Thorny issues around parental help in buying homes
Thorny issues around parental help in buying homes
Although the numbers stack up to support the buying of a private home here for a minor, there can be harmful social consequences if such help becomes widespread
Jan 25, 2022
RISING HDB resale prices and more million dollar resale HDB flats being transacted hogged the headlines in Singapore property in 2021.
Much buzz was generated in the luxury end of the home market too with the purchase of coveted homes in Good Class Bungalow (GCB) areas by technology titans and all the units at luxury condo development Eden at 2 Draycott Park by the Tsai family of Taiwan, who is behind snack food giant Want Want China Holdings.
Last month, the news reported that crypto billionaire Zhu Su and his wife Tao Yaqiong Evelyn were granted an option to buy a bungalow in Yarwood Avenue, which is in a GCB area, for S$48.8 million as trustee for a nearly 3- year-old child. All 3 individuals are Singapore citizens.
Bungalows in GCB areas have large plot sizes and are located in lush, green surroundings. They command a rarity value as there are only around 2,800 of such houses. Lucky is any kid who owns such a prized possession in a city where many young adults are working and saving hard to fulfil their dream of buying a HDB or condo unit.
On reflection, there are probably a fair number of people who receive aid from others such as family members in buying their homes. Parents helping their offspring in buying homes may be fairly prevalent not just in Singapore but also cities such as Hong Kong or Shanghai.
Looking at the income of a young couple per se can understate the couple's purchasing power. Well-heeled and generous parents in their 50s and 60s, who did well as Singapore transformed from Third World to First, may be a potent force in the private home market here, helping their children fund pricey home buys.
Should home prices rise over time, it makes sense for parents to help their children get on to the private residential property ladder sooner. It can also be sensible for parents to help their young adult children buy a more expensive home than what the latter can afford as such an investment may yield larger capital gains in absolute terms.
How extensively should parents help their children in buying homes? Even if parents can afford it, perhaps children may appreciate buying their own home on their own dime. After all, buying a first home as a young adult can be a scary and exciting experience that gives one a sense of achievement.
Buying in trust
Parental help in buying homes can extend to parents using a trust to buy a home for a kid. Such a course of action may create future problems. When the child turns 21, will he or she be able to act responsibly with his or her valuable asset?
Still, the numbers stack up to support the buying of a private home here for a minor.
Such a purchase has to be funded entirely in cash. Opportunity costs may be low if the funding came from money in savings accounts with banks here that pay an interest rate of close to zero.
The said home can be leased out to earn rental income. Net yield may be low at 2 per cent per annum or less but this is broadly comparable to the average yield on the Singapore Savings Bond over a 10-year period of 1.64 per cent per annum based on the bond to be issued on Feb 3, 2022. A 50-year Singapore dollar bond guaranteed by Temasek Holdings was issued with a yield-to-maturity of 2.8 per cent per annum last year.
Investing in a private home here offers potential capital appreciation whereas holding a bond to maturity generally results in one recouping the principal invested. After 10 or 20 years, a home's value could go up by 28 per cent or 64 per cent respectively if prices rose by a compound annual growth rate of 2.5 per cent.
Avoiding ABSD
From a financial perspective, parents who are citizens may want to buy homes in the names of their children who are citizens so as to avoid incurring hefty ABSD. If the parents already own two homes under separate names, buying another home in the name of a child, who is a citizen and does not own a home, means saving on 17 per cent of ABSD applicable to a citizen buying a second home. The difference is 25 per cent of ABSD between a citizen child buying a first home and a citizen parent buying a third or subsequent home.
Indeed, the higher ABSD rates for citizens and permanent residents (PR) buying their second and subsequent homes that kicked in on Dec 16, 2021, may inadvertently incentivise some to buy an additional home in the name of a child who is a citizen or PR and does not yet own a home.
Might measures be taken to curtail the buying of homes in the name of minors?
Land is a scarce resource here. Building new homes has environmental costs. Putting big sums of money into buying homes may not be economically productive.
Perhaps some of the wealthy can embrace family social responsibility by not over investing in homes. Invest more money to seed new businesses that create jobs or support initiatives that benefit society instead.
Indeed, the wealthy may hurt themselves if their actions drive home prices to grow too quickly relative to growth in income levels thereby potentially drawing more government intervention to rein in prices.
Individuals are generally free to spend money as they deem fit. Is it wrong for some parents to help their children buy a home, including buying a home for a young kid as a hedge against prices running away?
Nonetheless, widespread parental help in buying homes can exacerbate the challenge of those who are trying to buy a private home without such help. Potentially, there can be harmful social consequences if it becomes harder for this group to realise their dream of private home ownership as a result.
Meeting housing aspirations in any global city is challenging. The provision of high quality affordable public housing here has been very helpful and will continue to be critical in managing the allocation of housing resources.
Some people are lucky that their parents can give a helping hand to snare a dream private abode here. For others, fortunately there are quality options available in the public housing market even in prime areas.
Let's hope wealthy parents can at times exercise restraint and that parental help in private home purchases will not breed resentment among some in the wider community.
