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The property merry-go-round: anomalies in the market
IT used to be that properties in Good Class Bungalow (GCB) Areas - the most prestigious form of landed housing in Singapore - were bought by Singapore's captains of industry, tycoons and well-heeled foreigners turned Singaporeans.
In recent years, however, Singaporeans in their twenties have also been surfacing among buyers of these big-ticket properties, as property market watchers note. The phenomenon is occurring not just for bungalows in GCB Areas but also for other categories of private residential properties being bought for investment.
In some of these cases, it could well be that parents are buying a property for a child aged 21 and above as a gift - to give him or her a headstart in life.
However, agents reckon that for some who already own at least one residential property here, another reason for buying an investment property using a child's name may be to avoid incurring additional buyer's stamp duty (ABSD) - assuming the child does not already own a property here.
Doing so may result in substantial savings in ABSD, since no ABSD is payable on the first residential property purchased by a Singaporean. Based on current ABSD rates which took effect on July 6, 2018, the ABSD payable by a Singaporean on the second residential property purchase is 12 per cent; for a S$30 million property, the ABSD would amount to S$3.6 million. If this is the third and subsequent property, the ABSD rate is 15 per cent, or $4.5 million.
Property consultants do not think the number of such purchases is significant.
That said, the phenomenon may throw into the foreground a sense of social inequity. "ABSD and other cooling measures were introduced to reduce excessive property investing here which had resulted in private home prices spiralling upwards. Those with the means, however, can get around the rules by buying in the names of their children," says an analyst who declined to be named.
This is one of several anomalies that have arisen as property-hungry investors seek ways to get around the cooling measures, principally the ABSD. Let's take a closer look at some of the other unexpected things that have surfaced due to cooling measures, and their potential implications.
From trusts to decoupling
Parents with children too young to own property have been advised to consider buying the property through a trust listing a young child as beneficiary; one may look at this as an advance inheritance. Upon turning 21, the child can call for the property to be transferred to him or her. This is the solution that some property agents began suggesting to potential investors, even at showflats of mass-market condo projects, after the government raised ABSD rates by 5 percentage points last July.
However, again, setting up such a trust structure to buy property would be an option more for those with the means as it would be tough to secure bank financing - given that the beneficiary is under the legal age to own a property and different financing rules apply when the purchase is made through a trust.
As a result, agents typically tell buyers that such a purchase would have to be an all-cash transaction, with no bank financing.
In any case, not many parents would resort to such a route, as once the trust is set up, it cannot be revoked.
Decoupling is another unexpected consequence of cooling measures, notes Rajah & Tann partner Norman Ho.
Supposing a couple jointly owns just one residental property in Singapore, they could decouple their ownership with one spouse transferring his or her share in the property to the other spouse. This creates a sole owner, leaving the other half of the pair free to buy another residential property without having to pay the ABSD as that purchase would be deemed to be his or her first.
Some couples took to this approach following the introduction of ABSD in late 2011. The trend gained momentum following the January 2013 change to the ABSD rules, when Singaporeans had to start paying ABSD from their second residential property here, instead of the third.
Under last July's cooling measures, ABSD rates for second and subsequent property purchases were hiked by 5 percentage points, for both Singaporeans and permanent residents. As a result, the decoupling trend may gain further momentum.
While decoupling could make financial sense for some couples here, there could be potential hiccups, says Mr Ho. "What happens if the couple decide to divorce later on? Does the spouse who has transferred his or her share of the property have an equitable interest or claim on the matrimonial home any more?"
JLL senior director of research and consultancy Ong Teck Hui observes that various rounds of cooling measures have shaped the psyche of market participants to engage in pre-emptive behaviour. "The fear of more measures encourages some people to jump into the market. The classic example was on the night of July 5 last year. Within a few hours of cooling measures being announced, developers of at least three major projects brought forward launches to the same evening to catch buyers before the measures took effect the following day."
Buyers responded well - ironically resulting in a spike in new private home sales volume during the month when higher ABSD rates and a 5-percentage point cut in loan-to-value (LTV) limits were introduced.
Says Mr Ong: "Such reactions may not be healthy as some buyers could have taken the plunge without proper due diligence on their purchases." Analysts advise buyers not to be too highly leveraged to better handle any unexpected price corrections.
Mr Ho of Rajah and Tann also points out that many Singaporeans deterred by the ABSD from investing in residential properties at home have gone overseas - some with not-so-positive outcomes.
"Some who bought residential properties in Australia are stuck now because of the market downturn; moreover, second-hand homes can be resold only to Australian nationals and permanent residents. Meanwhile, Iskandar is reeling from oversupply."
He suggests that to avoid such situations as well as the potential problems caused by decoupling, the authorities should once again allow Singapore citizens to buy a second residential property here without having to pay ABSD.
The authorities, however, may beg to differ. ABSD was introduced and extended, with duty rates raised, to discourage overinvesting in Singapore residential properties which had led to escalations in private home prices that were running ahead of economic fundamentals. It was to avoid potentially destabilising corrections later on that the current set of cooling measures were put in place.
Still, there could be room for some fine tuning.
A veteran residential developer shared his view with BT that even the rapid land price increase in 2017 and 2018 - that was arrested only after the July 2018 cooling measures were announced - was, strangely enough, the result of earlier cooling measures.
He was referring to a key condition for developers in exchange for upfront remission of ABSD payable when they buy residential land: they have to undertake to complete developing the new project on the site and to sell all its units within five years.
"Due to developers being pressured to finish selling residential projects, many of us soon found ourselves running out of development land around 2016-2017."
This also coincided with a period of low supply in the confirmed list of the Government Land Sales Programme. The ensuing intense competition for land led to land prices shooting up at state tenders and later on spreading to private-sector collective sales.
Thus began the en bloc sale frenzy, which further fuelled increases in land prices, reflecting developers' expectations of continued rapid increase in private home prices. This led to the authorities reining in the situation with last July's cooling measures.
Market players also highlighted that at some points during the past couple of years, some developers have had to pay higher-than-normal commission rates to property agents to incentivise them to clear the remaining units in their projects before the five-year deadline.
A seasoned agent confirms that from late 2017 to the early part of 2018, commissions of about 3 to 5 per cent and in a few cases as high as 7 per cent were offered - against the market norm of about 1 to 2 per cent for new launches at the time. However, he adds that the abnormally high commission rates were due to the fact that the last few unsold units in a project are often the hardest to move: for example, large apartments on the top floors which are relatively big-ticket items in mass-market condos, or low-floor units with not-so-attractive facing.
To avoid a situation such as this, the developer suggests that instead of requiring developers to completely sell out their project within five years,it would be more feasible if the sales target could be lowered to 80 to 85 per cent of units. "This would still achieve the same thing: to ensure developers do not have too much pricing power," he added.
Mr Ho of Rajah and Tann argues that it is unfair to impose a uniform five-year sales deadline regardless of project size. "For a small project of say 40 to 50 units, the five-year sales deadline is not an issue. But if you have a project with 1,000 units or more, the authorities should give the developer more time to clear the units."
Perhaps, a possible solution could be to have a hybrid of the above two suggestions.
For projects with a large number of units, the authorities could still set a five-year deadline for the developer to sell, say, 80-85 per cent of units, with a further one to two years to dispose of the balance units.
It may be harder to unravel some of the other anomalous effects of cooling measures. Who knows if such attempts could in turn create another round of unintended consequences.
Ultimately, most of the anomalies discussed here have surfaced as a result of Singaporeans going around property cooling measures - because of their deep-seated affinity with property and also driven by ample liquidity and a lack of suitable investment alternatives at home.
Veteran property consultant Ong Choon Fah, chief executive of Edmund Tie and Company, says: "Singaporeans love property because firstly it is tangible. You can see, touch and feel a property. You can live in it, rent it, let your grown-up children live in it or simply treat it as your holiday home. As a nation, we have a very successful home ownership scheme, the bedrock of which are Housing Board flats. There is a lot of emotional link to property; it is something enduring that you can leave for your children.
"Historically, property has done well because we are a Little Red Dot with limited land; we always think that prices can only go up."
A mindset change may be required. "What we need to consider is also whether we have the capacity to hold the property through market cycles. You have to be prepared for a situation where if you cannot find a tenant, you'll still have to pay your mortgage instalment, property tax and maintenance/service charges. And don't forget to factor in the transaction costs involved when you buy, sell or lease a property," notes Ms Ong.
She also urges property investors to do their research and consider their own risk profile carefully before plunging into the market.
Singaporeans need to learn from the savvy foreigners who invest here; they are aware that there are always risks in every investment. "Some foreigners are prepared to pay very high prices for Singapore properties because they have other considerations such as the potential of the Singapore dollar strengthening against their home currency. So it's a different ballgame for them.
"Therefore our buyers cannot just look at these foreigners buying property and jump in and follow them."
Some developers may advocate that the authorities adopt a laissez faire approach. However, to ask the Singapore government to completely leave the property market to free market forces and not to "interfere" by coming up with cooling measures is also not a realistic expectation. The government already has a big role in the residential property market, being the developer of public housing, which provides a roof over the heads of the vast majority of Singaporeans.
The state is also a major and consistent source of land for private housing development. The policy of allowing the use of individuals' Central Provident Fund savings towards the purchase of residential property is already integrated into our real estate ecosystem. "We are a small nation with limited resources. Repercussions will be amplified if the market experiences the volatility of a totally-free property market," says Ms Ong.