http://www.businesstimes.com.sg/arch...arket-20140225

Published February 25, 2014

Stamp duty forecast not proxy for property market

By Kenneth Lim [email protected]


[SINGAPORE] The Budget's estimated 30 per cent drop in stamp duty revenues may not necessarily foretell a dire year for the property market, an analysis by The Business Times has found.

According to Finance Minister Tharman Shanmugaratnam's Budget announced on Friday, revenue from stamp duties is expected to fall to $2.8 billion for the year ending March 2015, compared to an estimated $4.1 billion for the year ending March 2014.

That projected 30 per cent reduction is the sharpest among the key sources of income for the Budget, and at first glance it would seem troubling.

Property consultants are expecting a 10 per cent correction for the property market in 2014, while DBS chief executive Piyush Gupta recently reckoned that a 10 to 15 per cent decline might be in the works.

Stamp duty revenues, which are derived mostly from property-related transactions, and private property prices have a strong positive correlation, based on 2005 to 2013 data.

Keeping in mind that the government's financial year ends in March, stamp duty revenues have an 86 per cent correlation to the private property residential price index on the Dec 31 that falls within that fiscal year.

But two factors prevent that relationship from holding true for the FY2014 Budget numbers.

In essence, the variability from new stamp duty rules as well as the government's estimates introduce margins of error large enough to make a straightforward extrapolation meaningless.

First, the new Budget will introduce changes to the way stamp duties are calculated.

The biggest change will affect rental contracts of three years' tenure, which face a 50 per cent increase in stamp duties.

A $30,000 per year lease, for example, would exact a duty of $360 under the new rules, compared with $240 previously.

On the whole, however, most of the proposed stamp duty changes merely shift the calculations to a smooth scale from a stepped one. That means formulae that will read "0.4 per cent of total rent" as opposed to the current "$1 for every $250 or part thereof".

Formulae aside, trying to extrapolate a forecast for the property market is complicated by the fact that the government has not been stellar at estimating how much stamp duty it will collect in the coming year.

Looking at data from 2007 to 2013 (stamp duty was not a separate line item before 2007), actual annual stamp duty revenues were higher than government estimates by about 72 per cent on average. Only in 2008 did the government overestimate how much it would receive, taking in 40 per cent more than its forecast.

That prediction is understandably tough to make.

"Stamp duties were mentioned as one of the cyclical factors that boosted FY2013 surplus but that is not expected to last," OCBC economist Selena Ling said. "As to how much is due to the decline in property transactions and how much due to correction in property price is unclear. But it is probably a fiscally conservative forecast."

Out of academic curiosity, what if the stamp duty changes have zero impact on revenues, and past years' relationship between stamp duty revenues and private housing prices continues to hold?

The closest the government got to predicting the coming year's stamp duty revenue was when actual revenue overshot estimates by 22 per cent in fiscal 2010, and the worst prediction was when the actual figure was two-and-a-half times the estimate in fiscal 2007.

Assuming that the estimate for fiscal 2014 is conservative and falls within those bounds, stamp duty revenues could be between $3.5 billion and $7 billion for the year ahead.

Using a best-fit line based on 2005 to 2013 numbers, that could translate to the private property residential index performing between a decline of 10.4 per cent and an increase of 31.8 per cent in the coming year.