Open economy forces government’s hand

Easy flow of funds mean rules are needed to keep property asset prices in check..

You can’t have it all.

Industry players say that what makes Singapore so susceptible to housing bubbles is also its most attractive characteristics: its open, pro-business and globally connected economy, as well as its safe-haven status. This, in turn, has made it necessary for the government to be “interventionist” in erecting rules that keep property asset prices in check.

Since the end of the 2008-2009 global financial crisis, Asean has seen an almost unprecedented period of abundant liquidity and near-zero global interest rates.

An industry veteran said that money can come in from anywhere to distort. We have attracted a lot of money into our assets here. We are a victim of our own success. So the government has to keep an eye to ensure there are no bubbles, because it has been proven that housing prices can get carried away to higher than Tokyo’s or New York’s.

Singapore’s positive political and economic fundamentals as well as its strong currency have also helped to attract a lot of regional monies into property assets here. An analyst says that we have globalised successfully, and that has not only made us prominent in the world, but our property market has also gained greater prominence as well. In 2007, some 83 foreign nationalities purchased private residential real estate in Singapore. We have been on the radar screens of buyers around the world.

The interventionist approach is thus necessary to weed out speculation in order to keep Singapore attractive to businesses too, CIMB Private Banking economist Song Seng Wun says. “Ultimately, for a small open economy like Singapore, Hong Kong, or even Macau, you need price stability. You can get wealthy very quickly from property speculation as many have experienced, but that will come at a cost to future generations. Your children may find it too expensive to live here. It is very easy for Singapore to lose its competitive edge if it becomes too expensive to live and work.”

For this reason, the government is very conscientious about regulating the housing market, through both demand-side and supply-side measures. On the supply side, the state owns more than 80 per cent of Singapore’s land, and the Urban Redevelopment Authority decides how much land to release for sale every year. On the demand side, financial controls (eg limits on property loan quantum and tenures) and taxation (eg buyer’s and seller’s stamp duties) can whet or spoil people’s property-buying appetites.

Mr Song says: “From the developers’ standpoint, there is always incentive for profit maximisation, so the hand of the government becomes important to ensure that there is sufficient supply to accommodate the demand in the market without excess.

“The cost of mis-steps is enormous to the economy. If the last cycle (of post-crisis runaway prices) wasn’t arrested, Singapore would have become so expensive that no one would consider setting up business here.

“Flipping properties also doesn’t create real economic activity, just paper gains and losses without any net jobs created or additional service provided or extra goods manufactured.”

Singapore is not alone in its extensive use of property measures, of course. Other countries also have their respective policies to address issues of affordability and household debt. These range from stamp duties to loan-to-value borrowing caps, to foreign ownership restrictions, property taxes, rental income taxes, value-added taxes on property, capital gains taxes, and even estate duties.

For example, in Australia, foreigners can only buy new dwellings, and not secondary market homes. This creates a two-tier market for foreigners and locals. The rental income tax and capital gains tax for foreigners is also higher than for locals.

Hong Kong has a 15 per cent buyer’s stamp duty for foreigners as well as seller’s stamp duties that vary depending on how soon a property is “flipped”. In fact, a 2015 report said that Singapore and Hong Kong are the most costly places for a foreigner to buy a property – not only because of the high price quantum, but also because of the heftier tax burden foreigners have to shoulder compared to locals.

Lee Liat Yeang, senior partner at Dentons Rodyk & Davidson adds: “I suppose there must be a balance to be achieved. The government should be mindful not to over-regulate and stifle enterprise. The real estate sector has suffered much in the past couple of years due to the slowdown in the market. People in the real estate sector need some degree of latitude to make a decent living. . . (The government) has to take good care of the market to keep it healthy and growing, but not inflated and unaffordable.”

Adapted from: The Business Times, 22 June 2016