Are first-time home buyers affected by the July 2018 cooling measures?

Property sellers tend to go into fire-fighting mode, whenever cooling measures come about (which is a bad but intentional pun). This time around, their message of reassurance is that genuine, first-time home buyers aren’t really affected by the July 2018 cooling measures at all. Actually, that’s not 100% accurate. First time buyers are far less affected by the measures, but they are impacted:

Which part of the cooling measures matters to first-timers?

The big factor is the reduction in Loan-to-Value (LTV) ratio, which determines how much you can borrow to buy the house.

Prior to the last cooling measure, the LTV on bank loans was 80% (i.e. you could borrow up to 80% of the property price or value, whichever was lower, leaving you with a 20% down payment payable by cash or CPF). Now however, the maximum LTV on a bank loan is 75%, and that means an additional 5% downpayment.

The government’s reasoning is that, with mortgage interest rates rising, Singaporeans shouldn’t be borrowing too much. It seems the lessons of the 2008 financial crisis in America haven’t been forgotten. In that year, unsustainable default rates in home loans tore through America financial systems — and subsequently the world’s — like Godzilla with a case of rabies.

[Recommended article: Loan-to-value (LTV) limit: a Quick Guide for Property Buyers]

Wait, just five per cent? Hahaha, how is that a big deal?

We’re not talking 5% of the price of a bowl of mee pok here. 5% on the price of a property is a huge sum of money.

Consider, for example, the impact if you were planning to purchase your first Executive Condominium (EC) unit at $800,000. An additional 5% down payment would mean you need to fork out $40,000, either in cash or from your CPF.

Now, the median income of a Singaporean is currently between $3,500 to $4,000 per month. But let’s take it that, as you’re buying an EC, you earn more than the median. At an income of $7,000 per month, your CPF contributions are S$2,590 per month (20% of your income, plus 17% from your employer). That’s about an additional 15 months of saving up to be able to afford your house.

Unless you’re going to make especial effort to save up that $40,000 quicker (several websites assure us this can be done by just refraining from eating avocado toast or drinking lattes), that’s a long wait for your house.

This new cooling measure also means HDB resale flats might be preferable for some first-time home buyers, if they can use the HDB concessionary loan.

The HDB concessionary loan is NOT affected by the new cooling measure. First-time home buyers can still borrow up to 90% of your flat’s price or value, whichever is lower. This means the downpayment for an HDB flat is far lower compared to what you’d face for a condo or EC (there are no HDB loans available for ECs, by the way).

This means the cooling measure could drive higher demand for flats. Many Singaporeans – particularly those who are self-employed or younger — don’t have a fat CPF account that can just shrug off an extra 5% down payment.

[Recommended article: Why now is the best time to buy a HDB resale flat]

In the long run, all this could push down prices of private housing for first-time home buyers; but we wouldn’t be overly optimistic about that.

Because down payments are higher, sellers may have to lower their prices a bit. It all depends on how much Singaporeans generally have in their CPF accounts.

If it turns out our CPF accounts are all way fatter than we imagined, then this cooling measure may even have no effect at all. It certainly doesn’t impact Singaporeans who have been in the workforce for a long time, as someone who’s been contributing for, say, 30 years won’t really struggle to afford an added 5%.

So while we admit it could push down private housing prices in theory, we’d also add: don’t hold your breath.

Most Singapore property owners are not too highly leveraged (thanks to curbs like the Total Debt Servicing Ratio and the latest cooling measure), so they have a lot of holding power; there’s no sense of urgency for them to lower their asking price.

The real upside to all this is that first-time home buyers are really saving money.

The bigger downpayment on your house isn’t really a loss in that it’s going towards paying the house (you would have had to pay it anyway as a mortgage). And because you’re making a bigger downpayment, you’re saving a lot on interest payments.

For example, let’s go back to that $800,000 condo. Prior to the cooling measures, you could have taken a loan for $640,000 and put down just $160,000. At an interest rate of around 1.8 per cent, over 25 years, total interest repayments would hit around $155,000.

Now let’s say under the new cooling measures, you only borrow $600,000 for the house. Using the same loan over the same period, your interest repayments are only around $145,000. That’s $10,000 saved.

Monthly repayments are also lower, at around $2,485 per month instead of $2,651. That’s not too bad a deal, so long as you have sufficient cash or CPF reserves for the downpayment.

Buying a home for the first time? Voice your thoughts in the comments section or on our Facebook community page.

If you found this article helpful, 99.co recommends Chart of the Week: Age vs Property Value in Leasehold Condos and 9 milestones to hit before you buy your first condo [July 2018 update]

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