Singapore Budget 2018: Implicit message in buyer's stamp duty hike

THE surprise hike in the top marginal rate of buyer's stamp duty (BSD) has been touted by officialdom and market watchers as a move towards a more progressive tax system, by placing a heavier burden on the wealthier.

While it is not expected to derail the nascent recovery of the residential market, it may still have a dampening effect on market sentiment, serving as a timely reminder to developers and potential homebuyers not to be too carried away in market euphoria.

Though industry players were already anticipating a move by the government to make taxes more progressive in Budget 2018, it came in the unexpected form of a hike in the top marginal BSD rate.

For the portion of residential property value in excess of S$1 million, the BSD rate is raised from 3 per cent to 4 per cent; the 1 to 3 per cent BSD rates still apply to residential property values of S$1 million and below.

This change applies to all residential properties bought on or after Tuesday, including en bloc property deals and residential land deals.

As the value of a property increases, so does the impact of the BSD hike. This is why its impact will be felt most for higher end properties and en bloc deals because of their larger quantums.

JPMorgan analyst Brandon Lee called the BSD revision "a subtle and calibrated yet far-reaching cooling measure" while OCBC analyst Andy Wong termed it a "mild cooling measure aimed at enhancing progressivity".

Cooling measure or not?

Most other market watchers are not as prepared to see it a cooling measure. After all, Minister for Trade and Industry S Iswaran said on Tuesday in an interview with Bloomberg that it was not.

But developer stocks on Tuesday still took a beating from the Budget announcement, suggesting that investors were reading into the policy move more than what its stated intentions suggest. Is this a cooling measure by any other name?

The revision to buyer's stamp duty (BSD) was careful in containing the blow within the luxury property space and developers' land purchases.

Based on data from URA Realis, the proportion of the properties transacted above S$1 million is around 64 per cent of the total private residential transactions including executive condominiums.

For the majority of homebuyers, however, the incremental tax burden is manageable.

Given that the sweet spot for mass-market private residential sales has been in the S$1-1.5 million region since the total debt servicing ratio regime, the additional tax burden of S$1,000-5,000 is still acceptable to buyers.

At the same time, the BSD revision is not expected to boost government's coffers significantly. Cushman & Wakefield estimates that the increase in tax revenue arising from the BSD tweak is about S$411 million for fiscal 2018 or equivalent to 8 per cent of the total stamp duty collected in fiscal 2017.

The bulk of the increase will likely come from big-ticket home purchases, especially the ultra-luxury segment such as Good Class Bungalows, bungalows in Sentosa Cove and the high-end units in excess of S$5 million.

Such approach to BSD revision is targeted and progressive, while dampening any excessive exuberance in the residential market fuelled by collective sales, said Cushman & Wakefield research director Christine Li said.

Arguably, collective sale hopefuls may have to apply a certain discount to make their properties more attractive to developers. This is certainly a desirable outcome from the government's point of view.

But for the highly adaptable developers out there, they may still have many ways to counter the impact of the BSD revision without compromising on their margins.

The additional one per cent stamp duty on the excess purchase value above S$1 million can be absorbed through construction costing and efficiency of net saleable space of the building, says Savills Singapore senior director Alan Cheong.

The higher cost stemming from the BSD could also be passed on by developers to homebuyers under bullish market conditions.

Let's take the case of a potential collective sale as an example. If Casa Meyfort in the East Coast area were to be sold at its asking price of S$340 million, the increase in stamp duties that a developer has to fork out for the purchase would translate to an increase of about S$14 per square foot per plot ratio (psf ppr). But this can either be absorbed by homebuyers or offset by construction costing and building efficiency.

Developers could also counter the BSD impact on buyers' affordability by building more compact units under S$1 million. But of course, there is a limit to doing so given the cap on the number of dwelling units for non-landed residential developments outside the Central Area.

Timely reminder

Clearly, developers with a depleting landbank will not stop buying land just because of the BSD revision. But they have already become more prudent in collective sales lately, preferring not to get into a bidding contest in public tenders but to match owners' reserve price under private treaty. This reduces the need for more draconian measures for now.

For all intents and purposes, the BSD revision provides a timely reminder to market players of the government's close watch over the residential sector, and the many policy levers it has at its disposal to ensure market conditions stay sustainable.

Should a more direct approach be required to cool the market, the government has a chance to address land deals soon - when the next revision for development charges from March 1 to Aug 31 is up.

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