Cooling measures won't stop wealth creation through owning homes but do combat inequality

While the investment case for private homes is not broken, it is much weakened by slowed price increases and raised transaction costs

Feb 08, 2022

FINANCIAL inequality can stem from disparity in wages and wealth among people. Tools to combat the former can include raising wages of lower-wage workers, curbing excessive pay of top management, and ensuring progressiveness in income tax.

Measures to curb wealth inequality can range from levying taxes on business, capital gains, inheritance and property, as well as schemes to help the less well-off own their homes and invest to build retirement nest eggs.

Private-home owners here pay recurrent property taxes as well as stamp duties on transactions that include buyer's stamp duty (BSD) and additional buyer's stamp duty (ABSD).

Effective Dec 16, 2021, property cooling measures that kicked in included higher ABSD rates of between 5 to 15 percentage points for individuals and entities buying homes here except for Singapore citizens and permanent residents (PR) buying their first home.

The property cooling measures aim to promote a stable and sustainable property market where home prices do not run ahead of economic fundamentals, thereby risking a destabilising correction later on.

Do the cooling measures help combat wealth inequality? Options exist for citizens and PRs to avoid paying the higher ABSD rates. Couples who are citizens or PRs can buy 2 homes under separate names. A citizen couple can buy a bungalow each in a Good Class Bungalow (GCB) area under separate names as the first home of each partner without incurring ABSD.

Citizen couples who jointly own a private home can restructure the ownership of the said home such that ownership is under one partner's name with the other partner free to buy another home without incurring ABSD. In such a case, BSD of around 3 to 4 per cent is payable on the share of the property that is being transferred.

Citizen couples can also buy homes for their citizen children who are below the age of 21 using trusts. If a citizen child does not own another home, the transaction incurs no ABSD. Such purchases have to be funded without the help of a home loan, which need not be a deal breaker for the wealthy. Moreover, a property held in trust for a child can be used to earn rental income.

In short, there are still ways for wealthy citizens and PRs to add to their holding of homes without incurring more ABSD despite the cooling measures.

Owning multiple homes

The property cooling measures do not stop rich locals or foreigners from buying multiple homes here so long as they are willing to pay the high transaction costs.

No cap applies to the number of homes an individual can own. This is akin to the ownership of private cars here, where one can own a fleet of cars so long as one pays for the certificates of entitlement.

The wealthy can still build up portfolios of homes here, including those with freehold tenure, for wealth preservation and handing over to the next generation.

Indeed, might the higher ABSD rates snuff out aspirations of the merely well-off of investing in homes here - but not those of the very well-off?

The rich, who already own multiple homes, are unaffected by the cooling measures. Owners of multiple homes may simply be disinclined to rejig portfolios due to the high transaction costs.

The cooling measures also do not directly raise the costs of owning high-end properties such as bungalows in GCB areas or ultra-luxury condominium units.

With the new ABSD rates, a citizen who wants to put tens of millions of dollars into homes in Singapore may be driven now to put this sum into 1 or 2 properties, rather than 3 or more units.

The rich could own fewer homes but each home may be larger in size and more opulent. The building of fancy mansions on land and in the air, boasting copious amounts of living space, super pricey materials and eye-popping fittings, need not slow down following the cooling measures.

Weaker investment case

Nonetheless, the property cooling measures do help combat wealth inequality by raising transaction costs for some who are buying homes for investment and weakening the investment case of homes via slowing the pace of increase in home prices.

Higher ABSD rates will likely cause some foreigners and local investors to stop looking at homes here and shift their focus elsewhere - be it to overseas property, non-residential property here, or other investment instruments.

The government is ramping up supply of both private and public housing units, which should help address the demand-supply situation. Moreover, the government's actions show it will be proactive in keeping home prices in check and signal that homes are meant for living rather than investing.

Wealth creation from owning homes is still possible as home prices should rise over time if the economy grows, income levels rise, infrastructure improves, and Singapore continues to be a safe haven.

However, with the cooling measures, growing wealth through owning homes becomes less attractive as it will be more difficult to build up holdings of homes and price increases may be more muted.

While the investment case for private homes is not broken, it is much weakened. Even if they can find ways to get around paying higher ABSD rates, wealthy locals may find other investment options besides Singapore homes to be more compelling. Could a preference for building wealth through homes be replaced by more money going into local or international equities and bonds, or new asset classes such as cryptocurrencies?

The jury is out as to whether more should be done to combat wealth inequality and whether private homes should carry an even bigger burden in this battle.

If there is a need to up the ante in fighting wealth inequality, more targeted measures aimed at bungalows in GCB areas or homes with values above a certain threshold can be rolled out.

Meanwhile, building more Housing Development Board (HDB) flats including in prime areas, ensuring HDB flats in prime areas are affordable and improving HDB estates will make housing less of a flashpoint among different socio-economic groups.

Invariably, the amount of money that people can make from home ownership will vary. Let us hope we strike the right balance between homes as instruments that preserve wealth and exacerbate inequality.