Last evening, the government announced another round of cooling measures for the property market, effective 14 January 2011:
1) Holding period of homes liable for Seller’s Stamp Duty (SSD) increased from 3 to 4 years;
2) SSD rates raised to 16%, 12%, 8% and 4% for homes sold in 1st, 2nd, 3rd and 4th year respectively;
3) Loan-To-Value (LTV) limit lowered to 50% on housing loans for non-individual property purchasers; and
4) LTV limit lowered from 70% to 60% for individual property purchasers with one or more outstanding housing loans.
Similar to any previous property measures introduced before, the market is expected to be quiet for a while, with buyers adopting a wait-and-see attitude.
I don’t expect any drastic drop in property prices. As seen in the past, these government rules have never proved successful to cool down the over-heated property market.
A gradual drop of property prices is more likely to be caused by the collapse of the stock market, a global or regional crisis, or an economic recession.
Nonetheless, these incessant rounds of news measures have created a lose-lose or neutral-lose position for the property developers and buyers.
Effects on property developers
Throughout the years, developers have learned how to adapt to a softening market:
1) Put plans for newly acquired land on hold;
2) Slow down progress of projects under construction before legal TOP date;
3) Delay launch of new projects;
4) Offer more incentives, bigger discounts or cutting prices for new launch; and
5) Unsold units after TOP automatically become rental units (sounds familiar with Far East?).
Effects on property investors/speculators
1) It is almost impossible to make any profit with 16% SSD. With investors paying prices near the peak, how likely is the market to go up another 20% in a year?
2) Rule no. 3 dashes the hope of property speculators making handsome profits by flipping properties through a company or partnership. With 50% upfront cash and 50% loan, it significantly increases the investment risk and lowers the net return.
Even without the new measures, I feel that property investment has now become a game almost impossible for players to win.
You can’t deny the fact that new buyers are bearing more potential risks these days:
– potential softening of rental market due to over-supply;
– inflation and increase of interest rates;
– probability of bubble burst or another recession;
– holding of negative assets (and mortgage banks’ requests to top up the difference); and
– opportunity costs (miss value-for-money investments in case there’s a bear market).
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