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UPDATE: 5 July 2018.
ABSD is going up 5% and LTV is being tightened as well.
Factor in this additional 5% when reading this blog.
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UPDATED (20 DEC 16):
How to calculate BSD and ABSD?
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A friend recently bought a second residential property and had to pay a 7% ABSD which amounted to quite a bit of money.
He asked why wasn't I considering buying another property as I seem to have the financial ability to do so.
Well, apart from the fact that I think that Singapore's residential property market is facing a glut and will continue to face a glut for a few years, I am reluctant to pay the ABSD.
ABSD stands for Additional Buyer Stamp Duty. This is at 7% for Singaporeans who buy a second residential property and is paid in addition to the regular 3% Buyer Stamp Duty (that has to be paid anytime a residential property is purchased).
For Singaporeans who buy a third residential property, the ABSD is 10%.
Imagine buying a $800,000 property and having to pay the taxman an additional $80,000!
That is enough to buy a 3 year old Japanese make family sedan in Singapore or a brand new Mercedes Benz E-200 in the USA with a fair bit of money left over.
My friend sent me this in an SMS:
"If it (the ABSD) goes down, then, people will rush in to buy again. Developers and sellers will raise the price. So, in the end, the overall paid is still the same...
"If without this ABSD to artificially suppress the demand, the prices would have been super high and just keep rising. So, it helps to suppress the price but I must pay the ABSD.
"If the ABSD didn't exist, we would still have to pay a higher price."
See how the belief that property prices in Singapore can only go higher is firmly embedded in the message?
My reply:
"That is what property agents are saying to encourage buying (even if buyers must pay an ABSD).
"I don't think anyone knows for sure (that prices will only go up). It is a lot of money. So, I rather stay cautious since I already have a property (i.e. my home). No hurry.
"It is called ABSD for a reason and when it is removed, it will be because the market has cooled enough and liquidity has dried up. In such an instance, developers would be shooting themselves in the foot by raising prices."
I am reminded not to ask a barber if I need a haircut.
Try to remember the Rule of 15.
The ABSD raises the buying price significantly for anyone who is buying a second or third property.
This has to be considered as part of the price tag of the property.
If we could only eke out a 3% yield from a purchase, in a rising interest rate environment, I would hardly consider that a good investment.
The ABSD has helped to keep out investors and allowed first time buyers a chance to buy private residential real estate at more reasonable prices.
Apart from the ABSD, investors should also be deterred from investing in residential real estate here by the fact that the oversupply situation seems set to worsen in the next few years.
Honestly, I would tell people to buy a piece of private residential real estate in Singapore now only if they want to make it their home.
As an investment, for anyone who decides to buy now, private residential real estate in Singapore might be rather disappointing a choice in the coming years.
Related posts:
1. The Rule of 15.
2. Disastrous investments in the property market.
Bloggy Award
27 comments:
this is what some of my peers have been doing. is not that they cannot afford. but I doubt they can ever recover the investment
Hi Victor,
I like to remind myself, my family and friends that even if we can afford something, it is never about affordability. It is always about value for money. :)
hi AK
this ABSD also stop me from buying 2nd property.
as both me and my husband not singaporean, so we have to pay that ABSD.
property and shares investment, which one you think safer and more consistent income?
Hi yeh,
Well, there are advantages and disadvantages that come with any investment type. It is hard to make a statement that holds true in all circumstances that one investment is better than another.
However, investing in a single piece of real estate does come with concentration risk. The fact that real estate don't come cheap in Singapore means that one wrong move could be seriously damaging financially for the average guy.
Hi AK71
Many many years ago, I told my friends that beware of interest hike. Of course nobody believed me. And they have proven me wrong.
So I am willing to bet interest will stay at zero for next ten years, it is unimaginable? Who would have imagined today's property price anyway? Who would have imagined crude oil price going below 50?
But then i am looking forward to a big hike in interest rate, not sure how many think the same like me, because my $1000 in the bank attract such a low interest now. I will be smiling wide if interest go up to 8%, 10%, seriously. I am so poor now that a 1++% FD bank interest have me rushing to it.
Btw, do you aware that people are snapping up negative yield bonds? I can't imagine that, but it is true! Not sure if you will buy, do you have any condition to buy into negative yield bonds?
What really kills the market is TDSR. I view this as takes longer time for people to save enough to climb over the barrier for first buyer. So is like a delay mechanism. And for subsequent property a even higher requirements.
Hi Kelvin,
In Singapore, we are pretty lucky that the banks are not charging us a fee for keeping our money safe. LOL. ;p
Will we see negative yields for SGS? I am not sure but I don't think it will happen. After all, our interbank rates in Singapore are "imported". If the US$ strengthens further against the S$, interest rates here will rise. When the US Fed increases interest rate, our interest rate will rise.
People in countries where their currencies are depreciating rapidly might buy negative yield bonds issued by countries with appreciating currencies because the FOREX gain makes it worthwhile. It all sounds very stressful to me. I am glad we are not in such a situation in Singapore. -.-"
Hi Cory,
The TDSR is to encourage financial prudence. I think it shouldn't be an issue for most first time home buyers (unless they are interested in something beyond their means).
TDSR is more a problem for people who already have a mortgage to service but would like to buy a second property and, I believe, it is this group of people that the TDSR is meant to curb.
Interestingly, the 'affordability' of some condos are now their Unique Selling Point/Proposition.
My take.
http://callingthetop.blogspot.sg/2015/04/the-singapore-property-market-is.html
Hi AK, thanks for your last paragraph ;p
TDSR seems to be delaying demand, temporary solving the problem of rising property prices, but once the delayed potential buyer have saved enuff to buy the property, prices will start increasing again?
Hi Kyran,
Just talking to myself, as usual. ;p
Hi bluelite,
The property market is cyclical. A boom is usually followed by a bust. Unfortunately, most people have short memories. -.-"
"Our central case is for a relatively orderly unwind. Maintenance of 5 per cent per annum household income growth and a two-year period of correction (based on previous property cycles) means that prices need to fall by 10 per cent over the coming two years to lower the price-to-income ratio to 8.5 times.
"Such a decline will push up loan-to-value ratios and force households to inject fresh capital into their mortgages when they attempt to refinance, further constraining private consumption in the coming years," said BNP Paribas, adding that tighter immigration policies have had a "detrimental impact" on demand for housing.
Source:
http://www.businesstimes.com.sg//real-estate/private-property-prices-may-fall-another-10-in-next-two-years-report
The Republic's real estate developers association (REDAS) has warned of record-high vacancies in the private residential property market, as supply continues to build while tighter mortgage curbs cools demand.
In his welcome speech at a property seminar organised by the association on Tuesday (Jul 14), REDAS' president Augustine Tan cited analysts' estimates that more than 89,000 new private homes will be completed from 2015 to 2019, and that the number excludes supply from the government land sites sold in the first half of the year.
http://www.channelnewsasia.com/news/singapore/redas-warns-of-record/1982848.html
I shared this on my FB wall:
"We must ask how much of the demand is genuine. How much of the demand is because of the abnormally low interest rates and money printing which have driven up asset prices in our part of the world? As people look for assets to protect their wealth from being eroded, real estate is one natural choice. Some are not even interested in rental yields which have become very low. The cooling measures bring some measure of normalcy to prices which are still high but at least not crazy like in Hong Kong.
"Lower prices can come about due to many reasons. It doesn't have to be an economic recession. Oversupply and weak demand in the residential housing market will be enough to drive prices lower. Add higher interest rates and there will be more pliable sellers. In fact, just a 2% increase in interest rates will see 15% of households here over leveraged.
"Investing in a property is a big commitment. Concentration risk is also very real. One has to be very sure that he is getting good value for money which also means having some margin of safety. For most of us, there is no nibbling in real estate investment."
"Mr Khaw noted that structural and temporary initiatives, such as Additional Buyers’ Stamp Duty and loan-to-value limits, were among the several rounds of cooling measures rolled out by the Government.
“Measures have to be adjusted and perhaps even lifted, when it’s the right time. The right time is when the equilibrium is a lot more certain, more sustainable. And I don’t think we are at that point yet,” he said."
Source:
http://www.channelnewsasia.com/news/singapore/not-the-right-time-yet-to/2054738.html?cid=FBSG
We cannot go through the mountain and, so, we must go around the mountain or so the saying goes.
6 months on, my friend sent me an SMS to say he feels like crying now because the developer of the condo he got a unit in (and paid ABSD of 7% for) just slashed prices which is equivalent to an absorption of the ABSD.
From my friend, "so cheap now. and the loft unit is bigger than the one i bot. the price is as good as removing absd now."
Remember, don't ask barbers if we need a haircut. Sales agents' job is to try to get us to sign on the dotted line. It is our job to decide if the offer gives us good value for money.
Care to share which condo development is that? Sim Urban Oasis?
Hi LKH,
Nah, not nice to say lah. There are quite a few developments which are offering bigger discounts now. ;p
Hi AK71,
I have been seriously pondering over if I should get a condo that I really like. As you said, 7% is really huge and yet wasteful... I am pretty sure one fine day they would just do away with it but then at that time, the units that I like could be all gone already (in the worst case, all units are gone since it's quite a popular project).
I still cannot make up my mind if I should go for it... As you said, it's not that we cannot afford that 7% but then it's like throwing the $ away..
Any advice? Thanks.
Hi Agh,
You might remember this blog post:
Buying a property: Affordability and value for money.
That 7% ABSD is irksome but if we feel that even including that 7% ABSD, we are getting good value for money, we could consider buying. I would rather not have to pay the 7% ABSD but it does not mean that having to pay a 7% ABSD means a project should be avoided.
Having said this, if we like a project very much, then, there is an emotive angle to the process. It is more difficult to be objective then and no one should interfere because things could get quite emotional now and in the future. ;)
(We are talking about the average Singaporean or Singaporean family here and not the super rich.)
Reader:
".... Some family are not savvy and good at stock investing hence they opt for property investing."
AK:
"Investing in real estate is actually a lot more daunting than investing in stocks because of the amount of money involved, the relatively less liquid market and also the concentration risk. Some might say they would like to invest in properties because they think it is easier to understand and even execute. I would say it isn't."
In this blog post, I don't think my friend knew what exactly he was getting himself into as a "property investor".
if prices don't come down, the cooling measures will remain, the additional taxes are more revenue for the gov, which is a good thing, so it might just become "permanent", which is a good thing because if the property prices fall too fast and too much, they still can remove the cooling measures to help boost prices to whatever "stable" level deemed by the gov. this is a very clear signal that the gov wants prices to fall much lower. the only question is when will prices fall? the gov is also conscious not to create supply cycles, so they are still releasing gov land for sale. developers also don't want to be caught with their pants down, so they have to still bid and build regardless of the property market sentiment being good or bad.
there can be a twist to this tale where the theoretical exercise for affordability based on income levels shows that prices has room to fall, but because the gov keeps releasing subsidised housing, they unknowingly create this growing divide between public and private housing, and they underestimate the holding power and income power of the top 5% income earners, and eventually, the prices can keep rising to unreachable levels. at that point, even if there is a crash, it's still a crash among the top 5% rich, and prices will still be out of reach from the masses. that $2000 psf condo you are eyeing might rise to $4000 psf and be $2500 psf in a "crash". as long as the owners of subsidised housing don't have options, hdb prices will remain around the same range. hong kong is a close example, although some ppl like to believe otherwise because of the 90%-singaporeans-own-their-homes propaganda. nobody in singapore is publishing population stats showing the % of people living in flats that are bought directly from hdb, and not resale. for this group of ppl who are paying and living in the subsidised flats, it really doesnt matter if they bought it at 99 years lease or rent it from gov for 99 years (like in hong kong), because either way, their life wouldn't have been any better off than the top 5% rich.
Reader said...
Avid Reader of Your Blog and I have two situations that I need your help.
Gotten Some Inheritance and Planning what to do with it. 500k Cash and was toying with the idea of buying a second property, paying ABSD as I see that the market seems to be recovering. Aged 32 with two kids.
AK said...
Oh dear. Don't ask me what to do with the money.
I don't know you well enough to know what is best for you.
I do know that buying a property thinking the price will go up in future is speculation which is not to say that it is a bad thing. It could turn out well. Who knows?
https://singaporeanstocksinvestor.blogspot.sg/2017/08/investment-philosophy-and-property.html
5 July 2018.
ABSD is going up 5% and LTV is being tightened as well.
Mr Menon urged developers to be cautious in their land bids, bearing in mind the supply that’s coming on-stream, and also warned buyers.
“We’re telling individuals who purchase property to be careful. Interest rates are rising, be cautious of debt servicing burdens, avoid taking on too much leverage when buying a house.
"We’re also telling the banks to be careful when underwriting as there’s euphoria now. When underwriting, banks should also stress-test for future scenarios.
"Basically, we’re sounding caution to everyone to be sober, balanced and exercise good judgement. The government is closely monitoring the market.
"We need to be mindful of the supply and demand dynamics and we have to ask ourselves whether demand will be able to match the big supply that’s coming on-stream in the next few years.”
Singapore property stocks currently offer more value than the physical property market (where prices have risen close to 4% in 1Q’18 as well as 2Q’18 after inflecting in 2H’17 and are not far from their last peak in 2013).
Source:
Lim & Tan
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