Investors hardest hit by new tax rules

Much has been made of the impact of the new property tax measures on high-end developers, but I would say that the hardest hit would be the investors.

Under the revised tax rules announced in Budget 2013, investment property owners will face higher tax rates on the assessed annual values (AVs) of the properties from next year. The higher rates will apply even if the units are left vacant. Previously, developers and investors could apply for tax rebates for unleased or vacant units.

Under a progressive tax rate structure, high-end properties with their higher assessed AVs would be the hardest hit.

Developers with unsold units in completed luxury projects will face significantly higher holding costs. But at least they have a choice. They can sell their problem away, albeit with vastly reduced profit margins. In any case, they have enjoyed the “good years” since 2010.

Not so for investors, who will be hard-pressed to sell their units quickly or lease them out.

Some investors have chosen to keep their newly-completed investment properties vacant while they seek a good price in the market. They do so in order to retain the price premium that new units usually command over previously-occupied ones.

After many rounds of cooling measures, it is getting increasingly difficult to find home buyers, let alone buyers of completed units. Indeed, much of the buying action has been focused on new launches.

In addition, investors who are thinking of selling properties bought within the past four years have to factor in the sellers’ stamp duty, whereas developers face no such hurdles. If investors cannot sell with a reasonable profit, they will have to lease out their units.

Official statistics show that at the end of last year, there were a total of 14,869 vacant private housing units, comprising 2,285 landed and 12,584 non-landed homes.

If the owners of all these units now choose to lease them out, what do you think would be the impact on the rental market? Well, they have 10 more months to decide.

And, lest we forget, 2013 and 2014 are the two years where the private housing market is expected to see significantly higher completions, that is, more supply at record numbers is on its way.

This is the “perfect storm” that some property analysts envisaged a couple of years ago that could hit the private housing market. Although interest rates have remained low, the new tax measures have an effect akin to a rise in rates as they both raise holding costs, and even more so for previously unoccupied units.

The still uncertain factor in the overall equation is the growth in the resident population size. The growth in new arrivals may be sufficient to mitigate the effects of the higher supply. However, if the Government has not been clamping down hard enough on new foreign arrivals, it faces even stronger pressure to do so now than it did two years ago.

For now, rentals may continue to be stable as investors ponder which course of action to take. But if rentals do fall, there will be less justification for home prices to remain high. Prices may eventually follow suit, but when this will occur is open to debate.

The region and the world are still awash with liquidity. Hot money will continue to flow this way, with Singapore being one of the few economies still holding an AAA rating.

On the increase in tax rates on owner-occupied properties, I am hard-pressed to understand the rationale for such a move. Because they are not linked to income, these taxes can be regressive in nature. Retirees are one group that is most vulnerable.

Why not keep a flat rate and keep the tax system easy to execute? It will not make a significant difference to the total tax revenue raised anyway.

If it is supposed to be a wealth tax, there are many more ways to tax the wealthy. For most single-property owners, that home is a result of hard work and years of savings. Do we need to penalise such efforts?

In any case, do most of these owners have a choice in avoiding such taxes? The decision to live in a particular location may have been made many years ago. Who could have guessed that an MRT station would open nearby?

If they choose to uproot now, they will lose their social and community ties. Will this lead to enclaves for those with higher incomes and others for those with lower incomes?

Finally, does the direction in taxes for owner-occupied properties mean that a lower-income household can never aspire to live in a convenient or central location? This is because these taxes can potentially drive them away — if not now, then in the not-too-distant future.

By Colin Tan – Head of Research and Consultancy at Chesterton Suntec International

Source : Today – 1 Mar 2013

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