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Property Herald - Wagging The Dog or Barbarians At The Gate? A Property Cooling Measure Analysis

MOGUL.sg's Chief Research Officer Nicholas Mak dives into the new cooling measures by the government, implemented on 27th April 2023, as well as an analysis on the subsequent impact it has on Singapore's property market.


Introduction

The Singapore government introduced another round of property market cooling measures at about 20 minutes before midnight…again.

This round of new measures mainly consist of hiking the Additional Buyer’s Stamp Duty (ABSD). The steepest rise in ABSD falls on residential property buyers who are foreigners, entities (such as companies) and trustees.

Table 1: Increase in ABSD as of 27th April 2023's cooling measures

Type of Buyer

Property Type

Rates from 16th December 2021 to 26th April 2023

Revised Rates from 27th April 2023 onwards

Singapore Citizens

Second residential property

17%

20%

Third and subsequent residential property

25%

30%

Permanent Residents (PR)

Second residential property

25%

30%

Third and subsequent residential property

30%

35%

Foreigners

Any residential property

30%

60%

Entities

Any residential property

35%

65%

Trustees

Any residential property

35%

65%

Source: MAS, MND, MOF (the government)

There is no change in the ABSD payable by Singaporean and permanent residents (PR) buying their only residential property and by housing developers.

Why Did The Government Do This?

Before this latest round of cooling measures, the government implemented two previous rounds of property curbs in the past 16 months. The frequency of the recent cooling measures mirrors the period of 2010 to 2013, when the government introduced two rounds of cooling measures annually on average.

One possible reason why the government introduced this latest round of cooling measures only seven months after the previous round of market curbs could be that the residential property price index for the first quarter of 2023 (1Q 2023) could be noticeably higher than the flash estimates. The flash estimates for the 1Q 2023 private residential property price index was an increase of 3.2% quarter-on-quarter (qoq).

Table 2: Flash estimate of 1Q 2023 residential property price index

Property Type

Q1 2023, Rate of change over previous quarter

All residential property

3.2%

Landed property

5.7%

Non-landed property

2.5%

Non-landed property (in CCR)

1.0%

Non-landed property (in RCR)

4.0%

Non-landed property (in OCR)

1.9%

A second possible reason for this new round of property market curbs is that the government expects more funds to surge into the local residential property market, even in the current climate of high interest rates and expectation of slower economic growth globally. The government probably expects more foreign demand for Singapore residential properties.

A third reason is that the government is just being overly cautious.

Putting the pieces together

Recently the government started to investigate property buyers who used loopholes to circumvent the ABSD regulations, such as the so-called “99-to-1” or similar methods to evade or reduce ABSD payable by the buyers.

Yesterday, it was reported that the Inland Revenue Authority of Singapore (IRAS) is offering a reward of up to $100,000 to whistle-blowers who inform on property buyers who used such tax-evasion methods.


The recent crackdown on the use of tax loopholes is paving the way for the introduction of the newest round of cooling measures. The crackdown is part of the bigger plan to cool the residential property market.

The latest cooling measures are part of a bigger plan from the government to crackdown on investors who are utililising loopholes and other means to navigate around the previous regulations.

Going ahead, we can expect the authorities to tighten regulations, close more loopholes and hunt down those who use or facilitate the use of such loopholes in their real estate purchases.

This is because with the higher ABSD and other taxes payment for purchasing and owning real estate, the incentive to evade the tax would be even greater.

Possible crackdowns

The following are some of the areas in the real estate industry that the authorities could investigate.

(1) Fake co-living spaces

Property owners who create more bedrooms by erecting more partitions in their residential property unit in order to house more tenants. Some owners call their condo or apartment units a “co-living space”, which is an affront to the proper type of co-living space.

By squeezing more tenants in a residential unit, the owner could earn more rental income. However, it increases the risks to the tenants and the neighbours, such as fire safety and unsanitary living conditions.

(2) De-coupling

This is when one partner of a married couple who jointly own a residential property transfers or sells his share of the property entirely to the other partner. This would free up the first partner to buy another residential property at zero or very low ABSD.


Impact and reactions of the latest property curbs

Firstly, the latest round of property curbs is expected to drive more investment demand to non-residential properties, such as commercial, industrial and shophouses, especially shophouses without residential space.

Secondly, some potential property investors may give up the whole idea of investing in physical real estate and turn to invest in other assets. Some investors may invest in real estate indirectly, such as through REITs or securities of property developers.

Thirdly, this round of higher ABSD could affect the buying preference of residential property upgraders, especially those who are more cash-strapped. When a residential property owner buys another residential property that is under development, he has to pay the ABSD for the second property first, even if he plans to sell his existing property after moving into the new property. He could apply for a refund of the ABSD within 6 months after the second property is completed.

Property curbs could result in people investing outside of residential properties: shophouses are a good workaround for investors.

The higher ABSD would raise the financial hurdle for such homebuyers. It is challenging for some buyers to come up with the money for the ABSD, which could amount to hundreds of thousands of dollars for a typical family-size property.

Hence, some buyers may prefer to buy completed properties, such as those found in the resale market. This would greatly shorten the waiting time to move into the next property. It could also allow the buyer to sell his existing property shortly before buying his next home in order to legally avoid paying the ABSD.

Honey, I shrunk the kids… and the condo unit

The fourth impact on the housing market is that developers could resort to building even smaller residential units in order to keep the price quantum “affordable”. Property developers are always looking for ways to increase the property price in terms of dollar per square foot (psf) without turning off the buyers. The most common method is to reduce the size of the housing unit.

If the developer keeps the sizing of housing units unchanged and raises the property price quantum, the higher ABSD rate would reduce buying demand. Therefore, we can expect even smaller family-size housing units in the future.

If the sizes of new private housing units are reduced, the sizes of new HDB flats could also become smaller, based on past trends.

Case of Tail Wagging The Dog or Barbarians At The Gate?

According to the government press release, the “ABSD rate increases will affect about 10% of residential property transactions.” If the ABSD rate hike only affects a minority of residential property transactions, it begs the question: “why is there a need to increase the ABSD at all?”

Is the property market so vulnerable that the 10% of residential property transactions could overheat the market? If that is the case, then the 10% of transactions is “the tail wagging the dog.”

Another question that comes to mind is why there is a need to almost double the ABSD for homebuyers who are foreigners, entities and trustees. Do foreign property buyers exert such a powerful influence on our local market that they should be feared as the ancient Romans feared the “barbarians at the gate”.

Are foreigners' involvement in the private property market that much to warrant a 100% increase in stamp duties?

Our research of the data from URA shows that the number of private non-landed residential units bought by foreigners from 2Q 2022 to 1Q 2023 remained fairly stable, ranging between 226 units to 294 units in each quarter. (Please refer to Table 3)

We selected to analyse the transaction of non-landed residential units because such properties can be purchased by locals, foreigners and companies without restrictions. Foreigners are typically restricted from buying local landed housing.

Furthermore, private non-landed residential units made up 91.1% of the private housing units transacted in the past 16 months. Hence, the transactions of this type of property would have a great influence on the property price index.

Table 3: No. of private non-landed residential units based on buyer’s residence status

Nationality by Residential Status

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Apr 2023

​Overall

Company

6

10

7

9

27

1

60

Foreigner

145

294

259

226

258

52

1,234

Permanent Resident

845

1,054

895

676

756

123

4,349

Singaporean

3,695

4,754

4,420

2,348

2706

751

18,674

Total

4,691

6,112

5,581

3,259

3747

927

24,317


Although the proportion of private non-landed residential units bought by foreigners increased from 3.1% in 1Q 2022 to 6.9% in 1Q 2023, the overall proportion in the past 16 months was only 5.1%. (Please refer to Table 4)

At 5.1% of the total number of private non-landed housing units transacted, the property purchases by foreigners are not significant enough to move the needle of the property price index.

Therefore, there are no barbarians at the gate.

Table 4: Proportion of private non-landed residential units sold based on buyer’s residence status

Nationality by Residential Status

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Apr 2023

Overall

Company

0.1%

0.2%

0.1%

0.3%

0.7%

0.1%

0.2%

Foreigner

3.1%

4.8%

4.6%

6.9%

6.9%

5.6%

5.1%

Permanent Resident

18.0%

17.2%

16.0%

20.7%

20.2%

13.3%

17.9%

Singaporean

78.8%

77.8%

79.2%

72.0%

72.2%

81.0%

76.8%

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Source: URA, Mogul.sg


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