GCB market may be hurt by higher taxes and weaker wealth creation

Jul 26, 2022

Every Singapore citizen can buy one private home here, without incurring additional buyer’s stamp duty (ABSD). Permanent residents (PRs) buying their first home pay ABSD of 5 per cent.

The ABSD rate for home purchases was raised in late 2021 for all buyers, except citizens and PRs who are buying their first home.

The purchase of landed homes here is restricted to citizens, while PRs can buy such homes, subject to government approval. Higher ABSD rates are seen to have little impact on demand in the Good Class Bungalow (GCB) market, as ultra-high-net-worth buyers typically allocate such homes as their first home.

Bungalows in the 39 gazetted GCB Areas are the most prestigious form of landed housing here, with strict planning conditions to preserve their exclusivity and low-rise character.

There were 90 deals of GCBs in 2021, almost double the 46 transactions in 2020. The value of transactions reached a record of around S$2.6 billion in 2021.

Average price per square foot (psf) on land area for transactions of GCBs jumped by nearly 15 per cent between 2020 and 2021, with prices rising further in 2022. These average psf prices do not take into account differences among homes such as their location, age/condition, built-up area, orientation and other attributes.

But, amid higher prices, transaction of GCBs has slowed in 2022. List Sotheby’s International Realty’s (List SIR) analysis of URA Realis caveats data downloaded on Jul 15 showed there were 28 transactions of GCBs worth S$691 million, with average price psf of S$1,760, in the first 6 months of 2022. Two transactions at Gallop Park Road and Oriole Crescent were at over S$2,700 psf of land area.



For the whole of 2022, List SIR predicts there will be 50-60 deals of GCBs with total transacted value of around S$1.3-1.5 billion.

While Singapore’s strong positioning as a hub for the super-rich will drive demand for GCBs, 2 factors may temper prices going forward.

Higher taxes

Firstly, taxes are rising and may rise further. The ABSD regime may incentivise a local to put all S$30 million into buying 1 GCB, versus buying a few homes. However, property taxes rates will rise starting from 2023, with high-end homes seeing a steeper increase.

For owner-occupied homes, the property tax rates for the portion of annual value (AV) in excess of S$30,000 will rise from 4-16 per cent currently to 5-23 per cent from 2023 and 6-32 per cent from 2024. For non-owner-occupied homes, the rates will rise from 10-20 per cent of AV presently, to 11-27 per cent from 2023 and 12-36 per cent from 2024.

The AV of buildings is the estimated gross annual rent of the property if it were to be rented out, excluding furniture, furnishings and maintenance fees.

For a bungalow with AV of S$280,000, the property tax for an owner-occupier will rise by over S$3,000 per month in 2024, which could hurt those with weaker cash flow.

For some GCB landlords, the higher property tax could shave around 10 per cent off gross monthly rental. An investment in a GCB with a net yield of under 1 per cent that is being squeezed, may lose its appeal in a rising interest rate environment.

As Singapore’s population ages, demand for healthcare and social care is increasing. Government spending is rising, with much of the higher spending going to healthcare.

Going forward, homeowners may need to pay more in taxes. A new wealth tax or an inheritance tax could be introduced, and property tax rates may rise further or become more progressive. Levying more taxes on GCB owners can also help in tackling wealth inequality.

Personal income tax in Singapore is going up for high income earners. For the year of assessment 2024, the portion of chargeable income in excess of S$500,000 up to S$1 million will be taxed at 23 per cent, while that in excess of S$1 million will be taxed at 24 per cent; both up from 22 per cent today.

As governments across the world seek to raise revenue and fight forces of populism, the tax burden of the wealthy in many countries may rise, thus curtailing their spending power.

Weaker wealth creation

Secondly, the pace of wealth creation at the top may slow. Regardless of the source of their fortunes, many of the super-rich buy palatial homes. However, some engines of wealth generation are stalling, which will affect demand for GCBs.

China’s economic reforms that started when the country began opening up in late 1978 have since led to decades of strong economic growth. In turn, China has produced many billionaires and some outside China have tapped China’s growth to build personal fortunes.

But near term, China’s economy pays a heavy price with the imposition of Covid-related lockdowns. Longer term, as the Chinese economy matures and the population rapidly ages, economic growth will slow. Also, crackdowns have hit the fortunes of China’s Internet giants, and the pursuit of common prosperity may see wealth shared more widely.

Other developments hurting the wealthy include less frothy valuations for technology businesses and weakness in many equities markets globally amid rising interest rates. A tougher environment for capital raising means a slower pace of minting new multimillionaires and billionaires, who may allocate part of their wealth to owning a GCB.

Looking ahead, the prolonged war in Ukraine, rising interest rates to combat higher inflation and Covid-lockdowns in China have raised the risk of a global recession, which hurts the confidence of the wealthy. Longer term, the growth in the ranks of the super-rich may slow if geopolitical tensions rise, globalisation retreats, and redistribution policies are actively pursued.

GCBs here command a scarcity value, with less than 3,000 such homes. The GCB Areas provide a high quality living environment, and owning a landed home in such areas helps convey social status. With its safe haven status, Singapore attracts the super-rich. Thus, the demand for a home in the GCB Areas is strong.

However, the GCB market faces headwinds as owners with weaker holding power may feel pressured to put homes up for sale, while demand could weaken if wealth creation at the top slows.

https://www.businesstimes.com.sg/opi...ealth-creation