Imagining a housing market without ABSD

[SINGAPORE] It will soon be five years since I started writing this column on property-related matters. Often, I dwell on topical issues. Occasionally, I wander into more blue sky topics.

Today, I imagine a Singapore housing market where there is no additional buyer’s stamp duty (ABSD). For one, if ABSD were removed, I will take a big step forward in buying another home here. 

ABSD was first introduced in December 2011. Today, it is not applicable to a Singapore citizen buying a first home. However, various other buyer profiles pay ABSD on home purchases. For example, a local buying a second home pays 20 per cent ABSD, while a non-permanent resident (PR) foreigner buying any home pays 60 per cent ABSD.

Is there a case to abolish ABSD? 

Possibly. Think about it, ABSD can hurt the government’s revenue collection and distort investment decisions.

ABSD suppresses housing demand from Singaporeans and PRs buying multiple properties as well as non-PR foreigners. In turn, the government loses out when developers bid less for private housing sites as demand is curtailed. The proceeds from selling state land goes to past reserves. 

Sure, buyers paying ABSD on their home purchases contribute to tax revenue. Still, arguably, developers might build and sell more new homes at higher prices if there is no ABSD. And an uptick in new home building generates greater economic activity.

Moreover, collection of buyer’s stamp duty (BSD) can rise through an increase in the volume and value of housing deals should costs of transacting homes fall for many buyer profiles. The BSD rate for residential properties ranges from 1 to 6 per cent, with the highest marginal rate applying to sums exceeding S$3 million.

ABSD distorts

Importantly, ABSD can skew investment decisions of locals, possibly to their detriment. Some locals wanting to purchase homes here may be “pushed” to buy abroad where they are unfamiliar with the regulations, and face foreign exchange, tax as well as land title risks. 

Others may buy non-residential properties here instead, including strata units in poorly managed buildings that are hard to lease out. Also, prices of strata office, retail and industrial spaces could get pushed up, which in turn hurts small businesses looking to buy such spaces to house their operations.

Furthermore, due to the ABSD regime, numerous local couples own homes under separate names instead of their preferred option of jointly owning homes. 

In many spheres, Singapore competes hard to lure foreign investment. With the ABSD regime, many non-PR foreigners may avoid buying homes in the city-state, thereby depriving the Republic of tax and other revenue associated with foreigners buying homes here.

At the same time, as housing demand may be suppressed by ABSD and developers face ABSD remission clawback if they do not start construction, complete development and sell out inventory on housing projects within tight deadlines, local property groups might increasingly allocate capital to investing overseas. 

As it stands, numerous Singapore groups actively build homes and own investment properties abroad. On the other hand, consider how the domestic economy could benefit should local groups allocate more of their capital to investing at home.

Moreover, as private homes here are predominantly bought for owner occupation today, there could be a shortage in future of good quality private homes for lease to foreign talent that the Republic hopes to lure in order to build a dynamic economy.

Prudent borrowing

Sure, private home prices could spike if ABSD is abolished. Nonetheless, there are existing tough borrowing measures to help ensure a stable housing market.

For example, total debt servicing ratio (TDSR) limits ensure that borrowers are not over-leveraged for housing purchases. 

A borrower’s TDSR is computed by first dividing his total monthly debt obligations by his gross monthly income then multiplying this by 100 per cent. The TDSR threshold for financial institutions extending property loans is set at a maximum of 55 per cent of the borrower’s monthly income. Exceptions exist for certain situations.

The TDSR framework complements the loan-to-value (LTV) limit, which determines the maximum amount an individual can borrow from a financial institution for a housing loan.

For a borrower with no outstanding home loan, the LTV limit for a private home is 75 per cent if the loan tenure does not exceed 30 years and the loan period does not extend beyond the borrower’s age of 65 years.

Public housing

The homeownership rate among the resident population is high and many households own Housing & Development Board (HDB) flats.

Without ABSD, private housing may become far less affordable for many locals. However, abolishing ABSD can be done together with expanding opportunities for locals to own new HDB homes.

Currently, strict eligibility criteria govern who can buy subsidised flats directly from the HDB. For example, local couples who bust the monthly household income ceiling of S$14,000 are ineligible.

Perhaps, give all locals the chance to buy a home from the HDB for owner-occupation. If needed, subject higher income buyers to clawback on sales proceeds when such parties sell their subsidised HDB flats.

In short, let the private housing market operate in a more unfettered way while ensuring that the housing needs of locals are comprehensively met by the HDB market.

Indeed, having locals of various socio-economic groups live together in HDB towns promotes interaction and bonding at a time when many societies are fragmenting. Meanwhile, continuous efforts to build well-designed HDB homes in good locations and close to attractive amenities can help snuff out the aspirations of locals for condo living.

Sure, building more new HDB homes is costly. New HDB homes are sold at subsidised prices to eligible buyers and some public housing flat buyers receive grants.

Still, the government can reap financial benefits from having a more vibrant ABSD-free private housing market. Such benefits could help mitigate the costs of building more HDB homes.

Very likely, having a housing market free of ABSD belongs to the realm of fantasy. After all, removing it today could introduce plenty of near-term volatility in private home prices.

Nevertheless, there are merits to reimagining what the local housing market should look like. A plausible and possibly desirable future could see a freer private housing market existing alongside a strong HDB segment.