On Sep 29, the Singapore Government revealed a new slate of cooling measures with the goal of “ensuring prudent borrowing and moderating demand” amidst a rising interest rate environment.
For some private homeowners, this announcement came as a shock as the new 15-month wait-out period would mean that they would have to either delay or scuttle their plans to downgrade from private property to an HDB flat.
Whereas for other homebuyers, the 5% reduction of the loan-to-value (LTV) ratio for HDB loans from 85% to 80% has resulted in them having to fork out larger down payments for their flat purchases.
And then there is the big picture. How will the market shift in the face of these cooling measures? Will Singapore’s real estate scene see a slowdown in activity? And what about million-dollar HDB flats, will there be fewer of them?
Read on for our predictions on how things could shake out for both homebuyers and the local property market in the coming months.
What are the latest property cooling measures?
Following the joint statement made by HDB, the Monetary Authority of Singapore (MAS), and Ministry of National Development (MND), a total of three new cooling measures were unveiled.
Requiring private property sellers who are below 55 years old to serve a wait-out period of 15 months before being able to buy a resale HDB flat.
Reducing the LTV limit for HDB loans from 85% to 80%. (The LTV limit for bank/private institution loans remains unchanged at 75%.)
Raising the medium-term interest rate floor used by banks to calculate the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) by 0.5%, while setting an interest rate floor of 3% for computing loan amounts on HDB loans.
What are the possible effects of the 15-month wait-out period?
According to official figures from HDB, the number of private property owners (PPO) purchasing resale flats had gone up by two-fold in 2021 and the first quarter of 2022 since 2019 and 2020.
As a result of this phenomenon, the 15-month wait-out period was introduced in order to reduce demand for public housing from cash-rich buyers fresh off selling their private homes.
Two possible short-term effects of this cooling measure are: 1) a rise in demand for private resale properties and 2) a bump in residential rental volumes. Both of these predicted outcomes are realistic forecasts as PPOs will either have to seek out a non-HDB residence as their new home or make temporary housing arrangements in the interim.
On the seller side, it is likely for PPOs to be less inclined about putting their homes up for en-bloc sales due to this cooling measure. Likewise, there are fair odds that there will be fewer million-dollar resale HDB flat transactions occurring as both selling prices and Cash Over Valuation amounts may moderate relative to lower market demand.
What benefits are the lowered loan-to-value limit for HDB loans likely to bring?
Put simply, the biggest benefit of lowering the LTV limit for HDB loans is that it will improve the health of the public property market in the long run. This is achieved by promoting a slower, but steadier and more sustainable rate of growth.
By cutting down the amount that buyers can take out on their HDB loans from 85% to 80%, they will now have to foot a bigger down payment on their new homes (either in cash or CPF funds), equivalent to 20% of the purchased flat’s value.
And while it does indeed hurt buyer affordability, this demand-side cooling measure has the overall effect of preventing Singapore’s housing market from overheating via the one-two combo of encouraging prudent decision-making as well as discouraging speculative behavior that could adversely affect local homeowners across the board.
How could the new medium-term interest rate floors influence the housing market?
During this round of cooling measures, new medium-term interest rate floors were introduced for housing loans offered by HDB as well as private institutions, namely 3% for the former and 4% for the latter.
And in doing so, the Government aims to prevent future difficulty in servicing mortgages – especially in the current environment where property buyers are facing the highest housing loan interest rates in years.
As the interest rate floor is the minimum rate that a borrower will be charged, it is also used to compute the loan amount that consumers are eligible for.
For instance, assuming a total monthly income of $15,000, a couple can only borrow a maximum of $1.72M (current 4% floor) now versus $1.83M previously (old 3.5% floor).
Hence, it can be observed that raising the medium-term interest rate floor has two outcomes where buyers will either have to restrict their purchases to properties priced within the new loanable limit OR secure more funds to be paid upfront for their dream home.
To sum up
Just like previous rounds of cooling measures that have taken place, there are always winners and losers – but ultimately, it is in the interest of all buyers, sellers, and stakeholders that Singapore’s property market is kept in check by the right policies.