cooling measures

Friend or Foe: Decoding Singapore’s Latest Cooling Measures on April 2023

In today’s segment, we will discuss the implications of the new cooling measures and how it will impact YOU!

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Effective 27 April 2023, the Singapore government has implemented fresh batches of cooling measures. This is the first time in the history of Singapore that in the span of 7 months, starting from September 2022, new cooling measures have been announced four times.

The latest cooling measures come in the form of higher ABSD for different segments of buyers. The government emphasise that the changes in ABSD rates aim to temper investment demand, supporting the government’s efforts to increase housing supply and ease the tight market for owner-occupiers and renters. Authorities have carefully designed these measures to balance housing demand and make the Singapore property industry more stable.

Effective from 27 April 2023, the ABSD rate has been increased for everyone from Singapore citizens, PRs, and Entities to Foreigners. For foreigners, the new ABSD has been particularly concerning since it has doubled from 30% to 60%.

Let’s have a peek at the new ABSDs imposed on Singapore residential buyers and to what extent it will affect them.

New ABSD rate for Singaporean citizens

ABSD ratesBefore 27 April 2023On or after 27 April 2023
Singaporean citizensFirst property0%0%
Second property17%20%
Third and subsequent property25%30%
Table 1: New ABSD for Singaporean citizens effective from 27 April 2023

It has already been challenging for local buyers to keep up with the escalating prices of residential properties in Singapore. The new cooling measure has added to the cost if you are buying a second or subsequent house. 

However, for locals, they are not subject to ABSD on their first house. It is rather targeted towards those people who are buying multiple houses for investment purposes. 

This is an effort of the Singapore government to stop the real estate sector from overheating and keep it affordable so that all locals can afford to own at least one property in Singapore.

For example, if a local buyer who is a Singaporean citizen purchases a residential property worth $2 million, he will be subject to pay ABSD as follows.

ABSD ratesBeforeAfterIncrease in ABSD
Singaporean citizensFirst property000
Second property$340,000$400,000$60,000
Third and subsequent property$500,000$600,000$100,000
Table 2: Example of how new ABSD will affect Singaporean citizens effective from 27 April 2023

As you can see from the above example, Singaporean citizens will not have to pay any ABSD to buy their first home. However, if you are buying a second or third home, your ABSD will increase significantly.

New ABSD rate for Permanent Residents (PRs)

As per the new changes that took effect on 27 April 2023, PRs will not experience any changes when they buy their first residential property. However, if you are a PR and thinking of buying your second or third house, you will be subject to an increased ABSD, as shown below. 

ABSD ratesBefore 27 April 2023On or after 27 April 2023
Permanent Residents (PRs)First property5%5%
Second property25%30%
Third and subsequent property30%35%
Table 3: New ABSD for PRs effective from 27 April 2023

If we follow the above example and a PR holder purchases a residential property worth $2 million, he will be subject to pay ABSD as follows. This once again indicates that while the Government encourages you to buy your first home, they are more strict on subsequent purchases to keep the residential housing price balanced.

ABSD ratesBeforeAfterIncrease in ABSD
Singaporean citizensFirst property$100,000$100,0000
Second property$500,000$600,000$100,000
Third and subsequent property$600,000$700,000$100,000
Table 4: Example of how new ABSD will affect PR holders effective from 27 April 2023

New ABSD rate for Foreigners, Entities & Housing Developers

The most shocking increase in ABSD has been for foreigners and entities.  With the implementation of the new cooling measures, their ABSD has doubled. If you are a foreigner considering buying a residential property in Singapore, you will be subject to double the ABSD than earlier, while for commercial properties, you won’t have to pay any ABSD – This is something to ponder about!

ABSD ratesBefore 27 April 2023On or after 27 April 2023
ForeignersAny residential property30%60
Housing developers35%* + 5%**35%* + 5%**
*Housing developers can apply for remission for the ABSD amount subject to terms and conditions.
** This 5% ABSD is non-remissible and needs to be paid upfront upon purchase of the property
Table 5: New ABSD for foreigners, trustees and housing developers effective from 27 April 2023

Let’s take the above example and see the difference if a foreigner purchases a residential property worth $2 million. He will be subject to ABSD as follows.

ABSD ratesBeforeAfterIncrease in ABSD
ForeignersAny residential property$600,000$1,200,000$600,000
Table 6: Example of how new ABSD will affect foreigners, trustees and housing developers effective from 27 April 2023

As you can notice, for the foreigner, any residential buyer he sets to buy will cost him double the ABSD, effective 27 April 2023. The Government is particularly targeting this segment with their cooling measure. This is mainly because even after previous cooling measures, the demand of foreign buyers for residential properties has not been deterred much. 

In the face of such high demand from foreigners, the residential real estate sector experiences a shortage of supply. They do not have enough residential properties to meet the demand, which leads to an increase in residential property prices.

When residential property price increase, locals struggle to keep up with the hgiher price and cannot afford to buy a home. 

The Singapore government wants to stop this snowball effect. As such, it is their way to effectively balance the demand and supply curve to maintain reasonable pricing for all buyers’ segments.

How Singapore’s ABSD Changes Could Reshape the Property Landscape?

The introduction of the new cooling measures in the form of higher ABSD will be instrumental in stabilising the property market. Currently, the nation is struggling with hiking rental yields and property prices, an inelastic supply chain, rising construction prices and mortgage payments. So, the cooling measures came at just the right moment to bring equilibrium to the residential property market and create a renewed interest in commercial properties.

36% y-o-y increase in rental

Condominiums have seen an escalating year-on-year rental by 36.2% from February 2022, as per SRX and 99. co reports. Tenants are anxious about the rental hikes, as some expats explained how their landlords are demanding as much as a 60% increase in their rentals.

The growing rental prices have been met with pushback by the tenants. On the one hand, landlords are unwilling to lower the rent. On the other hand, the tenants cannot afford to keep up with such high demand for prices.

Supply cannot meet demand

The key reason for the rental hike is the disruption in the supply chain. Due to the Covid-19 pandemic and on and off-border restrictions, there’s been a significant drop in foreign labours working in the construction industry.

Since many developers rely largely on these foreign talents to build their projects, the timeline for their project development takes as long as 3 to 4 years to complete. Alternatively, when they seek to employ local talents to replace the foreign labours, they have to bear additional costs. The delays and the rising costs are putting pressure on developers as they are unable to supply the pouring demand of residential buyers.

Escalating construction prices

The disruption in shipments due to ongoing global conflicts, such as the sanctions due to the Russia-Ukraine war and global pandemic, has caused further delays in construction, not to mention making the construction cost more expensive as they have to find alternative ways to make shipments and get an adequate supply of building materials and resources.

As a result of all these factors , the bottom line is effected! The increase in construction prices are reflected in higher property price, which has, in turn, caused the rentals to spike.

Local suppliers cannot cover the mortgage cost

Another critical aspect of the inelastic supply chain is rental rates are currently lower than the interest rate.  Fundamentally, in a healthy real estate landscape, the rental yield should be higher than the interest rate. However, currently, the property rental yield is approximately 3%, whereas the interest rate persists at 4%, imbalancing the whole dynamic.

As a result, property owners are unable to cover their current mortgage interest with the rental returns they yield. So, the pinch of the mortgage payments is mostly borne by local buyers who own multiple properties in Singapore. When they cannot pay their mortgage with their rental income, they have to spend from their personal savings, clasping them hard with cash flow problems.

Hence, they remain with two choices if they do not want to force a sale due to mortgage default. Either they have to sell the properties at a loss, or they can increase the rental prices to cover the expenses, which puts a heavy burden on the tenants.

The new cooling measures could not come at a better time. The timely move by the Singapore government to balance the equilibrium of Singapore real estate will play an integral role in its growth.

Stabilised foreign demand for Singapore residential properties

According to the new cooling measures taking effect from 27 April 2023, foreigners have to pay 60% ABSD on any purchase of residential housing, which has formerly been 30%. This overnight doubling of the ABSD will cause foreigners to take a back seat in buying properties which in turn will cool off the hyped-off demand for Singapore residential properties.

With a stabilised demand, the market will be more balanced, thus relocating to more affordable pricing for the residential segments both in terms of buying and rental.

Support for local owners

With the increased ABSD, the foreigners’ purchase cost for the property will be 60% higher than locals. To put it simply, for a S$1 million investment, a foreigner will have to sell that property at S$1.6 million to break even, whereas a local needs only to sell the property at S$1.1 million to make a profit. 

Since foreigners will have to buy the properties at a higher price, the rental they will set will also be higher. On the other hand, locals can attract tenants with much more affordable rentals since their property purchase costs are lower. This will give local property owners a leg up to sustain in the market.

As such, Singapore can position itself as a stable and thriving market with a healthy property landscape. Locals will get relief from the cooled-off demand to rent at affordable prices and catch up with their mortgages. Whereas the balanced demand for residential properties by foreigners will balance the supply and demand of residential real estate.

Position Singapore as a stable and secure market for foreign funds

With rising inflation and various sanctions doing rounds globally due to the Russia-Ukraine conflict, foreigners are keen to find a safe haven to grow their wealth securely.

The global conflicts led to a weakening USD currency reserve. The falling out of countries has caused hundreds of billions of USD reserves has been frozen. Transactions with each other can cause them to dilute their reserve heavily. Another recent development is that USD has withdrawn its military presence from the Middle East. As such, the USA is now the most significant oil exporter and a competitor to the Middle East. 

Currently, Singapore offers not only a secure home for foreign funds but also owns one of the strongest and most stable currency values. 

Commercial real estate to channel foreign investment 

With the cooling measures, Singapore real estate is set to maintain a balanced and stable growth. Foreigners can channel their funds into the Singapore commercial sector now that the residential purchase cost has increased significantly for them.

Hence, commercial real estate can become a better avenue for their investment as they can get exempt from ABSD if they buy properties in this segment. Besides Singapore being a prime Asian financial hub, its commercial segment offers lucrative investment benefits that foreigners can explore.

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