Singapore’s 2018 Property Shock

Yesterday, on 5 July 2018, the Singapore Government announced that it would raise the Additional Buyer’s Stamp Duty (ABSD) by 5% for citizens and permanent residents buying second and subsequent properties, and lowered the loan-to-valuation (LTV) limits by 5%, further limiting the ability of property buyers to borrow money for their purchases.

This means that a Singaporean who already owns a property and is looking to buy a $1million residential property for investment purposes would now need to fork out $144,600 in stamp duties, or 14.46% of the purchase price. For a $2 million property, due to the 4% Buyer’s Stamp Duty (BSD) for amounts of $1 million and above, total stamp duties would amount to $304,600, or 15.23% of the purchase price.

In a bid to avoid the higher stamp duties which came into effect today, throngs of Singaporeans rushed to the launches of several new developments last night, hoping to pay an ABSD rate that suddenly looks like a bargain.

However, it is worth remembering that even without the rate hike, residential property buyers would still have paid 9.46% in stamp duties for a $1 million property, or 10.23% for a $2 million property.

The old stamp duties were already a huge hurdle for property investments to break even. And that’s before taking any agent fees, conveyancing charges, bank fees, etc into account when you buy and sell a property, not to mention any renovations or maintenance that would be involved in between. Now, the hurdle just got much higher. Imagine going to your banker who tells you that the sales charge for a unit trust investment is 15%!

One way to view the panic seen at last night’s developer launches is that many Singaporeans have a love affair with property. Another view would be that perhaps many Singaporeans do not realise that there are viable alternative long-term investments such as a diversified global stock portfolio.

For example, if you bought a house for $520,000 seven years ago and after renovation, it cost $550,000 in total. (For simplicity, let’s not include any stamp duties, agent fees, or any other fees.) Today, it’s worth about $700,000. That may sound like a tidy profit, but if you annualize it, it’s a return of only 3.5% per annum. Assuming you rent your property out instead of staying in it and earned an annual rental yield of about 2.5% per annum (which is roughly the market rate), that would have given you a total return of 6% per annum. So your total gain would be about $277,000.

In contrast, a global stock portfolio like the MSCI All Country World Index has delivered about 10% per annum in the same period, meaning that you would have virtually doubled your initial investment and made $550,000 instead of $277,000.

This example is not to say that stocks always outperform property, or that stocks will always deliver 10% per annum (we expect global stocks to deliver about 6 – 8 % per annum on average). It is just to say that property is not the only viable investment out there.

Especially not with these stamp duties.

This is an original article written by Sean Cheng, Portfolio Manager at Providend, Singapore’s Fee-only Wealth Advisory Firm.

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