Should we be concerned about the impending property tax hike for residential properties? This sounds too surreal when the latest Singapore Budget 2002 talk announced higher tax rates for high end housing in two stages over 2023 and 2024.
On 1st January 2023, for owner-occupied residential properties, the property tax rates for the portion of Annual Value (AV) in excess of $30k will be increased from the current 4% to 16% to 5% to 23%. One year later on 1st January 2024, they will be raised from 6% to 32%. The AV of a property is the estimated annual rent of the property; if it were to be rented out.
The property tax rates for non-owner-occupied properties will be raised from the current rate of 10% to 20% to 11% to 27% starting in 2023, 12% to 36% thereafter on 1st January 2024.
Against the price hikes and heightened inflationary pressures, the double whammy of introducing property tax hikes doesn’t sit well with most Singaporeans.
Should this be something to be concerned about? Read on to find out more.
Here’s a glimpse of some good news
Ironically, the increase in the property tax seems to be over inflated, it actually would not be have a significant impact on the housing demand.
This somewhat counter-intuitive on the back of the cooling measures and the push from the Singapore government to soften the property market. Here’s why.
1) The government didn’t introduce a new wealth tax
Singapore government didn’t introduce a new type of wealth tax despite the anticipation from Singaporeans. If there’s a new type of wealth tax that’s linked to the individual’s ownership of real estate on top of the existing property tax, it would certainly increase the tax burden for homeowners. Needless to say, it would most likely curb and dampen real estate investment demand in Singapore, which isn’t good news for Singapore making a recovery post-pandemic.
2) Properties with higher Annual Value will feel the brunt
The bulk of the increase of property tax will fall onto the more expensive properties with higher Annual Value (AV); which essentially makes up a smaller proportion of real estate stock in Singapore. Only about 7% of owner-occupied properties will be affected by the higher tax rates. These higher end properties are located in the Core Central Region (CCR) of Singapore are typically owned by the wealthy where the majority of them could afford the increase in property tax in the first place. The incremental amount of property tax isn’t as significant as compared to the increase in capital appreciation of these luxury properties. And of course the bragging rights associated with the ownership of such properties!
3) Property tax hike will not deter real estate investors
The distinctive increase in the property tax rates for non-owner-occupied residential properties (eg. investment properties) isn’t large enough to deter investors from taking action. There are certainly bigger financial hurdles such as Additional Buyer’s Stamp Duty (ABSD) and the Total Debt Servicing Ratio (TDSR) that may sway investors from buying investment properties. In addition, other expenses incurred by property investors such as maintenance fees and commissions paid out to property agents to rent out the properties, would most likely outweigh the increase in property tax.
In the grand scheme of things, ifproperty investors are willing to fork out the expenses and tax associated with investing in real estate, the incremental property taxes would also be something generally acceptable. It wouldn’t be the straw that breaks the camel’s back.
4) Strong culture of home ownership in Singapore
The increase in property tax for owner-occupied homes won’t change the strong culture of home ownership in Singapore. Despite some homeowners needing to pay incremental sums ranging from tens of dollars to more than a thousand dollars in property tax annually, this wouldn’t discourage many from owning their homes.
The Ministry of Finance has claimed that 93% of owner-occupied properties will not be affected by the higher property tax rates. These will include HDB flats, most condominiums, apartments and low-value landed property. Hence, the new tax rates wouldn’t affect the property prices.
The not so good news
In the longer term, the higher property tax rates are most likely here to stay. It is highly unlikely that the government will lower the property tax rates after raising them, as that might send the wrong message. The government could adjust the property tax for individual residential property by adjusting the annual value (AV) of the property. Therefore, the higher tax rate is only half the entire story about the property tax payable in the future. Currently, only 7% of owner-occupied homes will be affected by the higher tax rates. But this number could rise over time.
In actuality, the higher property tax would potentially reduce the net rental yield for residential properties. As a result, investors would rely even more on capital appreciation when they invest in real estate. In order to capitalize on the price appreciation, investors would have to time the market to trade real estate. Ironically, the frequent trading of properties and speculation is what the government discourages with the various rounds of market cooling measures.
The higher property tax rates will not discourage a large majority of people from buying residential properties – either for their own stay or for investment. The property tax hike is not a property cooling measure, rather, it’s another way for the government to fill its coffers. The government estimated that the increase in property tax rates could raise an additional $380 million in tax revenue each year. The objective of the new tax rates is to draw more milk from the cow, but not to kill to cow.
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