Last Updated on 2, April 2014
Did you read the Straits Times article Govt acts to curb speculators dated 31 Aug 2010?
By now, all new rules to curb speculators from causing a property bubble have been out. Frankly speaking, I seriously doubt anyone truly could fully understand all the rules. I always give myself 3 minutes to read a newspaper article. If the newspaper article requires more than 3 minutes to comprehend, I consider it as an academic paper meant for academics. From what I see, the desire to curb property speculation is good but the solutions are too complex and require too much resource to implement.
For one thing, hardly anyone can remember all the rules. Not forgetting those rules introduced in the past years many of which still apply. In the beginning of this year, I met a couple who had to pay a hefty fine for unintentionally infringing on a HDB rule. The fine was so great that their bank account nose dived to zero.
If I am the government, I will just introduce one simple rule to curb property speculation which is to address the root cause of the issue. Property speculators only have one aim which is to make money. Therefore, all it takes is to introduce capital gain tax. The capital gain tax can be adjusted along the way to fine tune so as not to cause a property crash but at the same time put a dampen to the surge in property prices. Capital gain tax is very easy to implement. All it takes is to tax on the difference between the original purchase price and the selling price. Both information are easily obtainable. This will immediately discourage buyers who have the intention to flip properties. However, this will not have any effect on genuine buyers who just want a place to stay and make their house their home. In the newspaper report, Minister Mah Bow Tan was quoted as saying: “the Government had taken several small steps to cool buying sentiment, unlike its ‘big-bang approach’ in 1996, when tough measures like a capital gains tax caused a market crash.”
I checked what was the exact “big-bang approach” in the 1996 and I found that in 1996, the government introduced:
- 80% financing restriction for property purchase;
- 7,000-8,000 residential units to be released in 1997;
- 30-month project completion period (PCP) for private developments under QC scheme;
- 5% p.a. penalty imposition for PCP extension;
- stamp duty extended to buyers of all sales and sub-sales of uncompleted properties;
- new stamp duty on those who sell properties within 3 years;
- tax on gains from properties sold within 3 years of purchase.
(Source: Page 2 of this link HERE)
The 1996 measures can be briefly summarised as: (1) reduction in money supply by restricting financing (2) modifying housing supply through the release of residential units and penalty of extending the project completion period (3) increasing transaction cost by imposing stamp duty on buyers within the sub-sale market (4) increasing transaction cost by having stamp duty on sellers who sell within 3 years and (5) capital gain tax on properties old within 3 years.
The current measure is almost similar in essence in the 1996 measure which is the reduction for (1) money supply (by reducing the load-to-valuation) (2) increasing housing supply by building more HDB flats of 16000 this year and up to 22000 next year and as well as the expediting completion of BTO flats (source: Prime Minister National Day Rally Speech 2010 paragraph 44 HERE) (3) increasing cost by imposing stamp duty on sellers sold within 3 years. However, this time there is no capital gain tax but instead there are some extra measures compared to 1996 namely:
- Increasing the illiquidity period of a HDB flat from 3 to 5 years (call the Minimum Occupancy Period)
- The requirement to dispose an existing private property within 6 months upon purchase of a non-subsided HDB.
I do feel that the current measure is probably a greater “bang” than the previous 1996.
The question is this: why introduce complex rules such as the reduced loan-to-valuation, the mandatory liquidation of the private property when buying a non-subsided HDB, linearly declining seller’s stamp duty etc ? We also must not forget the tons of rules introduced accumulatively for the past many decades. Sometime, simple rules are all that is required to address a problem. Maybe the government wants to create more jobs in the industry to implement such complicated rules. To me, having a single capital gain tax is enough and other measures not needed.
If one is not careful, one could actually end up paying a hefty fine for infringing on a rule. Like the couple I met early this year, their savings was emptied as a result of the fine. In the meantime, property agents are now given the opportunity to demonstrate their professionalism by advising their clients on how to navigate these convoluted rules. As for me, it will just increase the number of chargeable hours in doing up a financial plan and ultimately only means a greater cost to the client who wants to do credit management in the financial plan. If you are interested in purchasing a property, I wrote an article which you may be interested: 7 Financial Planning Tips for Property Purchase.
This article also appeared in CPF Board's IMSavvy / IM$avvy website:http://www.cpf.gov.sg/imsavvy/blog_post.asp?postid=901197115-135-3284265398
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