Impact of the latest property measures

It’s all over the media – the government has just announced another round of cooling measures for the property market.

Summary of the new measures

Here’s a summary of the measures:

1) The holding period for Seller’s Stamp Duty (SSD) to be imposed has been increased from the current three years to four years.

2) Seller’s Stamp Duty (SSD) rates have been increased to 16 percent, 12 percent, 8 percent and 4 percent of selling price for residential properties which are bought on or after 14 January 2011, and are sold in the first, second, third and fourth year after purchase respectively.

(This is currently 3 percent, 2 percent and 1 percent for properties sold in the first, second, and third year after purchase respectively).

3) The LTV limit has been lowered to 50 percent on housing loans for property purchasers who are not individuals (e.g. companies).

4) The LTV limit has been lowered from 70 percent to 60 percent for purchasers who are individuals with one or more outstanding housing loans at the time of the new purchase.

These measures will take immediate effect on 14 January 2011.

My take on the likely impact of the measures

The increased Seller’s Stamp Duty is very harsh. To just breakeven if you’re selling within the first 3 years, your property price has to go up by at least 15-20 percent (taking into account transaction and interest costs). This basically means that most buyers are forced to hold for at least 3 (if not 4) years.

Also the SSD is a tax on your selling price regardless of whether you made money or not (unlike a capital gains tax). If property prices stay flat and you are forced to sell your house for whatever reason (loss of job, need liquidity etc) you will immediately make a loss of 4-16 percent (not including transaction and interest costs) on the total home price. Assuming you took a 60 percent loan, you could lose up to 40 percent of your capital due to the impact of leverage even if home prices stay flat.

I believe the net impact of these measures is that transaction volumes will fall significantly. Buying demand from investors and speculators will be heavily impacted, while even end users are likely to take a “wait and see” attitude in the hope that prices fall more.

But at this juncture I don’t think prices will fall significantly in the short to medium term. Home owners and developers still have strong balance sheet positions and are not likely to sell at a loss. We will need to have a recession and retrenchments before these two groups start to sweat.