Property cooling measures #8: If not capital gains tax then...

Comments made by our National Development Minister's last Friday, whereby he wants to lower the prices of new HDB flats, have sent jitters in the property market that the Government may bring in a fresh round of market cooling measures. This has sent property stocks tumbling over the past few trading sessions.

Property developers are concerned that lowering of HDB prices could affect the private market eventually as buyers switch to the HDB market. And some observers has interpreted the recent comments as a sign of the Government's willingness to further intervene in still buoyant private market, with increased sentiment and expectations of Round 8 of new cooling measures.

As you may recall, the seventh and toughest round of market cooling measures was unveiled in January of this year.

Rumors have been circulating in the market since last week that the Government may soon slash the mortgage servicing rate for private homes. This is the proportion of monthly income a borrower spends to service his monthly mortgage installments.

If you have been following our blog, we did put forward the possibility of reinstating the property gains tax by the Government in an earlier post. This has generated quite a lively discussion amongst our readers.

The wife and I decided to take another chance on our somewhat murky crystal ball and it has this to say: the mortgage servicing ratio for loans granted by banks on private home purchase may be capped as low as 30% of a borrower's gross monthly income. The current ratio can vary from anything between 30 to 60%.

The 30% mortgage servicing ratio was already implemented for bank loans on HDB flat purchase as part of the last set of cooling measures in January. 

To illustrate the impact of such a reduction in mortgage service ratio (illustration taken from a previous news article report): Let's take a buyer who takes up a 30-year loan for a $700,000 "shoebox" apartment. And let's assume that the loan to be 80% of the apartment's value, with interest rate pegged at 1.5%. Based on a 40% mortgage servicing ratio in the past, he would need to have a gross monthly income of $4,830. But for the same property at a 30% ratio, he would need to make $6,440 a month.

Will this cause a further dent in private property prices? The wife and I certainly think so.

When is this likely to happen? Sooner than you may think.


Click on the link below to read our previous post on property cooling measures round #8:
http://sgproptalk.blogspot.sg/2013/01/property-cooling-measure-round-8.html