By Mr. Propwise

The recently announced Budget 2013 was full of controversial measures such as the Wage Credit Scheme and higher Additional Registration Fees for expensive cars. One of the key themes was a system of more progressive taxes targeting the rich, and nowhere was this clearer as in the announcement of the new tiers of property taxes.

1. Increase in property taxes for the top 1% of owner-occupied homes

The tax structure for owner-occupied homes will be revised so that roughly 950,000 of these homes that have an Annual Value of less than $59,000 will enjoy tax savings of up to $80.

In contrast, the top 1% or about 12,000 owner-occupied homes will pay higher property taxes, with the very high end hit exponentially harder.

The current property tax structure for owner-occupied homes is as follows:

The following new property tax structure will be phased in over two years:

The following table was presented to illustrate the impact of the different types of properties:

The message is clear – most owner-occupied homes will have flat to lower property taxes, but for the very richest who live in centrally located landed properties or Good Class Bungalows (GCB) their property taxes could go up by 70% or more.

Will this lead to a correction in GCBs? I don’t think so. While the percentage increase is large, the absolute quantum of increase (around $5,000 a year based on the illustration) is barely noticeable for someone who is able to shell out $20 to $30 million for a home.

2. Increase in property taxes for the top one-third of investment properties

The impact of the increase in property taxes for non-owner-occupied homes is more broad-reaching, with an estimated top 33% of such properties facing higher taxes from the new structure, while there’ll be no change for the other 67% or 112,000 non-owner-occupied properties.

The current flat property tax rate of 10% of Annual Value for investment properties will be increased for properties with an Annual Value of more than $30,000. The new property tax rates will be phased in over two years starting from 1 January 2014 based on the following rates:

The property tax rate for land and non-residential properties remains unchanged at 10%.

The following table was presented to illustrate the impact of the different types of properties:

From this table we can see that even investors of a centrally located condominium unit will be hit with a 20+% increase in property taxes. If we assume the Annual Value is equivalent to the rental received (the Annual Values generally tend to be lower than the market rentals), that means 12% of your rentals will be going to pay taxes (versus 10% currently).

For centrally located landed properties, property taxes could soak up 16% of your rental versus 10% previously, a large increase.

3. Removal of tax refund for vacant properties means higher effective taxes for investment properties

One other change announced was that vacant properties would no longer enjoy property tax refunds with effect from 1 January 2014.

Currently, vacant properties or those undergoing repairs to get them fit for occupation can get refunds for the periods they are vacant for.

This will be removed and the net impact is that the effective property taxes for investors will increase as all investment properties will experience vacant periods when they are looking for tenants or between the end of one tenancy and the beginning of another.

The impact of Budget 2013 on the property market

I believe that the two bottom-line impacts of the new property tax structure in Budget 2013 are:

#1 – Soak the very rich Singaporeans who live in expensive landed properties

#2 – Discourage the ownership of high end properties for investment by increasing the holding costs

I think 99% of the homeowners will have no issues with #1, as it’s basically a redistribution of wealth from the top 1% to the bottom 50% who will get slightly lower property taxes of up to $80 per year. I don’t think it’ll have any impact on the property market either as the wealthiest Singaporeans will hardly notice the $5,000 per year difference in property taxes of their homes.

#2, though, could adversely impact the high end market as the top one-third of private properties is affected. Together with the removal of the refund for vacant properties, the impact on property investors could be significant, with the lowering of the potential return of the property. This will discourage property investors from buying, leading to a reduction in demand for such properties.

What’s the purpose of these measures?

In a way, these measures seem strange to me as the bubbly segment of the market seems to be the mass market as opposed to the luxury segment, but these measures do not affect the mass market at all. While #2 could lead to a softening of luxury home prices, conceivably only the top 10% to 20% of households will be able to afford them anyway.

Some pundits have suggested that shoebox homeowners could benefit as they will likely have a lower Annual Value, but I imagine that most buyers of these homes are investors and not owner-occupiers, so on the margin there will be no difference to them. Furthermore, the tighter foreign worker policies including higher levies, cuts in the Dependency Ratio Ceiling and tougher requirements to get an S Pass or Employment Pass would mean that the potential pool of renters for these units could be shrinking.

On the whole, it seems to me that the new property-related policies announced in Budget 2013 are less about controlling the property bubble and more about pleasing the masses.

By Mr. Propwise, founder of top Singapore property blog Propwise.sg, a Chartered Financial Analyst and resident real estate analyst at PropertyMarketInsights.com, a site to help property owners and investors make profitable decisions in uncertain times. Click here to learn more

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