Sunday, November 18, 2012

How to cool the HDB resale market

Nov 18, 2012

Require PRs who leave to sell their flats; make landlords pay levy and tax on rental income
By Chua Mui Hoong Opinion Editor

A property agent friend rang last week with two bits of news she wanted to discuss.

First, she said, the rental market is very weak. She had put up a Housing Board flat for rent and was shocked at how slow the response was. "Lots of foreigners are going home, they can't renew their passes," she explained.

The second issue: prices of HDB resale flats. She is worried for her sons, and whether they can afford their own home. "Crazy," she said, referring to reports of the Queenstown flat that sold for $1million and the executive condominium unit reportedly fetching $1.6million. "Will the Government let this continue?"

Each year, about 30,000 couples get hitched. Assuming those aged 26 to 30 are waiting to get married, that's five cohorts of 30,000 couples worried about whether they can afford a flat, or 150,000 couples.

Since each couple has four parents, that's 600,000 Singaporean parents fretting over runaway housing prices.

No wonder the subject spawns plenty of chatter online and in the mainstream media and in coffee shops.

The worry is that soaring HDB resale flat prices will feed into higher prices for new subsidised flats, and put HDB housing beyond the reach of the average worker.

Why resale flat prices soar appears puzzling at first glance.

Basic economics tells us prices turn on demand and supply.

First, consider the demand side. Why is there such strong demand for HDB flats in a country with 90 per cent home ownership?

The answer lies in three words: newlyweds, foreigners and churn.

The first are young couples forming new households.

The second are permanent residents (PRs) allowed to buy HDB flats, who make up 20 per cent of recent HDB resale flat transactions.

The third refers to folks who have sold their own homes (either HDB or private property) for whatever reason and need a new place.

You can curb demand to cool prices. In fact, the Government has done so, by building more build-to-order flats to cater to newlyweds and some of the churners; and by requiring those who own private property in Singapore or overseas to sell their other properties if they buy an HDB flat.

But I think more effort needs to go into the supply side of the equation.

To do this, we need to understand why the supply of resale flats is so limited.

The number of resale flats sold has fallen over the years: from 39,320 in FY2009, to 30,061 in FY2010 and 24,331 in FY2011. That's a fall of 38 per cent in three years.

At the same time, the number of flats put up for sub-letting has increased: from 27,256 to 36,440 to 41,162 over the same three-year period to FY2011. That's a rise of 51 per cent.

Clearly, more HDB flat-owners who don't need their flats to live in are finding it more worthwhile to rent them out than sell them.


In part it is due to new restrictions being imposed on the purchase of resale flats, dissuading existing flat-owners from selling, for fear they can't buy an HDB resale flat in future.

If you own both private property and an HDB resale flat for example, you're unlikely to sell the latter. If you did, you'd find that current rules prevent you from purchasing an HDB resale flat in future unless you're prepared to sell off your private property too.

But the real answer to why folks want to rent out, not sell, their resale flat, lies in one word: Yield.

With good rental, it becomes attractive to rent out your HDB flat for an income stream, rather than sell it now for instant capital gains.

Would you sell your four-room flat for $400,000 now? Or hold on to it, get $2,200 a month or $26,400 in annual rental income for 10 years, and then sell it in 2022, by which time you hope the price goes up to $600,000?

It's a no-brainer. A steady income stream today, with possible capital appreciation tomorrow, gives every reason for HDB flat-owners to hang on to their money-making machine.

What works for an individual HDB landlord, however, may not be ideal for society as a whole.

If fewer resale flats come onto the market, prices will remain inflated, and all the cooling measures on the demand side won't be effective.

This is why I think there must be measures to boost the supply of resale flats too.

You can't mandate or force HDB flat-owners to sell their flats. That would be politically untenable and goes against the free market here.

But you can create incentives and disincentives to change the equation for HDB landlords.

The basic philosophy is to persuade folks who don't need an HDB flat to live in, to sell it.

First, permanent residents who own HDB flats. I am not in favour of banning PRs from buying HDB resale flats. After all, they live and work in Singapore and need affordable housing too.

But they must live in the flats. This means requiring them to sell their HDB flat when they leave Singapore. HDB has also introduced rules to limit the number of years PRs can sub-let their flats.

Second, make sure the rental income of HDB flat landlords is declared and taxed. Those who rent out their flats now need to declare this to the HDB, including stating the amount of rental.

HDB and the Inland Revenue Authority of Singapore must work seamlessly to ensure taxes are paid. This will increase the tax liability of those who already earn good incomes. If they are in the top income bracket, every 20 cents of their rental dollar go back to the taxman.

Third, on top of the usual tax on income, impose a special levy on HDB rental income for those who also own private property. There are about 33,000 of them, or 4 per cent of the total HDB stock.

The levy can be justified as a redistribution measure. After all, this group doesn't need a home to live in and are wealthy enough to afford private housing. Meanwhile, their younger or less wealthy compatriots are being priced out of the basic housing market.

The free market allows landlords to collect rental. The state then steps in to impose a levy to alter the equation for the landlord, to persuade him to give up his title and sell the property.

A levy of, say, 50 per cent can tilt the balance towards selling rather than renting. High-income private property owners making money from their HDB flats will have to pay 20 cents per dollar in tax, and another 50 cents in levy. They get to keep only 30 cents per dollar of rent.

Some will consider it worthwhile to hold on to their HDB flats anyway, perhaps because they want to retire in one, or give it to their children. At the margin, however, there will be a number who figure it makes better financial sense to sell their HDB flats now while the market is robust.

If more units come onto the market, prices will certainly adjust.

More pertinently, it sends a clear signal to Singaporeans that while HDB flats can appreciate in value, they should not be traded like a high-yield investment asset. A high tax on rental yield will send such a message sharply.

Is this a drastic measure? Not by any means.

It will hit only those who own both HDB flats and private property. It's less intrusive than outright bans or tighter ownership restrictions.

It's certainly less drastic than the Singapore Democratic Party (SDP) proposal to build a category of flats which can't be sold on the open market and can be priced lower. I applaud the SDP for its serious engagement on this issue and believe Singapore would be a richer society if opposition parties paid the same level of attention to policy proposals. But I belong to the category of those who don't think it's a good idea to deny lower-income households the opportunity to benefit from increases in value of their homes. There are other ways to help the bottom 40 per cent of households afford their own homes: build smaller flats, give more generous grants, offer interest-free loans.

In contrast, a levy on rental income from HDB flats is a fiscal measure that can be easily tweaked: If 50 per cent is not right, tweak it to 30, or 70. It hits the HDB landlord-investor right where it hurts most: his pocket. It can tilt the balance to make it less attractive for those who don't need a roof over their head to buy a resale flat.

Nor should there be concerns about a levy being passed on by landlords to tenants, inflating rental costs. As Singapore tightens the tap on foreign manpower, rental demand will soften in the years to come. It will become a tenants' market, and landlords won't be able to hold tenants to ransom.

[The problem in the resale market is that there is no cap on the COV. On the one hand, COV can be seen as an instrument for instant adjustment and response to the market to properly reflect the true costs and value of the property and the owner should have a right to this adjustment as the valuation may have lagged. However, how much lag or discrepancy can there be? Perhaps COV of up to 10% of the valuation of the flat can be allowed without any restrictions. However beyond 10%, every dollar of COV will be taxed as part of income of the seller.

And if the COV is higher than 20% of valuation, every dollar above 20% paid by the buyer must be matched with a dollar of tax to the govt to be paid by the buyer. i.e. 100% sales tax.

So if a flat is valued at $400,000, the seller may ask and receive up to $40,000 as COV tax free.

If the COV is $45,000, the seller will be taxed on the $5000 as income.

If the COV is $100,000, the first $40,000 will still be tax-free, but the seller will have to include $60,000 as part of his income to be taxed. The buyer in addition to the COV of $100,000 will also be required to pay the govt $20,000 for a total of $120,000, because $20k is above the 20%.

This effectively puts a loose "cap" of 20% of the valuation for COV, as beyond 20%, the buyer has to pay 100% tax.

Is this a possible solution or will it cause more problems?]

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