The move is probably done to combat a potential demand surge when more people are expected to return via the vaccinated travel lanes. Perhaps more stringent measures were imposed on PRs as they snapped up condominium units faster than Singaporeans last year.

Compared with 2020, the number of condo units bought by PRs rose 55.3 per cent, compared with 50.7 per cent for Singaporeans.

For foreigners, the ABSD rate stands at 30 per cent.

If we include the standard buyer's stamp duty, a $2 million property purchase may translate to around $664,600 in hefty taxes.

With the new measures, we expect a temporary pullback in demand for the upper end of the property market, as investors and foreigners form a substantial bulk of buyers.

However, the ultra-rich and super-wealthy investors will probably proceed with their purchases.

The advantages of parking their money here, with Singapore's haven status and strong economic fundamentals, may outweigh the additional costs to them.

Owner-occupiers, first-time buyers set to benefit the most

The announcement of the cooling measures did not come as a surprise since a market correction was inevitable.

The recent run-up in home prices is unsustainable, and escalating housing costs may exacerbate income inequalities and impact social stability.

Millennials and Gen Zs may struggle to buy a home if the affordability gap continues to widen, and many may eventually turn to long-term renting.

The housing price gap has hindered some aspiring HDB upgraders from purchasing private property last year. Pickings are slim for these house hunters due to the low housing supply, high prices and fierce competition.

The new measures have little impact on Singaporeans purchasing their first private property as they are exempted from paying the ABSD.

As investors take a temporary back seat, some HDB upgraders may take the chance to enter the property market now.

However, the window of opportunity is narrow. Even as price growth is expected to slow after the cooling measures, a supply lag in the suburban areas is likely to persist.

Lower demand may still drive prices higher in the mid-term, especially since more upgraders will be selling their flats after the minimum occupation period.

The supply of new condominiums in the suburban region will be moderated this year.

Fewer than 4,000 new private homes over 10 residential projects (including executive condos) could be launched in the outside of central region, about 33 per cent lower than the 6,000 units released annually in 2019 and 2020.

Although the authorities will ramp up supply in the upcoming Government Land Sales (GLS) programme, these projects will be launched only next year or in 2024.

Impact on the HDB market

The effects could be minimal to moderate depending on the family's financial situation.

The loan-to-value (LTV) limit, or the maximum amount that buyers can borrow from the HDB, was lowered from 90 per cent to 85 per cent.

With a lower LTV limit, buyers will have to pay more cash when they purchase a Build-To-Order (BTO) or resale flat.

For instance, the down payment for a $600,000 resale flat will be increased from 10 per cent ($60,000) to 15 per cent ($90,000) with smaller loans.

The cooling measures may not impact everyone. Some buyers do not need to apply for a maximum loan, while others can borrow from financial institutions.

For those affected by the measures, young couples with financial support from families or middle-income earners may have the means to come up with the additional cash outlay. Lower-income earners or the self-employed, however, may be most affected.

Some may think twice if they should pay record prices for choice flats, while others may take the opportunity to negotiate prices. In recent weeks, we have observed a few sellers adjusting price expectations to more realistic levels.

For the BTO market, there could be some demand shifts. Due to the reduced LTV limit, young couples may reassess their affordability threshold when they apply for pricier flats in mature estates.

Some may opt for cheaper flats in non-mature estates.

The measures will be timely in calming the euphoria over prime location public housing (PLH) flats.

The application rate was high for the first PLH flats launched in Rocher and more of such flats are slated for launch this year.

Moving forward

There may be a knee-jerk reaction in the short term. Sales volumes may slow moderately as buyers adopt a wait-and-see attitude while sellers take time to assess buyers' interest before making any price adjustments.

However, owner-occupiers, especially those with immediate housing needs and families not affected by the measures, may continue to purchase homes.

Since our employment rate is still healthy and gross domestic product growth is robust, overall prices are likely to stabilise and appreciate at a slower pace this year.

Supply will be increased in the private and public housing sectors.

The private housing supply will be raised to meet the increased demand and address developers' dwindling supply of unsold homes.

For the GLS programme for the first half of this year, the supply of private homes from sites on its confirmed list has been increased about 40 per cent compared with the second half of last year.

Most of these private homes will be launched for sale eight to 10 months after the close of their land tenders. Therefore, price pressures may likely ebb when supply catches up with demand from next year.

The writer is senior vice-president of research and analytics at OrangeTee & Tie.