Luxury market will be hardest hit.
The key themes behind Budget 2013 are continuation of the economic restructuring plan and the building of a more inclusive society. The Finance Minister explained that it is important for Singapore to succeed in its economic restructuring given the stage of Singapore’s economic development and its demographic profile.
Nomura analyst Min Chow Sai notes that to create a progressive tax structure, the government has imposed higher property taxes on luxury residential investment properties and created wider bands for owner-occupied residential properties based on the annual value of the properties.
Here's what analysts had to say:
Alan Cheong, analyst, Savills
New marginal property tax rates of 12% to 20% for non-owner-occupied residential properties will be introduced. By this, it wouldn’t have much of an impact as rents are determined by the forces of demand and supply.
However, taken in circumspect, it appears that with the higher marginal tax rates added onto personal taxes, owning a high end real estate here for investment is becoming less of an attractive proposition than investing in one in a developed economy where taxes are higher. This will encourage more to take their capital overseas.
For owner-occupied residential properties, the 0% property tax band widened to 1st $8K of AV. New tax rates of 8-16% introduced. The revised progressive property tax structure for residential properties will be phased in over 2 years starting from 1 Jan 2014. 99% of owner-occupied residential properties will enjoy lower tax rates.
The point that 99% of owner-occupied residential properties enjoying lower tax rates is puzzling as there are currently about 900,000 HDB flats and 277,620 private properties.
The percentage of private and public housing is therefore 76.4% and 23.6% respectively. For 99% of owner occupiers to enjoy lower tax rates, it would mean that high rental private properties only constitute a miniscule percentage of our total housing stock.
In the illustration provided by IRAs in the file “Illustrations of property tax computation for Owner-Occupied Homes”, under Example 3, one item of the property tax rate for 2015 should perhaps be 5% (Next $5,000) instead of 6% as was published.
Current concession which provides property tax refunds on vacant properties will be removed from 1 Jan 2014. This may have serious implications on the rental market in that it could force individuals or companies, to eruct their vacant units onto the market at a time when rental budgets are constrained and the net number of employment passes issued have not been growing.
Min Chow Sai, analyst, Nomura
The increase in property taxes especially for investment residential properties could double the property taxes payable by the owner of high-end residential properties. In our view, the additional taxes will likely erode the returns on the property and undermine the rationale for investments in high-end properties in Singapore.
Tricia Song, analyst, Barclays
High-end investment properties will see the most significant increases in property tax rates - instead of the current rate of 10% flat, there will be new marginal tax rates of 12% to 20%. Even for owner-occupied residential properties, the marginal tax rates are raised from the current 0%, 4% and 6%, to include 8-16%. The 0% property tax rate band, which currently applies to the first S$6,000 of annual value of properties will be widened to S$8,000.
This will enable 950,000 owner-occupied homes (c.80% of total 1.2mn homes) to enjoy tax savings (see below), but the top-end home owners to pay significantly more. For example, a landed property in a central location for owner-occupation of for investment with an annual value of S$150,000 will see property tax increase of 69% and 60% to S$12,580 and S$24,000, respectively.
Janice Chua, analyst, DBS Vickers
The government is raising property tax rates for high end residential properties, with the largest increases applying to investment properties that are not owner occupied. At the same time, as property tax is a wealth tax, property tax rates for owner-occupied homes will also be adjusted such that a
higher number of households do not have to pay property taxes.
Under the new rules, owner-occupied residential properties with annual value of S$8000 and less (compared to S$6000 and less previously) will not have to pay property taxes while those with a higher annual value bracket would see the rates increasing from 4-6% previously to up to 16%. This will be gradually put in place over the next 2 years. Under this revised scheme, 950,000 home owners will enjoy savings on property taxes.
The biggest impact is on non-owner occupied properties; the new marginal tax rates will range from 12-20% compared to 10% currently. This will affect homes with annual values of >S$30,000, which represents the top one third of all non-owner occupied properties.
Property tax rates for non-residential properties remain unchanged at 10%.
The impact of these changes on the residential sector is likely to be muted as the quantum increases are not significant. However, those in the high end are likely to see greater effect arising from higher payments of property taxes from the changes. For investment properties, if these added costs cannot be passed on in the form of higher rents, this could potentially result in an erosion of 5-10% in rental yields which currently stands at between 2.9-3.2%,
thus reducing the attractiveness of owning high end assets slightly.
This could also spur holders of vacant investment property units to reconsider their options and would likely continue to dampen the demand for high end residential assets.
Our view on the residential sector remains unchanged, with a projection of a 5% decline in home prices this year while volume demand could likely moderate by up to 20%.
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