Here's how Budget 2013's new property taxes will hurt investment demand

Private properties to suffer the most.

Here's the full impact analysis from Knight Frank:

Rationale of the New Property Tax Policies

According to Knigh Frank, From the government’s viewpoint, a progressive property tax structure allows greater social equity without hurting economic competitiveness or reducing the incentives for enterprises. With an increase in the progressiveness of the property tax system and higher property tax rates for high-end residential properties and especially investment properties, the government is aiming to ensure social fairness. The property tax is a wealth tax and is applied irrespective of whether the property is lived in, vacant or rented out. Those who live in the most expensive homes should pay more property taxes than others.

Residential property prices have continued to rise over the last 2 years, with the URA All Residential Price Index posting a 9 per cent increase and the HDB Resale Price Index at 18 per cent as at 4Q 2012. Many middle and lower income groups are finding harder to secure an affordable home and this is becoming a bugbear for policy makers. The new property tax policies could hopefully control property prices by moderating property investment demand.

With the highest ABSD applicable for foreign homebuyers, the previous cooling measures have reduced foreign demand for properties in Singapore where the proportion of non-Permanent Resident buyers fell from 11.9 per cent in 2010 and 17.6 per cent in 2011 to only 6.3 per cent in 2012.

However, the residential property market remained buoyant with a continuous surge in developers’ sales volume in January 2013. The new tax policies target property investment demand in the long run as taxes are payable annually

Potential Impact on Property Market

This policy is akin to 'another shot' on top of the existing cooling measures, which could discourage purchase of private properties for investment purposes, while having a marginal impact on owner-occupied residential properties.

Under the new policies, property tax rate for non-owner-occupied residential properties and vacant residential properties are more than twice the rate for owner-occupied properties, given similar Annual Value (AV). For example, a property with AV of $60,000 will be subject to property tax rates of up to 5 or 6 per cent if it is occupied by the owners; or up to 13 or 14 per cent if it is leased out or vacant. In another case, a property with AV of $70,000 will be subject to property tax rates of up to 6 per cent if it is occupied by the owners and up to 15 per cent or 16 per cent if it is leased out or vacant.

In terms of property tax payable, investment properties will also see higher increase compared to owner-occupied properties. For example, a $12,000-AV property saw a decline of 33 per cent in payable tax quantum if it is owner-occupied but saw no change in payable tax quantum if it is leased out or left vacant. A property of $100,000 AV will experience 23 per cent tax increase under owner-occupation status and 40 per cent tax increase under investment status.

Holding costs for residential homes as an investment asset become higher with this new property tax regime. While ABSD is a one-off initial cost, property tax is an annual expenditure, which adds a fair bit of costs to highend home owners and investors.

The removal of property tax refund concession for vacant properties further discourages speculators and short-term investors who look for capital gains rather than long-term investment returns. These buyers can no longer claim tax refund by leaving their units vacant, and letting out is another way to mitigate holding cost with a rental income stream. With lease contracts varying from 1-year to 3-year term and coupled with initial fitting out costs, it might be more worthwhile for investors to hold their units over a longer period to plough back costs than flipping vacant units for quick capital gains.