Mind the adverse impact on returns from higher property taxes on homes

Leslie Yee

Nov 30, 2023

FOR some Singaporeans, owning one’s home for occupation while renting out another property for rental income and potential capital gains sounds like a great plan to fund retirement needs.

However, there are major obstacles to becoming a residential property landlord. Private home prices have risen sharply, and home loans are pricier amid high interest rates.

Singapore citizens who buy multiple homes now pay Additional Buyer’s Stamp Duty (ABSD) of 20 per cent to 30 per cent.

Lucky then, those who own multiple homes that were acquired some time back when ABSD did not exist or ABSD rates were much lower. Also, a Singapore citizen couple can own two homes under separate names without incurring ABSD.

The picture for private residential landlords may be darkening. Property tax bills for non-owner-occupied homes, especially higher-value ones, are set to rise substantially in 2024.

Annual property tax is calculated by multiplying the annual value (AV) of the property with the applicable property tax rate.

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. The AV is determined based on estimated market rentals of comparable properties.

The AV of many homes will rise in 2024, reflecting a general increase in rents of homes since 2022. In the third quarter, the Urban Redevelopment Authority’s (URA) rental index of private residential properties was up 19.3 per cent from a year ago and 44 per cent versus the fourth quarter of 2021.

Meanwhile, the property tax rate for non-owner-occupied homes which rose to 11 per cent to 27 per cent in 2023, from 10 per cent to 20 per cent, will increase further to 12 per cent to 36 per cent in 2024. In 2024, the first S$30,000 in AV will attract a tax of 12 per cent, the next S$30,000 between 20 per cent and 28 per cent and amounts above S$60,000 will be taxed at 36 per cent.

Take a non-owner-occupied condominium unit with an AV of S$52,000 in 2023. The tax bill for this year is S$7,170. If the AV rises to S$60,000 in 2024, the tax bill next year will be S$10,800 – up 51 per cent.

Residential property landlords may have to get accustomed to the idea that property taxes could continue rising.

The government sees property tax as a key source of taxing wealth. Property tax is effective as it is hard to avoid. Taxing wealth is vital in fighting inequality, and fair as those with greater means contribute more.

Slowing rental market

Still, residential property landlords are being hit with higher tax bills at an inopportune time.

The quarterly rise in the rentals of private non-landed homes slowed to 0.2 per cent in Q3, from the 2.3 per cent rise in the previous quarter.

For the whole of 2023, the URA said that about 20,400 private homes (including executive condominiums) are expected to be completed. This would be the highest annual private housing supply completion since 2017. In total, around 39,700 private homes (including executive condominiums) are expected to be completed between 2023 and 2025.

The addition of housing completions in both the public and private markets will expand choice for tenants and strengthen their bargaining power. Thus, it may be tricky for residential property landlords to pass on higher property taxes to tenants.

Moreover, some landlords face higher financing costs with rising interest rates. The fear of leaving a unit vacant for a prolonged period with the ensuing higher property tax bill to pay could prompt landlords to cut asking rents to secure tenants.

Owner-occupiers of homes will also generally see property taxes rise in 2024 from higher AVs and property tax rates for higher-value private homes. But, there is reprieve in the form of a one-off property tax rebate.

Still, owner-occupiers of pricier private homes should be mindful that the property tax rebate is one-off and their property tax burden will rise. In particular, owner-occupiers who are servicing costlier home loans as well as retired persons who are cash-flow poor may be hard hit by higher property taxes on their homes.

Singapore homes make for strong investment propositions because of continuous efforts to improve the country as a live, work and play destination.

It may be said that no other nation trumps Singapore in long-term planning. Think of the just-announced land reclamation project to develop an 800 ha “Long Island” on the eastern coast of Singapore that will create more land, strengthen the country’s water resilience and protect the city-state from rising sea levels.

However, the price to pay for investing in Singapore homes can be an increasingly stiff one. As Singaporeans live longer, locals need to urgently find other instruments besides homes to build retirement adequacy.

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