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Hot money in real estate?— A review of the Additional Buyer’s Stamp Duty (ABSD) 6 February 2013, The Business Times |
Despite four sets of cooling measures imposed from 2009 to late 2011, the private residential property price index still rose 5.9 per cent in 2011. In a world flush with cheap credit and incessant money printing by the western nations, Singapore’s authorities were concerned that the “investment flows into our property market are now larger than before, and unlikely to recede as long as interest rates remain low.” So on 7 December 2011, the Additional Buyer Stamp Duty (ABSD) was introduced to “cool investment demand, and avoid the prospect of a major, destabilising correction further down the road.” It has been more than a year since this stamp duty was introduced for private residential properties and it is time to ask some questions.
• YES: The proportion of foreigners purchasing private residences (excluding landed properties and Executive Condominiums) fell from an average of 19.4 per cent during the twelve-month period of January to December 2011 to 7.1 per cent in the subsequent twelve months. In absolute terms, foreigners purchased 2,053 private residences in 2012, a drop of 62 per cent from the 5,480 units clocked in 2011. Obviously the ABSD was a successful deterrent in shutting out foreign interests in Singapore’s residences.
Fig 1: Monthly private residential purchases by nationality, excluding enblocs, landed properties and Executive Condominiums
source: URA, IPA
• NO: However, developers’ sales of private residences set a record high of 22,197 units in 2012. New records were also achieved for prices of mass market condominiums and ECs. The private residential price index continued its ascent, gaining 2.8 per cent in 2012. This was backed by the strong price increase of 6.5 per cent in Outside Central Region (OCR) which was in turn supported by the northward march of HDB resale prices, up 6.6 per cent.
• NO: Recall the long lines of blank cheques queuing at commercial and industrial property launches. All five rounds of property cooling measures were aimed at cooling the residential segment but the strata industrial and office segments were left alone to boil over. New launch strata industrial properties have crossed $1,000 psf with an expected rental yield of 2 to 3 per cent, on par with freehold luxury residences.
• NO: We needed round six of cooling measures in October 2012 to restrict borrowing limits for residential properties. But that did not prevent new record prices from being set in the supposedly sandwiched segment of EC buyers at the end of 2012.
• Still NO: Now that Japan has joined the money printing frenzy to stimulate its economy to achieve positive real inflation, we needed round seven of cooling measures on 12 January 2013. Investors were further penalised upfront through higher ABSD, stiffer requirements on CPF versus cash equity, mortgages and lending limits, and for once outside of the residential segment, a curb on speculation in the industrial segment through a three-year Seller Stamp Duty (SSD).
Singaporeans purchased 25,081 private residences in 2012, a rise of 18.9 per cent from the 21,101 units in 2011. These numbers include landed residences and exclude ECs but we know both EC launches and HDB Build-To-Order (BTO) volumes were at record highs last year. These numbers should put to rest the finger pointing on foreigners and their hot money flow destabilising Singaporeans’ home values. However this calls into question why the latest set of cooling measures are even tougher on foreigners.
The January 2013 measures punish foreigners more with ABSD increased to 15 per cent. Why so when their numbers are already down? It seems counter-intuitive to further consider that the 2013 Population White Paper pointed to a need for more foreigners and Permanent Residents (PRs) as we grow Singapore towards a target population of 6.5 to 6.9 million by 2030. We want foreigners and PRs to assist us in sustaining economic growth of 2 to 3 per cent per annum up to year 2030, but on another hand, we make it exorbitant for foreigners to own their own homes.
I am not completely clear about the rationale behind the cooling measures but if such measures are purely to safeguard the residential segment and protect the home values of Singaporeans, then why did we not start from the bottom?
First, cool the growth of HDB resale prices. It is difficult to reign in the price growth of private residences when HDB upgraders feel that their HDB asset values are climbing faster than private home prices. The HDB resale market remains tight despite three years of record breaking new supply of more than 20,000 BTOs per year. Unless we can construct the BTOs quickly, the waiting time of three to four years is simply too long for young families that need their own homes. Some HDB owners affected by Selective Enbloc Relocation Scheme (SERS) may choose to purchase resale flats for immediate relocation.
However, to prevent speculative and frequent trading of HDB flats, the recent measures on HDB ownership, borrowing limits and increased Minimum Occupation Periods (MOPs) have caused the pool of resale flats to shrink. Tightening the noose further is HDB’s sub-letting policy, which greatly diminishes the resale pool. The number of flats with approvals for sub-letting has increased every quarter over the last six years.
In the fourth quarter of 2007, 17,400 flats were approved for sub-letting. The number climbed to 35,000 flats in 2010 and then 43,508 flats in 2012 — which amounts to almost 5 per cent of the total stock of 917,000. While the increase between 2010 to 2012 is 24 per cent, the increase between 2007 to 2012 amounts to a whopping 150 per cent over the five-year period.
Surely the more HDB flats are approved for sub-letting, the less resale units would be available in the market, thereby pushing up Cash over Valuations (CoVs). More Singaporeans now view HDB flats as investment assets. Until the valuation of the 917,000 HDB flats stops increasing, there will always be upward pressure on the valuation of the 278,000 private residences.
Another puzzling aspect of the cooling measures is the concern over the inflow of foreign hot money into Singapore’s real estate market. If the large inflow of foreign hot money poses a real risk, why did we not apply the anti-speculation measure such as SSD and ABSD to all property segments — which would cover office, shop spaces and hotels, and other commercial units? And now that foreigners’ purchases of private residences are reduced, why is the ABSD increased instead? Are the authorities similarly concerned about foreign hot money scooping up overpriced emerging market perpetual bonds with 60 per cent or even 80 per cent leverage in Singapore? Would we see anti-speculation measures in the bonds and equities markets then?
At the luxury end of the market where freehold residences, such as Ardmore Park, yields 2 per cent per annum, a foreigner would rather pay eight years of rental than fork out the 15 per cent ABSD and 3 per cent (minus $5,400) normal stamp duty upfront. A $10 million apartment in Ardmore Park will cost close to $1.8 million in total stamp duties at purchase, so why not pay the $17,000 monthly rental over the next 96 months?
We can therefore expect more foreigners to stay on the sidelines of the Singapore property scene. However, after a while we might just become unattractive to foreign investors. Foreigners will leave the sidelines as their home markets become more attractive and profitable to invest in. This is certainly how Indonesian and Filipino investors view the Jakarta and Manila real estate markets respectively — as having better capital upside potential than Singapore.
The luxury residential segment is in the doldrums, prices in the Core Central Region (CCR) rose by only 0.8 per cent in 2012. With an overhang of completed stock that remains unsold in the CCR, developers have little incentive to invest in building high quality and well anointed bespoke homes if they cannot be sold at a reasonable pace. With an average of two property curbs per year and the harsh measures on foreign buyers, will Singapore lose its sparkle in the eyes of high-net-worth foreign individuals and their families?
I believe the public would accept a moderate population growth and if we took the low end of the Population White Paper 2013, we might expect total population to be 6.5 million in the year 2030. Accounting for emigration, mortality and PRs who do not renew, we would need to continue attracting up to 100,000 foreigners and PRs every year for the next seventeen years.
And life would have to be comfortable for them such that some may consider Singapore their long-term home and take up citizenship. Do they have to wait till they become Singaporeans before they purchase their first private home? Do we really fear that the high-net-worth who want a home in Singapore are depriving Singaporeans of affordable private residences?
The SSD has effectively taken out the speculative wind in the residential segment. So to prevent foreign elements from disrupting home prices for Singaporeans, and yet encourage high quality foreign professionals and business owners to set up their homes here in the next decade, we might tweak the ABSD for foreigners and PRs as such:
1. For all residences of over $5 million in value, cut ABSD to 5 per cent for Singaporeans (second property onwards), foreigners and PRs.
2. For completed residences of over $5 million in value which are purchased for staying in (the investor has to register his residential address there for at least three years), cut ABSD to 3 per cent for Singaporeans (second property onwards), foreigners and PRs. A completed property is less of a speculative investment due to the larger proportion who buy homes to stay in immediately and for its payment requirements.
Table 1: Number of private residences transacted at more than $5 million value by purchaser type, excluding enbloc, ECs and landed properties.
Source: URA, IPA
From Table 1, we can see that Singaporeans account for a slight 150 units of non-landed residences of above $5 million in value. Many Singaporeans with that budget prefer to look at landed properties. This suggests that foreigners and PRs is unlikely to deprive Singaporeans of homes at the $5 million category. Therefore a reduction of ABSD will let Singapore attract foreigners and PRs to drop anchor here. And with such a large commitment, they are more likely to stay for the long term.
The government’s coffers are not short of money. Therefore the imposition of higher taxes to cool the property market should not be overdone. If further cooling measures were needed, perhaps in the other property segments or even in the bonds and equities markets, I rather prefer the introduction of non-monetary and non-tax restrictions such as higher cash components and reduced loan tenures. However, we need to be mindful that an overcooled market may turn foreign investors away, completely.