By Mr. Propwise

On the evening of December 7th the Government announced an Additional Buyer’s Stamp Duty (ABSD) to be imposed on certain categories of residential purchases. The intent is crystal clear – stamp out (pardon the pun) investment demand, especially from foreigners. There have been a flurry of news reports and opinion pieces, and I’d like to add on my thoughts here in this article. I believe that this Government measure will be a turning point for the residential property market.

Details of the ABSD

The ABSD will be collected on top of the current Buyer’s Stamp duty, and will apply to the higher of the purchase price or market value of the property for the following:

  • Foreigners and non-individuals (including corporates, trusts and collective investment schemesetc) buying any residential property will be hit with an ABSD of 10%
  • Permanent Residents (PRs) buying a second or greater residential property (including part ownership but excluding overseas property) will pay an ABSD of 3%
  • Singaporeans buying a third or greater property will pay an ABSD of 3%

The ABSD will be effective 8 Dec 2011.

The Government’s rationale for this measure is to “promote a sustainable residential property market where prices move in line with economic fundamentals.” It sees the rising prices of residential properties (now 13% above 2Q96 peak and 16% above 2Q08 peak) as unsustainable given the economic uncertainties and fears a property bubble that could have destabilizing effects on the banking system.

In particular, the Government fears the large pool of global hot money that is looking for a safe haven in the Singapore Dollar, now considered by many as the new Swiss Franc. Foreign purchases of property have been growing, and now account for 19% of all private residential property purchases in 2H11, versus 7% in 2H09.

The ABSD has also been designed to intentionally exclude Singaporean first time buyers and upgraders, and buyers of HDB flats. This not only helps to emphasize the home occupation use of housing but will no doubt score some political points among the electorate.

On the supply side, the Government will list sites that could potentially yield 14,100 units in the 1H12 Government Land Sales (GLS) Programme, with 7,000on the Confirmed list. This is on top of the 41,000 unsold private housing units in the pipeline.

Impact of the ABSD

  • Transaction cost for investors will increase substantially, killing investment demand. Foreigners and companies will be the hardest hit. For example for a $1 million dollar purchase, the effective buyer’s stamp duty will increase from $24,600 to $124,600, a $100,000 or 500% increase! The effective tax rate will increase from 2.5% to 12.5%. This will effectively stamp out any investment demand from all but the wealthiest who may have other non-investment considerations. Even for Singaporeans who already own two and PRs who own one unit, they will be heavily discouraged from investing in property as their effective stamp duty for the $1 million purchase will increase from $24,600 to $54,600, a 220% increase. The message to the rich is clear: “Don’t invest in residential properties.”
  • Transaction volumes will fall. Some analysts are looking for a 20% fall in volumes next year. With investing sentiments dampened by the continuous stream of government measures and the unstable economy in Developed countries, this is quite probable. Bid-ask spreads between buyers and sellers will increase, tanking volumes and setting the stage for price decreases later.
  • The impact on prices will be negative but uncertain. The measures were unexpected as property price momentum has already been falling for the past eight quarters. Some analysts expect a 10-15% fall in prices, but the impact is uncertain as interest rates remain low and unemployment hasn’t rise, so property owners still have holding power. Furthermore economists are still expecting a 3-5% GDP growth rate for Singapore in 2012, which is not bad, although this number is volatile and can be revised downwards quickly if the external environment deteriorates. The large spike in supply is expected in 2014-2015 so the market could be hit then if this measure is still in place.
  • Foreigners will shrink as a percentage of all buyers. The recent wave of foreigners (especially the Chinese) coming to Singapore to buy property will think twice. Foreigners (excluding PRs) made up 18% of new units sold in 3Q11, versus ~15% in 1H11 and the last peak of 15% in 2007.
  • Negative impact on high-end market will be larger.The impact is likely to be larger on the high end residential market as the share of foreign buyers there is higher.Foreigners (excluding PRs) and companies accounted for 34% of new sales in 3Q11 versus 17% in suburban locations. Some analysts are predicting a 40% fall in volumes in prime districts.
  • Developers will be leery of bidding aggressively for new land.In addition to the measures above, the IRAS will also levy the ABSD on developers if they fail to sell all the units in a residential project within five years. Developers will thus be more careful about stocking up on land bank unless they are sure they can develop and sell it within that timeframe. Developers are also incentivized to cut prices to move inventory if they are approaching this deadline. As the ABSD is based on land price, the impact is likely to be less significant versus general sentiment and investment interest.
  • Investors may focus on the commercial market instead. Now that the residential property market has been effectively closed to investors both local and foreign, will they turn their attention to the commercial property market? The problem is that with an uncertain global environment and Singapore’s open economy, office and industrial rents could also moderate.
  • Will investors start to look at foreign property? Both local and foreign investors could start to divert their funds earmarked for investment into Singapore properties into overseas locations such as Malaysia, where property is significantly cheaper.

All things considered, I believe that the ABSD will be the turning point of the market. Given the current negative sentiment and slowing price growth (prices were up just 1.3% in 3Q11), these heavy-handed measures are likely to be the straw that breaks the camel’s back and may mark the turning point of the property cycle. 2012 could turn out to be a year of woe for those who are heavily invested and leveraged, and one of bargain hunting for cashed-up long term investors and end users.

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