Don't blame ABSD for overseas property buys

Cash-rich Singaporeans need more education on the various investment options available

Benvolio: "Be ruled by me, forget to think of her."

Romeo: "O, teach me how I should forget to think."

Benvolio: "By giving liberty unto thine eyes; Examine other beauties."

- William Shakespeare, Romeo and Juliet

ARGUING for a removal of the additional buyer's stamp duty (ABSD) for Singaporeans, Nee Soon GRC MP Lee Bee Wah said on Tuesday that the additional taxes have led cash-rich Singaporeans to invest in riskier foreign properties in Malaysia, Cambodia, the US and UK.

"With the influence of friends and fellow investors, coupled with the low initial downpayments and fewer restrictions in foreign properties, Singaporeans are enticed to look abroad. This not only does little benefit to our economy, but we are putting our people at risk," she argued. "I feel we should keep the total debt servicing ratio (TDSR) to encourage prudence in financial spending, but remove the ABSD for Singaporeans."

There are many things wrong with the argument to remove the ABSD, to encourage cash-rich Singaporeans to buy private residential properties here.

First, domestic properties beyond the first home are not necessarily suitable investments. They cost a lot and can be hard to sell. Much debt needs to be incurred. Getting rental income is a hassle and not guaranteed.

A Singaporean investor looking to retire will need investments that can pay out a decent yield and can be sold quickly in case of emergencies, like a medical operation. Property does not tick either box.

Most investors do not have a long-term horizon. For them, property investing is a leveraged, risky bet to make money quickly when prices are rising.

Second, the ABSD should not be blamed for pushing Singaporeans to invest abroad. For citizens, it is a 7 per cent tax on the second residential property, and a 10 per cent tax on the third and subsequent properties.

Is a 10 per cent tax so onerous as to discourage buyers from buying their third property? Not if they expect prices to go up by much more within their time horizon, such that they get a suitable rate of return for the risk they are taking.

What the ABSD discourages are speculators: those looking to make money from a quick flip. If people truly believed in the potential of a property, they would be eyeing a 30, 40 or 50 per cent increase in prices over 10 years or more. In fact, not too long ago, prices were going up 5 per cent a quarter. A 10 per cent tax won't deter anybody in that kind of environment. (Nor will rising interest rates, for that matter.)

So don't blame the ABSD for making local property unattractive to Singaporeans; blame a gambling mentality, excess capacity, and prices that have gone out of sync with incomes.

Third, overseas properties are not necessarily risky purchases. In property, as with all investments, there are riskier choices and less risky ones. Buying a centrally located property directly from an established developer here or abroad will be less risky than buying a property away from any established infrastructure. It is also not the wisest thing to go through several middlemen to buy a piece of land in the middle of nowhere, in a country with dubious rule of law.

With all overseas assets, potential investors have to carefully evaluate regulatory risks, currency risks, and counterparty risks.

Moreover, Singaporeans buy properties for many reasons, not all of them financial. Financially, there are "pull" factors, not just "push" factors. For example, currencies in Australia and Malaysia have been depreciating against the Singapore dollar, making assets there more attractive.

Meanwhile, Singaporeans might just want a home for their children to stay in should they ever study or work abroad. Some might simply desire a retirement home across the Causeway, where the pace of life is slower.

Finally, the income gap will only widen in a very visible way if cash-rich investors, Singaporeans or foreign, snap up local properties, push up their prices, and pass them on to their children. A small city-state cannot afford that kind of rift.

Dr Lee, in her speech, highlighted something important: many Singaporeans have spare cash and do not know what to do with it.

We should encourage them not to be fixated on property, but to examine traditional, liquid assets that can offer a reasonable return without leverage, like stocks and bonds. Property should be just one part of a balanced portfolio.

We also need more education on the topic of investing itself, on how to get a financial return suited to one's time horizon, liquidity requirement, wealth, and risk tolerance.

This message would be better heard in a property downturn.



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