Friday, January 14, 2011

A cold shower on hot money

THE Singapore government yesterday acted defensively to stem the tide of hot money flowing into the island's housing market. This comes in the light of recent steps taken by Chinese and Hong Kong authorities to guard against property asset bubbles in their markets.


The latest measures are also the most severe announced till now to cool Singapore's housing market. Analysts say transactions will slide and so will prices. 'There's 100 per cent certainty these measures will work to cool the market,' declared Knight Frank chairman Tan Tiong Cheng.


The sharp spike in seller's stamp duties is even harsher than the May 1996 anti-speculation measures that had treated gains from sales of properties within three years of purchase as taxable income. Whereas that tax applied only to those who profited from flipping their properties, the latest set of hefty seller's stamp duties must be paid regardless of whether the seller makes a gain or loss.


Now, even if a property speculator or investor decides to simply cut a loss in future, he'll be liable to pay the hefty seller's stamp duty (SSD). This is a more severe deterrent to investing or speculating in property than the old 1996 tax.


In letter, the new SSD rates apply to those who buy a private home from today. In reality, they will also frustrate existing home owners' efforts to offload their properties as buyers become scarce since anyone who buys from today will be hit with the new SSD regime.


For those who buy a private residential property from today and sell it within the next 12 months, the seller's stamp duty will be 16 per cent of the sale consideration (much higher than the up to 3 per cent currently). If the property is disposed of in its second year of purchase, the SSD is 12 per cent (again higher than the up to 2 per cent currently). The SSD is fixed at 8 per cent if the property is sold in its third year of purchase (higher than up to 1 per cent currently). The government is also extending SSD for sale of properties in the fourth year of purchase, with the rate fixed at 4 per cent.


What the new SSD rates effectively mean is that short-term speculators would have to be confident of being able to clear a profit hurdle of about 20 per cent (comprising the 3 per cent stamp duty payable when buying the property and the 16 per cent SSD when divesting it within a year) before they'd find it worth their while to enter the market.


Following HK's example


The SSD package is somewhat similar to what Hong Kong authorities announced in November. Under those measures, homes sold within six months of purchase attract an extra 15 per cent stamp duty; the rate is 10 per cent for properties resold between 6 and 12 months; and 5 per cent for those resold between 12 and 24 months.


The Hong Kong government also raised downpayments for homes (depending on their value) and lowered the loan-to-value (LTV) limit for non-owner occupied residential properties and those held by corporates to 50 per cent.


Yesterday, Singapore's authorities too announced a lowering of the LTV limit (from 70 or 80 per cent currently) to 50 per cent on housing loans granted to corporates, trusts and other non-individual buyers.


Analysts suggest that this measure could have been triggered by recent bulk purchases of units in new residential developments which help developers achieve more pricing power.


As well, the Singapore authorities are further reducing the LTV limit on housing loans from 70 per cent to 60 per cent for new purchases by individual home buyers with one or more existing housing loans. This should further foster financial prudence and reduce over-exposure to the property market among Singapore households. After all, the hot money coming in from overseas can easily leave the local property market, and Singaporeans may be left holding the baby from a property downturn.


The latest package is the biggest bomb the government has dropped from its arsenal to cool the property market - and this will no doubt unnerve market players.


But the measures are not intended to cause a severe crash in the market and if that threatens to happen, the government can quite easily withdraw them.


On a brighter note, those who have been waiting for a price correction to enter the market may now see their wish fulfilled.

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