Singapore: New Real Estate Measures and How they Impact You?

The Government of Singapore has recently introduced a new set of laws dealing with the real estate sector. These new rules have been introduced with the sole purpose of reducing speculation in real estate and they are also expected to cool down the rapid increase in real estate prices here in Singapore.

So how do these new rules affect you? Given below is a detailed explanation of the new provisions for real estate and how they will affect home-buyers and other real estate investors.

1. Speculation in real estate will reduce significantly

The new taxation structure will rein in speculation in real estate by a great degree. The new tax laws add 22% to the cost of any property purchased from now on. This increase is explained below.

• Stamp Duty for buyers has been increased to 1% for a property worth $180,000, 2% for any property worth up to $360,000 and 3% on any property purchased for more than $360,000

• Stamp Duty for sellers has been increased to a whopping 16%

• Banks will now charge fees for early redemption of loans discouraging short-term buying/selling in property

• Agent commissions generally amount to 2% of the property sale value

• Housing Loans are charged 1.5% per year in interest( this can go up in the future)

These provisions make it almost impossible for short-term real estate speculators to profit from buying/selling of property.

2. More difficult for middle class to purchase property

The new tax laws make it very difficult for the middle class to purchase property. First home buyers now need to put up a 40% down-payment while the back only finances 60% of the property value. Similarly buyers of second homes must now put up 60% of the property value as down-payment while the banks will only finance 40%. Before these laws took effect; home buyers only needed to put up a 30% down-payment and banks would finance the rest.

For a property worth $1 million, buyers now need to put up a $400,000 down-payment as compared to $300,000 earlier. Assuming that the average middle class family saves $15000 a year; they would now need to save for an additional 7 years to meet the $100,000 difference.

The government of Singapore has taken these measures to curb the flow of hot money from neighboring China and Hong Kong into Singapore’s real estate market. The Monetary Authority of Singapore has also put out a consultation paper which calls for banning the use of home equity to purchase new properties. They also want home equity based loans to be capped at 60% of home value. Under the current rules, a property owner can avail a home equity loan which is equivalent to 70% of his property’s sale value. If the measures suggested by the consultation paper are implemented, this too will come down.

So where do we invest our money now?

1. Real Estate

Taking into consideration the stringent tax laws introduced recently; the only attractive real estate investments in Singapore are landed properties. There are less than 70,000 landed properties in Singapore and they are generally beyond the grasp of the middle classes. With 1.5 million immigrants and the current population of 5 million, even if 10% of these people are rich then demand for landed properties will greatly outstrip supply going forward. This makes landed properties the best real estate investment option currently.

2. Equity

Stock market movements happen in 3 phases. One is immediately after a market crash when the overall economy is performing badly. For Singapore, this phase lasted between March 2009 to December 2009. The second phase generally involves a sharp rise followed by a long period of consolidation; Singapore experienced the second phase in 2010. The third phase sees the markets rallying to take out their earlier highs. Singapore is currently between the end of the second phase and the beginning of the third one and the current correction can be used to start investing in stocks of well managed Singapore companies.

3. Commodities

The current rally in commodities is more a function of weakness in the U.S. dollar than any real rise in demand. Since most countries hold large amounts of U.S dollars, the dollar will not collapse at least for now. At the same time, huge levels of debt will surely lead to a gradual but continuous fall in the value of the U.S dollar and all hard assets including commodities will continue to outperform.

The new real estate laws formulated by the Government of Singapore will lead to more money flowing into other asset classes like equity and commodities. It is advisable to use this opportunity to invest in stocks/commodities for financial benefit.