Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Singapore Hurts Property Bubble By Limits on Housing Loan Payments, Higher Taxes

Singapore has figured out the best way to burst a bubble is to reduce the leverage taken to make that bubble go higher. They’ve upped the taxes on properties, and reduced the total debt service ratio that borrowers can have.

In Singapore, the government raised the minimum down-payment on second-home purchases, brought in new taxes for foreign and corporate buyers, and added a stamp duty for all residential properties. The Monetary Authority of Singapore said June 28 that home loans should not exceed a total debt-servicing ratio of 60 percent. In August, the central bank then cut the maximum period for new loans to buy public housing, where about 80 percent of Singaporeans live, by five years to 25 years. Mortgage payments were capped at 30 percent of gross monthly incomes, down from 35 percent, according to the Housing & Development Board.

So buyers will pay more (through taxes) for properties. And then, if they take a loan, their total loan payments (including cars and other debt) cannot exceed 60% of their income. The housing loan mortgage itself (interest plus principal) can’t go beyond 30% of pre-tax income. The term of such loans are limited to 25 years.

In India, I’ve argued that we have signs of a housing bubble. I’ve also stated that we have unnecessary housing “subsidies” – tax saving on interest AND principal, capital gains offset if you have capital gains of ANY sort (not just housing), lower interest rates, offsetting losses on rents against salaries. None of these are available for loans taken by individuals for other purchases (cars, scooters or TVs). I argue that we should remove these subsidies to make housing affordable and curb bubbles.

States have already upped taxes. Housing loans have been deprioritized when they go beyond Rs. 75 lakh. India’s loan to value (for banks) is capped at 75% for larger loans and then, there are no prepayment penalties.

However, India has two kinds of housing lenders – banks (well regulated by the RBI) and housing NBFCs (not that well regulated). Regulations must apply to all lenders, otherwise there’s just player arbitrage.

We don’t seem to have the inclination to curb this bubble. And as I speak, it is imploding. Housing is not so leveraged in India that it will hurt banks – there is a cash “black” component to housing buys that is effectively the buyer’s equity. (A bank loses only after the buyer’s equity has been wiped out) But the burst of the bubble *will* hurt everyone – from individuals to real estate companies to cement manufacturers.

  • Sujeet Pillai says:

    The tax on corporates, NRIs, foreigners might help curb the bubble. There probably should also be a tax on unoccupied property somehow. The housing incentive can be modified to be a one time incentive in ones life.

    • D Rama says:

      Hi Sujeet, so if someone wants to purchase second house after first one has been paid off (say prepaid early), and he wants to move to a bigger house, then he should not be allowed interest deduction on his second house?
      And if a builder has just completed construction of a building, and several flats are unsold, he as to pay extra tax just because they are unoccupied?
      In India, what is needed to prick the property bubble is to flush out the black money component completely from all RE transactions. One way to do it is to have 0% long term capital gains tax on residential property sales. When that is done, there is simply no incentive for the seller to want money in black.
      But then again, politicians are in control of Govt and they are the ones having maximum black money…so that’s never gonna happen.

      • Rama – I believe he should not be allowed the deduction of interest on his second house. You do not get a deduction for buying a car, for taking public transport, or for buying a TV. (In that context, I think the tax deduction for rent should be removed too. Then, with simpler taxes, we can reduce tax rates).
        A builder can be given a certain amount of time after which rent is deemed to accrue to him. This time can be for 12 months, and only available to the person who has constructed the house or flat.
        Interesting about the long term capital gains tax to zero but that will only inflate the bubble. Tax exemptions need to come with an end-date. Black money will not deflate the bubble, black money is here because there is not enough enforcement, not because of fear of capital gains.

      • Sujeet Pillai says:

        Rama,
        Yes. I think a one or two shot allowance for interest deduction on housing loans make sense. The state should not stand in the way of a person owning a house and should encourage purchase of some real estate. After that there’s no need to provide for that deduction. But considering the real estate demand it doesn’t seem that anyone needs any encouragement to buy their own house.
        I do believe unoccupied houses should be deemed to accrue rent. Unoccuppied houses represent wastage of supply. If an investor has 6-7 houses purchased or a builder is keeping a few flats for himself just to sell it off at higher prices later why shouldn’t those flats accrue rental tax?
        Primarily I think the RE market in India is quite inelastic downwards on price. Pressure on the owners who sit on property would change that.

  • lohit says:

    With the exception of Germany/Japan/Switzerland, the entire world has fallen in love with RE. See these wonderful charts from the economist – http://www.economist.com/blogs/dailychart/2011/11/global-house-prices
    Authorities are trying to curb bubbles in canada, netherlands, australia, new zealand, Hongkong, … (the list is long). But unlikely they will succeed. By the time authorities act it is usually too late.
    As for black money, it is a symptom not the cause of our RE bubble. The cause is as usual easy money and a flawed sentiment that RE will never fall here. The ‘this time is different’ phenomenon.

  • lohit says:

    During the US RE crash this chart was quite popular – http://www.ritholtz.com/blog/2011/04/case-shiller-100-year-chart-2011-update/
    Now that Shiller has won the Nobel, we might see it gaining popularity again. Essentially, it says that home prices just keep pace with inflation over the long term.
    So for all the countries with overvalued RE, its either a fall in prices or stagnation till inflation catches up.

  • Hi Deepak,
    I have always enjoyed reading your blogposts. Today I thought to comment on it for the first time because I had a view which was very different from yours. I believe reducing the leverage will just have a very short term impact on house prices in Singapore. It will just push the ratio of all cash purchases to new highs and house prices will move north again moving out of common man’s range. We have reports that all-cash deals in London and US are touching all time highs ( http://www.bloomberg.com/news/2013-10-06/london-cash-buyers-send-banks-north-to-riskier-loans.html and http://www.marketwatch.com/story/nearly-half-of-all-homes-are-purchased-in-cash-2013-08-29 )
    Singapore will soon be home to millionaires and billionaires while the middle class will be wiped out slowly. The reason is the same across all the jurisdictions which have stable government, highly developed financial system and low taxes (which is the most important aspect). Singapore is basically a tax arbitrage country which will continue to attract wealthy as a store of their estate and wealth. As long as tax arbitrage is there, property prices will continue to skyrocket.
    India on the other hand has the same problem but for different reasons. India has an effective tax arbitrage not because of low official taxes but low enforcement of the tax code.
    What can be done to prevent it? Nothing except bringing more supply to the market which includes developing new cities with equivalent if not better infrastructure as Delhi and Mumbai (unfortunately even this is not possible in Singapore)

  • Rohit says:

    I think the main reason for property bubble here in India is largely due to unregulated practices in the real estate industry and a complete indifference on part of the buyers on the performance of the developers, which mushroom everyday all over the indian cities. Infact anyone can become a real estate developer with just a few billboards & ads in place and ofcourse by paying handsome commision to the brokers.
    The pre launch game, easy resales with no 1st transfer charges encouraged by the developers not only jacks up the prices but gets in early money, sometimes even before the project gets all the legal clearances. Since it’s too easy to use the sales revenue and divert it to other projects while continuously delaying the projects; works like a charm for both developer and the buyer a.k.a. ‘Investor’. Reason these practices are never questioned. Infact the Investor is happy with the slow pace, with his property value appriciating and no further demands being raised. If you know how to play this game right, there is no better money turner.
    But the irony of all this is the end-user (because he’s always late in the game) suffers badly – ends up paying escalated prices, since he come in late – paid 70-80% to the developer and due to delay keeps paying the rent + EMIs.
    How can this be regulated? Tightening the norms and criterias for the developer to start any projects, phased developmental controls ( not free for all like Gurgaon). Price and performance index for all developers. Developers should not be allowed to touch the sales money ( some states have brought in this provision of the sales reciept going to an escrow account but not enforced fully). Heavier penalties for delays and non- performance. Higher taxes on luxury housing schemes, which mostly ends up increasing the price barrier. Promoting affordable housing schemes through customer refinancing and indirect incentives to developers. Sorry no numbers or figures.

    • Yes, there is a strong need for an RE regulator. Escrow is now enforced by some banks, but they all get around it by second sales. The concept of course will see massive deleveraging one day, but it is currently being encouraged by our policies.

      • Krishna says:

        Im quite surprised that you approve a RE regulator. Will only lead us back to the license raj system. These are market forces and people learn by only making mistakes.
        Those days are gone when people just lapped up any project not even glancing at the name of the builder. Now people are becoming smarter and doing all the background check.
        The more rules you make, the more are the loop holes. People bought property for reasons other than living. There was pure speculation(read gambling) going on. Everyone is now coming back to senses. Normal market procedure of Euphoria, Stall, Crash, Stall, Rise, Euhoria

        • SEBI hasn’t taken us back to license raj 😉 Regulation is useful; I don’t believe in the concept of buyer beware in any investment transaction. There should be damages for violating regulations, and standardized agreements. Like recently some builders decided to say they will own the maintenance even after the building is handed over. Courts eventually ruled that this is bunkum, but a regulator would have ensured the project wasn’t even sold with such an agreement. Secondly you want a place that people can complain to, which can take punitive action (such as stop future projects).
          But the issue with regulation is that it gets too high handed, and I don’t disagree that this is a risk. However no regulation is far worse, and bad regulation can be fixed.

        • Krishna says:

          But what happens to the RE or infrastructure business….. already too many hurdles to pass….
          In India its not about the law… the law in India is pretty good… its all about the enforcement of law which is cranky… Till the overall judicial system is not overhauled it pretty much has to be ‘Caveat Emptor’, just adding layers of licensing and approvals is not gonna help…
          for SEBI its pretty much easy to supervise a few exchanges… but will it be equaliy feasible and probable to have a similar system for RE… Also not to forget that SEBI deals with transactions mostly done online or which have a online trail…. nothing of this sorts in RE…. also so many different local/state laws related to RE…. its much messy than we think….
          It is also very hard to bring black money into capital markets but RE thrives on Black Money… so people have vested interests and it just balloons up the problem for the regulator.

        • I disagree in this – I believe an effective regulator can help. However, the effectiveness is about how much power it has, which like you say is about too many pieces of authority, local land laws, etc.
          Caveat emptor isn’t overwhelmed by licensing. You can do what RBI or SEBI have done – create a complaint mechanism (which functions now as a court and is getting more and more effective), penalize class action situations, provide for punitive damages, create level playing fields, enforce disclosure requirements etc.
          These can be done today; for instance, every project should have photocopies of land documents online and with the regulator (who should publish them) – this gives you at least a better chance of assessing the project before getting a down payment. This will also ensure all documents are there – the original plan, the approved deeds, the standard agreement between builder and everyone in the project, the size of the common areas, the facilities they said they would provide etc. Put that, and punitive damages for violations, and things will change.

        • Krishna says:

          I believe the culprit here are the buyers and not sellers. What would you call of sellers who start booking and pay upfront fees when no conclusive plan is in place forget the charts, paperwork and approvals.
          There have been cases where the full payment of the land even is still not settled and there are people already buying pieces, **in full knowledge of what is happening**.
          When greed overwhelmes rational thinking you fill always find such stink starting. Ofcourse we can keep discussing this at length but finally agree to disagree 🙂