This is an opinion piece on a slightly contentious topic. I am sure there are many views depending on which side of the aisle one’s on – already made the purchase or looking to invest in another property.
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Before I go on, let me clarify that I am only referring to abolishing of ABSD (Additional Buyer’s Stamp Duty) up to a second property for citizens in this country. Currently, locals are charged a 12% ABSD on the purchase price for owning a second property in Singapore. This is on top of the usual BSD (Buyer’s Stamp Duty) of up to 4% for properties above $1m. Taken together, that means a total tax liability of 16% for the purchase of a second property by locals. As the old adage for property investment goes – you make when you buy. After paying for a second property for investment at today’s high psf prices, one is already 16% “in the red” from day one.
You often hear views that advocate removal of ABSD from parties with vested interest – agents, property firms, developers, etc. Those who support ABSD will cite the case of Hong Kong which best exemplifies what happens when property prices are left to free market forces and unchecked. There’s no clear-cut and easy answer. I am sure no one wants to see prices escalating out of reach in a property bubble (and bursting later), neither does anyone want to see their asset values fall.
As a mortgage consultancy firm, a related industry to real estate, you can say that we do have some self-interest to peddle for the removal of ABSD, as we like to see more real estate activities in the market. But I believe we do have some valuable insights to share. Primarily, our arguments are summarized in five points below which I hope the authorities might notice and consider, especially in a post covid-19 world.
1. Removal of ABSD for 2nd property for locals WILL NOT lead to speculative fever or escalating prices
This is in fact testament to the success of our TDSR (Total Debt Servicing Ratio) policy rolled out in June 2013 which has capped a person’s total borrowing capacity (regardless of how many properties one purchases in Singapore) to within 60% of his income. There is simply no way for anyone to be able to afford to buy “outside of their means” if he or she has already stretched it to the limits and is unable to put down more cash for the purchase. At the same time the LTV (loan-to-value) for a second mortgage has been lowered over the years from 80% to the current 45%. This means even more cash is needed. Hence, the twin-policy of TDSR and LTV limits have effectively in our opinion curtailed any speculative fever or the likelihood of escalating property prices.
There is really no need for ABSD tax for locals which brings me to my next point.
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2. ABSD has caused unintended distortions in the broader market place
Some of the distortions we have observed over the past years include:
- More and more couples are resorting to decoupling of property titles whilst they refinance home loan, so that they could be ready to buy a second property at the opportune time. We are not exactly sure if this is a good thing in society when eventually each spouse will hold just one property – what happens to the value of a matrimonial home? Still, as long as this is not the ideal or preferred manner of holding but comes about as a result of policy outcome albeit unintended, it is a distortion in the market place.
- As Asian economies mature and the middle class grows, it is an innate desire for people to invest their money for higher returns. And real estate is undisputedly the favourite asset class for most. With exhorbitant ABSD tax, people will still choose to invest in real estate (we cannot change that) but they bring their money outside of Singapore which benefits other countries. Again, this creates a distortion in the market as in the ideal situation, people will not need to assume the higher risks involved investing in overseas properties. Or dabble in unfamiliar commercial or industrial properties.
- A third but more insidious distortion comes when people decide to give up investing in real estate altogether and dabble in other asset classes which may come with higher risks. The search for yield will continue with interest rates staying depressed globally, perhaps for many more years to come. We have already seen how many in Singapore have lost money to various investment schemes be it property-related or not. Certainly no one wants a repeat of the mini-bond saga back in 2008 where unsuspecting retail investors were sold complex financial instruments “repackaged” as guaranteed returns by bankers.
- We have read how developers are now allowing lapsing and re-issuance of options for HDB upgraders. Many of these first-time private property buyers might not wish to sell or dispose of their HDB. But they are forced to do that as they are not willing to part with so much cash for ABSD on a second property. This introduces distortion as it forces people to alter their actions based on policy measures instead of their true preference. Developers getting creative is also a kind of distortion in real estate sales and marketing as the wrong numbers are reported.
3. Every citizen should be encouraged to first invest in his own country
I can understand the need for ABSD for foreigners buying in our country as they need to pay a premium to invest here and we need to level the playing field otherwise prices will sky rocket when liquidity flows in from all corners. There’s just something not quite right with ABSD on a second property for locals. As I have already explained, it’s an innate desire to want to invest in property in one’s own country. This is in fact good for the country as people entrench their roots and tie their personal worth and assets to the prosperity and destiny of their country. This is also what the government wants to do – to let its people share in the economic gains of a well-run economy and well-governed nation.
Instead, people are now bringing their money overseas to create demand for property developers in other countries, interest income for overseas mortgage lenders, and foreign businesses for all parties from property agents, brokers, management agents, tax consultants, renovation firms to even property listing sites overseas.
I would also point out here that many who can afford to buy a second property are doing so as part of wealth transfer to their next generation. They do that as they worry about affordability of private housing for their kids by the time they become adults. There’s nothing wrong here for wealth creation and preservation and they should not be penalized for it – up to a second property for the Singaporean couple.
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4. Save jobs – the No.1 priority now (not cooling measures)
Amidst the challenge of covid-19, the government has put jobs as its top priority – both keeping them and creating new ones. I do not have all the official stats here. Besides the 30,000 self-employed property agents, the property sector in Singapore employs many more in positions like valuers, conveyancing law firms, mortgage brokers, mortgage teams in banks, renovation companies, etc. You get the idea. It may not be such a big industry but in a crisis every job counts.
It makes no sense for me not to release more pent-up and genuine demand for property purchases from those who are financially stronger and able to commit to another purchase. Removal of ABSD for second property will thus help to support demand in an industry where most demand has vanished with first-time buyers now more concerned with job security and overseas purchasers are unable to conduct viewing. Especially when doing that will not lead to any escalation in property prices (even more unlikely in an economic crisis) but help saves more jobs.
5. ABSD makes it difficult for people to upsize or downsize in a post-covid world
I’ll give you another practical reason why we propose abolishing ABSD for locals for at least up to a second property. Because it will also benefit those who owns only one property which is the majority, but who needs to “buy first, then sell”.
It’s a practical situation that all of us face when moving houses. Not everyone has the funds to “pay ABSD first and get reimbursed later” for the changing of a matrimonial house. Doing that also means one is faced with time pressure to sell off existing property within 6 months. And not every one likes the idea of “sell first, rent or buy later” as this is for owner-occupation with many considerations.
I have read on various blogs how some argue for the demise of offices, or the demise of CBD altogether, or shoe-box units in a post-covid world. While I cannot be sure how these forces will shape out, I think what is certain is people will become more conscious of the need for space after covid-19. So those who wanted to get a 2-bedder may now go for a 3-bedder, and those going for 3-bedder may go for 4-bedder or a 3+study, and so on. Within one’s affordability, it’s always good idea to get an extra room.
This requires the need to move and the question of “sell first” or “buy first” will ensue. Abolishing ABSD on a second property just creates more flexibility for people. And again, we re-iterate, abolishing it will not cause the property market to overheat when it’s on a second property purchase and only for locals.
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To wrap up, we believe the hunt for yields will continue post-covid as we remain deep into a “lower-for-longer” interest rate environment. In the last financial crisis, 3-month SIBOR stayed down at 0.40% for prolonged periods from 2009 to 2014. A good six years. And that’s coming from a global market awash with liquidity after three rounds of QE. This time, post-covid, we are talking about unlimited QE where US Fed has already printed US$3.5t in merely 3 months!
It is high time for the government to review some of the cooling measures as we are no longer in a cooling mode starting with ABSD on a second property. The impending recession is a natural dampener on sentiments. We need to revive many parts of the economy now and start eliminating distortions in the market place.
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