Property Cooling Measures: How will it affect you? (Beginner's Guide)

The words "property cooling measures" have been fronting the news headlines and been thrown across dining tables for the past month.

Let's be honest, for the average Singaporean like you and I, it's just a cool word to sound clever. Beyond million dollar HDB resale and ballooning property prices, we actually don't know what cooling measures are.

And unfortunately, as we're entering the festive Christmas and New Year's season, it's kinda high time for you to figure the property cooling measures out - at least before you meet your high-achiever and pompous secondary school, poly, and university friends for that annual Secret Santa Christmas dinner.

Take 15 minutes to read this article, or save this link. Here's your ultimate beginner's guide to all things property cooling measures in Singapore this year:

What Are Property Cooling Measures?

Property cooling is a term that is commonly used to refer to housing prices growing at a slower rate, or outright declining. Property cooling measures, then, refer to the courses of action or steps taken to induce a decrease in real estate prices.

It's not unique to Singapore. In other countries, it's known as cooling housing market, or real estate cooling measures. Some reported cities and countries with real estate cooling measures include Canada, China, and the UAE.

Do not confuse cooling measures for the "cooling off period" which refers to the final stage of a property's sale.

What Is The Purpose of Cooling Measures?

In Singapore, the property cooling measures serve to "promote continued housing affordability", states the Ministry of National Development (MND). Simply put, property cooling measures basically keep housing prices low so normal Singaporeans like you and I (and our children, hopefully) can afford to buy a house of our own.

Likewise, in Hong Kong, property cooling measures were recently introduced in October 2022 as well to ensure locals can continue to afford homes to stay.

So, how do property cooling measures work to keep housing prices low?

If you were to follow the many property cooling measures over the years, you'll realise that every batch of property cooling measure targets a different section of the real estate market, introducing new regulations, or tightening home loans to make it more difficult for people to buy properties.

When rich foreigners can't just come in to Singapore and freely buy houses without hefty taxes, when people can't freely take up massive mortgages, and can't freely flip their condominium for profit and move back to a cheap HDB, they will think twice before buying and selling. And hopefully, this way, property prices will rise slower.

Let's take the property cooling measures introduced in September 2022 as an example.

What Caused The 2022 Property Cooling Measures?

Two reasons why the September 2022 property cooling measures took place:

• Rising interest rates: From July 2022 to date, bank home loan interest rates in Singapore have dramatically increased by 2 per cent (and counting). That's very expensive!

• Overheated HDB resale market: Despite property cooling measures in December 2021, the HDB Resale Price Index still increased by more than 5 per cent at the end of Q2 2022. That means there are more people buying resale HDBs!

Most eye-catchingly, you would also have noticed the increasingly common news reports of million-dollar HDB flats.

By early October 2022, HDB had already recorded 277 million-dollar HDB resale flat transactions, breaking the record of 259 units sold in 2021.

Who are all these rich people buying resale HDBs at sky-high prices? They are pushing HDB prices up, way too much.

Sure enough, the Monetary Authority of Singapore (MAS), Ministry of National Development (MND), and the Housing Development Board (HDB) announced a new batch of property cooling measures on 29 September 2022 - to be in effect on 30 September 2022 00:00 hours.

When Was The Last Property Cooling Measure?

From the first property cooling measure in 1996 to date, there have reportedly 13 property cooling measures in Singapore. Here's an overview of all the property cooling measures.

There has been a lot of adjustments for the Loan-to-Value ratio (the amount of home loan we can take based on the property's price and our income), Seller's Stamp Duty (tax you have to pay when selling your house), and Additional Buyer's Stamp Duty (tax you have to pay when buying your second or third house).

It's then clear that the property cooling measures serve to deter all that buying and selling action going on. Instead, the goal is to have Singaporeans buy their homes and stay put for a long time.

Property Cooling Measures 2022 [Summary]

September 2022's property cooling measures were introduced to:

• safeguard Singaporean homeowners from the global rising interest rate climate
• discourage private property owners from flipping and downgrading to subsidised HDBs

Ensure Singaporeans are prudent when borrowing home loans

As part of the property cooling measures, HDB and banks will assume higher and higher interest rates when assessing your application for a home loan.

For those taking private bank home loans, MAS will increase the Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR) benchmark for residential purchases from 3.5 per cent to 4 per cent respectively.

This means that if you are planning to buy a house and take a home loan, you must be able to finance their loan even if the interest rate increases to 4 per cent. The actual interest rate will still be determined by the individual banks.

For HDB loans, there will be an interest rate floor of 3 per cent for computing the loan amount you're eligible for. However, this doesn't mean the HDB loan interest rate will increase. HDB loan's interest rate will remain at 2.6 per cent.

The Loan-to-Value (LTV) limit for HDB housing loans will also decrease from 85 per cent to 80 per cent - which means you will need to pay more downpayment.

Moderate HDB Resale Market

Private and ex-private property owners now have to wait 15 months to buy a non-subsidised HDB resale flat after selling their private homes. This is a temporary measure, and will be reviewed in the future.

However, if you are selling your private property because of financial difficulties, you can appeal to HDB on a case-by-case basis.

This new 15-month wait-out period will not affect elderly aged 55 and above who are moving from a private property to a 4-room HDB or smaller HDB resale flat.

Within the first week of the new measures, HDB received about 450 appeals about the 15-month wait-out.

How Will Property Cooling Measures Affect Property Prices and Buyers?

As with all cooling measures, they are met with cheers and boos. Here, let's look at how the property cooling measures will affect us, along with their pros, and cons.

Advantages of Property Cooling Measures - More affordable for first-time HDB resale flat buyers

We have heard so many horror stories from young friends and relatives – all well-educated university graduates with decent-paying jobs, mind you – who found themselves priced out of the market while shopping for their first home.

They were vying with buyers flushed with cash from selling their own homes.

Property analysts like OrangeTee & Tie's senior vice-president of research and analytics, Christine Sun, told The Straits Times that a “stronger market reaction” is expected as the new curbs are one of the most significant cooling measures imposed on the public housing market in recent times.

Thus, this new rule should dampen the market a little and help these first-time buyers get their toe into the property market.

More prudent property buying and selling

During the good old days, many ambitious buyers took advantage of the low property loan interest rate – about 1.4 per cent – by maxing out their loan quantum and loan term. This allowed them to purchase more expensive properties.

All was well and good until interest rates kept increasing this year.

A couple who used to pay about $3,900 for their $1.05 million home loan, now complains about paying almost $4,900 due to the interest rate hike.

“We didn’t even get a $1,000 increase in our monthly salaries, so this is eating into our savings,” sighs the husband, who asked to remain anonymous.

Stricter MSV and LTV rules will hopefully make home buyers work out their math more carefully before committing to properties they may be able to afford now but not in the future.

Disadvantages of Property Cooling Measures - 15-month wait-out punishes genuine private property owners right-sizing their home

While most assume that private property homeowners will sit on a big pot of cash when they downgrade to a resale flat, this isn’t always true.

Some may be downgrading because they bought their property at a higher price or had their jobs or businesses impacted and are unable to continue financing their private properties.

They may be selling to stem their loss.

We also know of a couple seeking a divorce who is stunned by this twist.

Both parties intended to sell their condo apartment and buy separate resale flats. Now that they have to wait 15 months and rent two separate homes at a conservative $2,000 monthly each, this sudden change will cost them a total of $60,000, calculated the missus.

“This money could have gone into renovating our future homes or our child’s university fund. It is enough to make me rethink my divorce,” she adds wryly.

Similarly, some families outgrew their condo apartments and want to downgrade to a cheaper, bigger HDB flat. They may now have to buy a more affordable, older private property to avoid the wait out.

Or, if they still want their HDB resale flat, bite the bullet and shell out rental for the next 15 months.

“We wanted to downgrade to a bigger resale flat because we are planning for our growing family and our retirement needs,” says an exasperated Kenny Tan, whose third child will be due next year. “Now, my wife and I feel like we are being punished for trying to be prudent.”

Some homeowners and buyers may find their HDB loans or for mortgage refinancing applications rejected

Homeowners currently on lock-in floating home loans are probably panicking. If your lock-in period is up, you'll be out and about seeking cheaper repricing from your current bank or refinancing with another bank.

However, the increase of the MSR from 3.5 to 4 per cent, coupled with the TDSR having been reduced from 60 to 55 per cent since December 2021 (this means you can only use up to 55 per cent of your monthly salary) is bad news.

You may have qualified for a bank home loan a couple of years ago. However, if your salary has remained stagnant or dipped, you may find yourself now unqualified to refinance your bank home loan.

If so, you may need to consider right-sizing your house.

Is Seller's Stamp Duty (SSD) A Cooling Measure?

Yes, property tax such as Seller's Stamp Duty (SSD) and Additional Buyer's Stamp Duty (ABSD) are all instruments of property cooling measures.

According to the Inland Revenue Authority of Singapore (IRAS), current SSD rates for residential properties are:

• Stay up to one year: 12 per cent
• Stay one to two years: 8 per cent
• Stay two to three years: 4 per cent
• Stay more than three years: No SSD

Current ABSD rates for residential properties are:

• Singaporean first house: No ABSD
• Singaporean second house: 12 per cent
• Singaporean third and more house: 25 per cent

The ABSD rates for residential properties are higher for Permanent Residents (PRs):

• PR first house: 5 per cent
• PR second house: 25 per cent
• PR third and more house: 30 per cent

Foreigners purchasing any residential property will be slapped with a hefty ABSD:

• Foreigner all houses: 30 per cent

Thank you for contributing to our nation building fund, guys.

Is TDSR A Cooling Measure?

Likewise, the MSR, TDSR, and LTV are all property cooling measures as well.

The Mortgage Servicing Ratio (MSR) tells you how much of your monthly salary can go towards your HDB or EC loan. Currently, you can only use 30 per cent of your monthly income for home loans.

That means, if you earn $3,500 per month, you can only use $1,050 to pay your monthly HDB loan.

The Total Debt Servicing Ratio (TDSR) tells you how much of your monthly salary can go to all your loans and debts. Currently, you can only use 55 per cent of your monthly income for loans and debts.

If you earn $3,500 per month, you can only use $1,925 to pay all your loans and debts.

Finally, the Loan-to-Value (LTV) tells you how much home loan you can borrow from HDB or banks. Currently, the LTV for HDB loan is 80 per cent, and 75 per cent for bank home loans. The LTV also decreases if your property is older, or if you are an elderly applicant.