1 HDB flat for 2 condos? Such sales tack plays down risks

“Sell one property, buy two” has been the sales pitch of numerous property agents in these challenging times.

The proposition – sell your HDB flat and use the proceeds for down payments on two condos – has had some home owners and investors hooked, but market watchers are cautioning against it, calling for prudence as it carries some serious risks.

Potential buyers are urged to do their sums carefully and consider possible scenarios before taking the bait dangled by sales agents. Amid a slowing global economy, being laid off and a property’s value depreciating are real possibilities, with both occurrences crippling a couple’s ability to service two mortgages at the same time.

In response to queries from The Business Times, a spokesperson for the Monetary Authority of Singapore (MAS) said: “As property purchases are significant and long-term commitments, (households) should be aware of the risks involved – these include potential changes in the economic environment, and the impact on the value of their properties and their ability to service their mortgages if, for instance, there are changes to their employment status or prospects.”

Under the “sell one, buy two” strategy, a Singaporean couple will be urged to sell their HDB flat to capitalise on the capital appreciation, and then buy two condominium units – one in the name of one spouse for the family’s occupation and another smaller investment property in the other spouse’s name to be rented out. This is done by using a combination of cash and CPF monies.

One key “attraction” touted by property agents is that the additional buyer’s stamp duty (ABSD) does not apply as each spouse is holding only one property. Assuming the mortgage on the investment property is partially funded by CPF monies, while the rental income covers the balance, there is the possibility of positive cash flow.

Though the strategy is not a new one, buyers are now keen to find out more about it given the double-digit ABSD, PropNex chief executive officer Ismail Gafoor noted.

Following the latest round of cooling measures in July last year, Singapore citizens now pay 12 per cent ABSD on their second property purchase.

There are currently several blogs or websites by property agents detailing how the strategy works, complete with working examples. Agents have also taken to social media such as YouTube and Facebook to hawk the scheme.

However, there are risks attached to the strategy, not to mention certain caveats.

Both buyers must continue to work to meet the requirements for their individual property loans, such as the loan-to-value limits and the total debt servicing ratio (TDSR) requirement.

And should one spouse lose their job, it could place strain on the family to service two mortgages at the same time.

Preliminary Ministry of Manpower data showed retrenchments reaching 2,900 in the third quarter of this year, higher than 2,320 in the prior quarter. For the corresponding quarter a year ago, retrenchments stood at 2,860. While employment growth continues, the overall unemployment rate rose to 2.3 per cent in September – the highest since Dec 2009.

In taking up property loans in individual names, one party’s single income – not combined household income – is taken into account in calculating TDSR, the MAS spokesperson highlighted. Each borrower’s total debt repayment obligations, including the monthly payments for their own property loan, cannot exceed 60 per cent of their single income, for the sake of prudence.

The MAS spokesperson said: “As property purchases entail substantial upfront costs, households should also consider whether they have sufficient savings to pay for the relevant stamp duties and cash down payments before making property purchases.”

The spokesperson pointed out that while the cooling measures implemented have helped to keep household balance sheets resilient, they should continue to review their debt obligations, especially given uncertainties in the economic outlook. “MAS and the government will continue to monitor household balance sheets and property market developments closely.”

ERA Realty key executive officer Eugene Lim pointed out that the strategy is not for everyone. “You have to be financially stable. Both (spouses) have to have fairly high income,” he stressed, adding that property ownership is for the long-term.

When doing the sums to see if a couple can each afford one property, Mr Lim also advised potential buyers against factoring in a housing loan based on the maximum TDSR of 60 per cent.

Savills’ executive director (research & consultancy) Alan Cheong reckons that some property agents also use the scheme to lure potential buyers to generate sales. “After they crunch the numbers, a lot of (potential buyers) will not meet the criteria,” Mr Cheong said, adding that the agent would then try to sell them a single property.

In any case, potential buyers who do meet the financial criteria should still weigh the risks involving job security in an uncertain world, he cautioned.

Propnex’s Mr Ismail highlighted another caveat in the strategy: “Property investments are illiquid. You can’t cash out tomorrow. In the event of a downturn, you may not be able to find a tenant.” Given the uncertainties in the global economy, he advised buyers not to plough all their savings or cash reserves into their property purchase, but maintain cash reserves amounting to at least one year’s worth of mortgage instalments as a safety buffer.

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