A common argument against removing the Additional Buyer’s Stamp Duty (ABSD) is that it will undo the stabilizing effect of the Cooling Measures. The Doomsday scenario is that a flood of overseas speculators will rush into the property market and drive prices to unaffordable levels.
This view overstates the negative externalities of ABSD while failing to acknowledge the success of subsequent measures and structural changes, which have strengthened the property market’s resistance to instability.
ABSD was not Government’s first Cooling Measure. Three versions of the Seller’s Stamp Duty (SSD) and three changes to Loan-to-Value (LTV) came before the first version of ABSD. The sequence of the Cooling Measures suggests that Government recognized that ABSD was controversial but felt it had no choice. The earlier measures were not bringing down prices, and Government needed to buy extra time for supply to come online.
ABSD was always an imperfect short-term solution and its continuation comes at a cost to the very spirit of Singapore. By its very structure, ABSD treats groups of people differently and sends the wrong signal to Singaporeans, permanent residents, and foreigners who want to invest in Singapore for all the right reasons. The threat to Singapore’s economic stability is not long-term investors and fair-market property prices.
The real threat is unaffordable housing, excessive consumer debt, and a protected private property market that discourages capital investment in Singapore. In all three cases, other policy measures have proven to be more effective and equitable than ABSD.
There were three primary reasons for the run-up in property prices after the Global Financial Crisis: demand outpacing supply, record cheap financing, and overseas capital seeking a safe haven in Singapore.
Supply
ABSD cannot solve shortages in housing stock because it doesn’t add or subtract units into the market. Instead, ABSD tries to bring down prices indirectly by reducing demand. It does this by making housing more expensive to selected buyers. Unfortunately, this temporarily distorts market pricing without altering its fundamentals. As a result, it can’t be a long-term solution.
SRX Property’s graph on the Cooling Measure illustrates that ABSD was very effective at reducing the number of transactions but struggled to bring prices down. In fact, ABSD One, which only affected foreigners, didn’t bring prices down after its implementation in December 2011. It was not until Government revised ABSD in January 2013 and expanded the tax to include Singaporeans and Permanent Residents (PR) that prices began to slow.
ABSD Two cannot reduce price in the long-run. The reason is simple. The market understands the value of homes. When sellers recognize they cannot achieve fair market value, they sit on the sidelines. As such, homeowners who sell are those who must or those who sell to a buyer not impacted by ABSD. All ABSD can do is buy time while supply catches up. When prices are high because of a housing shortage, the only solution is to build more homes in order to re-establish a lower market equilibrium price.
Housing shortages create affordability issues. Since ABSD can’t permanently bring down prices during housing shortages, it can’t solve unaffordable housing problems. Again, only sufficient supply can make housing affordable in the long run. (Subsidies can help but they do not alter the fundamental value of the home.)
Now that supply has had time to come online, ABSD is no longer needed. Many analysts and increasing vacancies rates indicate that there is now sufficient supply to accommodate demand, especially given the constraints of Total Debt Servicing Ratio (TDSR) on borrowing. Indeed, the Monetary Authority of Singapore (MAS) Macroeconomic Review, October 2015, reports that “Over the past four decades, the Singapore housing market has expanded at a sustained pace, alongside population and economic growth.” The report praises the ability of Government and commercial developers to ramp up and down construction to stabilize property prices and counteract downturns in the economy.
Even if one doesn’t agree that the market has achieved a sufficient level of supply, it’s difficult to understand how market prices would suddenly go haywire and shoot above fundamental value if ABSD were removed.
First, today’s market is more than capable of properly pricing homes without the help of ABSD. Thanks to Government, the real estate industry, and technology companies, market participants have access to big data and valuation tools like X-ValueTM. They are more than capable of anticipating supply in the pipeline and factoring it into their pricing. To not acknowledge these new efficiencies in the market negates public-private efforts to introduce transparency as a way to prevent housing bubbles and help stabilize the market. This more transparent and efficient market now has self-stabilizing mechanisms that renders older measures like ABSD obsolete.
Financing
The second reason prices are unlikely to soar is Total Debt Servicing Ratio (TDSR). It has removed much of the underwriting risk in the market. (There is still more that can be done but this is a subject for another column).
In his book, Hidden in Plain Sight, Peter Wallison, a member of the USA Financial Crisis Inquiry Commission (2009-2011), identified poor underwriting standards as one of the primary causes of the U.S. Housing Crisis. He writes:
“It is clear beyond doubt that good underwriting standards produce a stable housing market during normal (non-stressed) times, while deviations from these standards produce instability and high rates of mortgage default. A decision to loosen underwriting standards as a matter of deliberate (U.S) government policy was a serious error.”
Unlike U.S. policymakers, MAS prudently tightened underwriting standards as a pre-emptive measure to stabilize the financial system. They were clearly concerned that in the price run-up after ABSD One, particularly in the primary property market, consumers had taken on too much debt and would find themselves in dire financial straits if interest rates were to rise.
TDSR gave the market a twofer. Not only did it impose some sanity on a local market over-stimulated by low interest rates, but it helped dampen demand in a productive way by taking people out of the market if they could not afford to be in it. TDSR did it in a way that focused on affordability rather than on the buyer’s passport.
Overseas Capital
The third reason the private condo market won’t get out of control (even if you believe that there is insufficient supply) is that reopening the market to overseas capital is highly unlikely to cause a run up in prices and certainly not one that would make the mass market unaffordable.
In 2012, the first ABSD reduced foreign investment from about 22% of total private apartment transactions to 6%, yet prices continued to increase rapidly. Why? First, developers discounted new projects in response to ABSD. Second, local buyers saw an opportunity to take advantage of low interest rates, discounted new homes, and less competition from foreign buyers. In summary, it was mainly Singaporeans who drove up private apartment prices, not foreigners. As such, given increases in supply, transparency, underwriting constraints, and the true cause of the previous spike in pricing, it is difficult to understand how restoring market pricing to foreign capital (by removing ABSD) would result in uncontrollable price increases.
For those of us who are worried about combatting speculation and hot money, SSD is a much better remedy than ABSD. SSD attacks the root cause of speculation by imposing a holding period on property.
Furthermore, long-term investors are used to lock-in periods, especially those with investments in private companies. They can live with SSD because it is easier to manage backend risk than the high ROI (Return-on-Investment) hurdle caused by ABSD.
Ironically, this means that ABSD deters good investment but does not necessarily stop shady overseas capital. Money launderers are accustomed to paying high transaction costs and are not deterred by high upfront taxes.
For the Good of Singapore
Up until now, I have presented the technical arguments for why it is safe to remove ABSD: a better pricing equilibrium thanks to an increase in supply, a more transparent and efficient market, consistent mortgage underwriting, and measures that prevent speculation. There is also a compelling strategic reason for lifting ABSD.
ABSD sends a bad signal to investors. The fact is that Singapore is a multinational country that is fully integrated with the world. As MAS reported in its October report, the economy is primarily export-driven, which means its customers are the world. According to Ministry of Manpower (MOM) and SRX Property calculations, foreign workers consist of 38% of Singapore’s working population. By my count, Singapore hosts the Asian headquarters for 319 companies in the Global Fortune 500. Yet, ABSD says that Americans can purchase Singapore property in accordance with the same rules as Singaporean citizens but Brits cannot. Is that the right signal to send about a Cooling Measure that has outlived its usefulness?
Isn't it time to remove ABSD and show the world that we have built a more efficient and stable property market that operates a free market pricing mechanism that rewards long-term investment?