Home prices may rise 5-8% on wider impact

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Published November 15, 2006

GST INCREASE
Home prices may rise 5-8% on wider impact

Developers also point to rising construction costs adding to tax bill

By KALPANA RASHIWALA

(SINGAPORE) The two percentage point hike in the Goods and Services Tax could result in a direct rise of up to one per cent in the breakeven cost of residential property projects.

But the GST rise, combined with rising construction costs, could have a 5-8 per cent inflationary impact on home prices next year, some property players say.

Developers are exempt from paying GST on land zoned or approved for residential use.

But as Ernst & Young partner for GST services Yeo Kai Eng explained: 'Because the sale of homes is exempt from GST and residential developers cannot collect GST on home sales, they also cannot recover the GST that they incur on construction costs, engineering/architectural fees, and marketing expenses in the course of developing a residential project.

'When the GST rate goes up from 5 to 7 per cent it will mean an additional cost for developers. The question is whether they will absorb it and take a margin cut or pass it to home buyers instead.'

A developer put it this way: 'With home prices on the rise anyway, developers have more leeway to pass the increase to home buyers, which is why it's a good idea to introduce a GST increase when the economy is doing well.'

Typically, construction costs, fees and marketing expenses account for about 35-50 per cent of the breakeven cost of a residential project. Based on this, a rise in GST from 5 per cent to 7 per cent will in itself result in a 0.7 to one per cent increase in breakeven costs - assuming no change in other cost components, including construction costs on which developers have to pay GST.

But the problem is, breakeven costs themselves are going up because of rising construction costs, as higher oil prices have led to increases in the prices of raw materials such as copper, steel bars and ready-mix concrete, as well as the cost of transporting them.

Kuik Sing Beng, managing director of Sim Lian Land - whose parent listed Sim Lian Group is also involved in construction business - estimates that construction costs have gone up about 15-30 per cent in the past year, depending on the tier in the property market. He predicts construction costs will easily rise a further 10-15 per cent next year because of strong demand amid big projects like the integrated resorts.

'So if construction costs go up, proportionately the GST cost also goes up. And in addition to that, if there is a two-point GST rate hike, the total cost of developing a residential project could go up by 5 to 8 per cent,' he explained. 'The selling price has to go up by this amount - just to recover the higher cost - if developers want to make the same margins.'