In the aftermath of the 2008/9 financial crisis, Singapore’s property market became heavily skewed toward investors. With interest rates at record lows, and housing prices on an apparently non-stop climb, property was the investment asset of choice. This left home buyers panicked, as values climbed beyond affordability. Today however, the trend has been reversed. Here’s why, more than ever, our property market favours home buyers over investors:
Cooling measures have completely prioritised home buyers over investors
The Additional Buyer’s Stamp Duty (ABSD) is an underrated boon, within the context of home buyers. While often maligned by those seeking gains, the ABSD has a subtle but significant impact on the Singaporean home buyer.
The ABSD imposes an additional tax of 15 percent, on foreign buyers.
For Singapore Permanent Residents, there is an ABSD of 5 percent on their first property, and 10 percent on subsequent properties.
Singapore citizens pay no ABSD on their first property, seven percent ABSD on their second property, and 10 percent on subsequent properties.
Now it’s not uncommon to hear calls to remove the ABSD, now that property prices have been in a slump for 12 consecutive quarters (and prices have fallen around 10.8 per cent across the board, from the peak in 2013). There have also been calls to remove the ABSD for Singaporeans. We don’t know if the government will ever heed these calls, but we know one thing for sure: the ABSD is a godsend for home buyers.
One of the main problems facing home buyers is affordability. Before the ABSD, prices were spiralling out of control because of rich investors (some foreign, some local) who were buying properties at high prices. Their tolerance for high price points caused sellers to hike prices, and local home buyers were being priced out of the market.
But a 10 or 15 percent ABSD, which translates $100,000 to $150,000 more on a $1 million condo, significantly dims the prospect of returns (it eats into any profits from resale). With regards to Singaporean citizens however, the ABSD will only impact investors: the home buyer is not purchasing a second or third property, and is hence unaffected. The only thing the ABSD does, regarding Singaporeans buying their first home, is to repress prices and make private homes more affordable.
If the ABSD were ever lifted, the property investors (who have the cash to buy) will swoop in and drive prices up again. And remember, the rising prices won’t bother the investors, because that means the assets they buy will appreciate. So home buyers do have a big reason to cheer the ABSD, and they would be better off if it wasn’t removed even for Singaporeans.
Singapore’s weak rental market is also helping home buyers
Singapore’s rental market is scraping rock bottom, with some condos approaching the same rental rates as HDB flats. If you’re a home buyer, and not into property investments, it might be hard to appreciate the implications – but the rental situation benefits you.
When property investors make a purchase, they usually want the property to at least cover its own costs. This means obtaining a rental income that exceeds the loan repayments for the property (so if the monthly loan repayments are $2,700, they want to rent it out for $3,500).
The only reason this is still possible is that interest rates are low. Should the interest rates be at historical norms (over three percent per annum, instead of the current average of 1.8 percent), many investors today will find that their property is a liability. The property loan would cost more than the property generates in rent.
Here’s the kicker though: the Federal Reserve in America is looking to impose a gradual rate hike, with the next one probably coming in December.
With rental no longer being an attractive option, property investors will either (1) sit out the situation and not buy, thus preventing price competition with home buyers, or (2) offload their existing properties, which have now become liabilities.
This is most evident in the luxury market for now, where investors have re-sold their property at million dollar losses.
A continued slump in the rental market will eventually see similar situations in other types of property, such as mass market condos. Mass sell-offs of private property, at low prices, present an opportunity for home buyers.
Even if you do have an eye toward profit, some public housing is beginning to look like a better prospect than mass market condos
HDB has truly picked up the pace of late, and we don’t just mean they are building more flats. The last BTO launch at Bidadari, for example, was an unprecedented opportunity, one that property investors would have killed for.
In the long term, discussions are ongoing regarding the construction of even more BTO flats in central regions, like the Greater Southern Waterfront Project. While that is a long way in the future, it does set the tone for developments in public housing: mature estates and central regions are gradually becoming accessible to home owners, who also get to buy at subsidised prices.
In an ironic way, these home buyers have been given the exact advantages that their investor counterparts look for. If BTO flats in mature estates (like Queenstown) or near central regions (Tanjong Pagar) were private, you can bet investors would be competing to buy them at much higher prices than the subsidised rates home buyers get.
For resale flats, the late disclosure of COV is making housing more affordable
A subtle, but also underrated change in our property market is the change in rules regarding Cash Over Valuation (COV). The COV is paid above the actual value of the flat, and is thus pure profit for the seller. Back in 2012, it was not uncommon to see median COVs of $35,000 or more – and many of the million dollar flats reached those prices precisely due to COV.
Today, the COV is only known after the Option to buy the house is signed. This means that buyers haggle over the overall price of the house, rather than over the COV. There is no more “guaranteed” COV, which means investors are less inclined to buy resale flats in the hopes of huge gains. It also means home buyers are spared the pain of every seller insisting on getting COV, which is an amount that is not covered by a bank or HDB loan.
While this has not gotten much attention in the news, we feel it should be pointed out as a clear advantage to home buyers right now.
This may be one of the best times for home buyers in Singapore
There are plenty of doom and gloom stories about our property market. But the key is to remember this applies primarily to sellers, investors, and developers. A home buyer stands only to gain from sliding prices.
While some may argue that your housing asset would be depleted in value, we don’t think that’s a big blow to home owners. A home owner is looking for a comfortable place to live, and perhaps raise a family. The concerns of profitability, or the prospect of rental income, should be at best a passing concern.
So enough with the constant moping about our “dire” property market. We haven’t had 12 consecutive quarters of a bad market. We’ve had 12 consecutive quarters of affordable home ownership in Singapore.