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Commentary: Will higher property taxes dent aspirations in Singapore’s rental market?

The once bullet-proof strategy of owning multiple properties for long-term wealth accumulation may face headwinds ahead, say NUS’ Lee Nai Jia and Sing Tien Foo.

Commentary: Will higher property taxes dent aspirations in Singapore’s rental market?

Potential buyers looking at scale models of new apartments. (Photo: TODAY/Robin Choo)

SINGAPORE: Finance Minister Lawrence Wong outlined significant changes to Singapore's tax system in his maiden Budget speech on Friday (Feb 18). 

Enhanced progressivity is the key feature: High-income earners and owners of multiple residential properties and luxury cars will see higher tax contributions, requiring the more affluent to cover a larger share of fiscal expenses. 

How to tax wealth is a conundrum for any economy and increasing property tax rates is the approach that the Singapore Government is taking. 

While it is hard to determine the net wealth of individuals, it is easier to track tangible wealth in investment properties that are fixed in location and easily assessable in value.

Increasing taxes on prime location properties with high annual values (AV) and for investors who rent out excess properties are coherent steps.

Higher tax rates will apply to those who live in their own properties with AVs of more than S$30,000.

For those who have properties that are not owner-occupied, tax rates will be increased from the current 10 to 20 per cent in two steps – first to 11 to 27 per cent in 2023, then to 12 to 36 per cent in 2024. 

But will this impact the aspirations of those in Singapore who invest and become landlords to build up wealth?

GREATER IMPACT ON PROPERTIES FOR RENT 

Most of those living in their own properties, including almost all owners of HDB flats and most non-landed properties in the outside central region (OCR), should see no change to their property tax, apart from the AV revision announced in December 2021.

Only the top 7 per cent of owner-occupied properties are implicated in the Budget 2022 changes, according to Mr Wong.

File photo of HDB flats lighted up at night. (Photo: CNA/Jeremy Long)

Instead, the increased property tax rates will have a greater impact on non-owner occupied homes – something that many current and prospective landlords in Singapore will surely be contemplating.

The tax hike will certainly be felt most at the higher end of the spectrum, as designed to target indirect proxies of wealth.

To illustrate, an S$18 million investment property in District 10 with a S$360,000 AV will draw a property tax of S$89,850 in 2023 and S$118,800 in 2024, up from the current S$66,000.

That said, a significant proportion of those who own private residential properties for rent will see a moderate increase in their property tax.

Many such properties are in the lower tax brackets with AVs between S$30,000 and S$42,000, drawing from Urban Redevelopment Authority (URA) data on sample rental contracts, and are often smaller 1- and 2-room private properties in the OCR. 

But the fact is that all owners looking for rental income will see higher taxes: Properties with an AV of S$30,000, the first tax bracket, will pay S$3,300 in 2023 and S$3,600 in 2024, up from the current S$3,000.

Properties with an AV of S$60,000 will pay S$8,850 in 2023 and S$10,800 in 2024, up from the current S$6,900. 

IS PROPERTY INVESTMENT STILL AN ATTRACTIVE WAY TO BUILD UP WEALTH?

The once bullet-proof strategy of owning multiple properties for long-term wealth accumulation may face headwinds.

Profits from renting will inevitably take a tumble with the new tax changes, coming hot on the heels of cooling measures in December 2021, such as the increase in Additional Buyer's Stamp Duty (ABSD).

Even if earnings don’t evaporate completely, would-be landlords might think twice about entering the rental market.

Buying a second home for rental income has been an attractive investment option for many in Singapore because of potential capital appreciation gains amid the low-interest environment.

This usually generates more than enough rental income to cover mortgage instalments in the low-interest environment, and can provide passive income upon retirement.

The rental market has stayed resilient during the pandemic due to the construction delays and the lack of new completions, with the URA rental index for private residential properties rising by 9.9 per cent in 2021.

However, with 39,881 units expected to be completed from 2022 to 2024, of which about 17,276 are primed to come on in 2023 when property tax will be first increased, the pressure will be on investors to lease and generate steady cash flows. 

Impending revisions to property tax rates, on top of paying maintenance, insurance and repairs, will increase operating expenses, and owners will find their rental income squeezed.

DEMAND FOR LUXURY HOMES MAY NOT WANE

But some argue that this will not necessarily get the wealthy to contribute more as expected, if landlords could simply pass the additional property tax burden on to tenants. 

If the rental market were to weaken due to global shocks and new completions when the increased tax rates take effect, it will be harder for landlords to transfer, partially or in full, their increased property tax burden to tenants.  

So savvy buyers who price the higher property tax to maintain their returns might think of negotiating lower purchase prices now, instead of trying to raise rents unilaterally later when it might be more difficult.

A row of condominium blocks in Singapore on May 6, 2021. (File photo: AFP/Roslan Rahman)

All things equal, higher property tax rates are likely to cause a decline in prices. But if buyers are willing to pay more despite higher property taxes, prices may hold instead.

The ultra-rich looking for investments may not object to contributing progressively to tax coffers.  

Historically, the sales of luxury homes tend to recover after an initial decline after cooling measures.

After the 2018 cooling measures, total sales of homes above S$5 million eased from 815 units in 2017 to 653 units in 2019, but recovered and hit a significant high of 1,605 units in 2021.  

Sales of high-end properties continued to be resilient after the cooling measures in December 2021. The Belgravia Ace development sold 77 units at an average price of S$4.4 million after launch in January 2022. 

CAREFUL CALIBRATION OF THE PROPERTY MARKET

While a property-related wealth tax is a sensible approach, it has to be calibrated to avoid repercussions elsewhere in the market.

Higher holding and transaction costs in direct property investment may drive some foreign investors away from Singapore's property market.

Will the increase in property taxes be the last straw that breaks the camel's back and push buyers to other overseas markets? 

For now, it is premature to conclude whether such a scenario would occur. 

What is sure is that the tax revenue collected from the progressive tax could be invested in deepening new capabilities and creating new business opportunities, making Singapore a vibrant and sustainable home to stay.

The "amenity" effect from the spending may offset the "push" effect on foreign investors. 

Dr Lee Nai Jia is Deputy Director at the Institute of Real Estate and Urban Studies (IREUS). Professor Sing Tien Foo is the Director at the same institute and Head of the Department of Real Estate at the National University of Singapore.

The views and opinions expressed here are those of the authors and do not represent the views and opinions of the National University of Singapore, its subsidiaries, or affiliates.

Source: CNA/geh

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