The changes in the Sellers Stamp Duty and TDSR requirements have been exaggerated by headlines. Here, we explain what the new property measures mean.
There has been a lot of confusion regarding the new property measures in Singapore announced this March 2017. This is mainly due to flashy headlines that claim the TDSR is lifted, or that cooling measures are eased. Most of these are misinterpretations.
Here, we’ll clear up what all of it actually means:
What are the New Property Measures?
There are only two changes to existing property measures, which took effect from 11 March last week. They are changes to the Sellers Stamp Duty (SSD), and changes to the requirements for home equity loans.
These are as follows:
1. The Sellers Stamp Duty
The Sellers Stamp Duty (SSD) is a tax imposed on property sales. Property owners incur SSD if they sell their property within a certain time period after buying.
The SSD is a tax; it exists to discourage a practice known as “house flipping”. This refers to investors who buy and resell houses for profit, within a short time span (in some cases mere weeks). This speculative activity causes property prices to rise across the board, and makes housing less affordable.
Under the old SSD rules, the tax rate was as follows:
- 16% of the property value, if selling on the first year
- 12% on the second year
- 8% on the third year
- 4% on the fourth year
- No SSD on a sale that occurs during the 5th year or thereafter
Under the new rules, the SSD only applies for three years. The tax rate is also lowered:
- 12% if selling on the first year
- 8% on the second year
- 4% on the third year
Who is Affected By the SSD?
The main effect will be on a small group of property investors, who like to make short term property investments. An example would be investors who want to buy under-development properties at discounts and low interest rates, and then sell the property as soon as it is complete during the fourth year.
On the large scale of things, it is somewhat plausible that the shorter SSD will lead to faster resales. This could nudge general prices upward for private properties, but that’s speculation.
Most Singapore homeowners will not find this relevant at all. HDB buyers cannot sell until the end of the Minimum Occupancy Period (MOP) of five years anyway, so the SSD doesn’t matter to them.
Even among Singaporeans who buy private property, it is a rare handful who intend to sell after three years.
2. Removal of TDSR Requirements for Home Equity Loans
The Total Debt Servicing Ratio (TDSR) limits your home loan to 60% of your monthly income, inclusive of other debts. So if you earn S$6,000 a month, the TDSR dictates that your maximum monthly loan repayment is S$3,600, inclusive of other debts like car loans, student loans, etc.
It is a common misconception that TDSR has been lifted for home loans. This is not true. Rather, the TDSR has been lifted for home equity loans. Even then, it applies only to home equity loans with a Loan-to-Value (LTV) ratio of 50%. Confused?
A home equity loan is when a property owner takes a bank loan, using their house as collateral.
For example, say you are retired, and have no income. However, you do own a property that is worth S$2 million. You are in a situation in which you need money badly, but you don’t want to sell the house.
You could take a home equity loan of S$1 million (this would be 50% LTV), pledging your house as security for the loan. As you have staked your house, your risk of default is low; the bank will charge interest of just around 1% per annum.
Prior to 11 March, it was impossible for people with low or no incomes - such as retirees - to take home equity loans. This is because people like retirees do not have much income (or have none at all).
Under the new rules, it is now possible for such people to borrow, as there is no TDSR requirement for loans with an LTV of 50% or below.
Who is Affected By the TDSR Requirements?
This affects a small number of asset-rich, cash-poor individuals. Think of people with paid up houses, but low incomes. A home equity loan will allow them to raise money without having to sell their house.
Most other Singaporeans will not need or use this kind of loan. It is also irrelevant to HDB flat owners, as you cannot take a home equity loan on an HDB flat.
That’s All It Is?
That’s all. There is no removal of the cooling measures like the Additional Buyers Stamp Duty (ABSD), nor is it easier to get home loans. The impact on our property market is not likely to be too huge, so don’t rush out to buy a house because of this.