Saturday, 23 March 2013

What impact does the revised Property Tax Structure has on me?

The recently announced and unveiled Budget 2013 included a segment on a new residential property tax structure that would take effect by 1 January 2014. This tax structure features progressive tax rates for all property, based on their Annual Value. A further increase of 1% for the upper tiers is slated for 1 January 2015. In addition to increasing tax for higher-value properties, a different, higher-tax structure will also be put in place for non-owner-occupied residences.  

Non-owner-occupied residential property is the category for all residences in which the owner does not reside in. The most common example of this is a landlord who rents out an entire residential property to another  party. Even vacant properties will now fall under this category, with effect from 1 January 2014. Effectively, that means vacant properties will incur the same taxes as if it were rented out.

For a clearer impact of the new measure across all property types, do refer to the table with examples as per below:

*Refer to this IRAS link for the various calculators for property tax calculations.
Illustration of impact of property tax changes to owner-occupied residential property:
  Illustration of impact of property tax changes to non-owner-occupied residential property:

What are the possible Market reactions to these changes?

A possible market reaction would be for landlords to try pass the increased tax cost on to their tenants
However, the market can only absorb a finite amount of increase. Once these landlords realise that their properties are lying vacant due to overpriced rent, their asking price will tend to come back down. Moreover, these landlords will feel a greater urgency to rent out, as they have to pay the property tax whether the property is vacant or not. As such, holding the property to wait for a higher rent is no longer as attractive a proposition, especially for the higher value properties. The result might even be lower rents in the long run, as landlords with fallow properties attempt to make up for the additional taxes they have to pay due to this new tax structure. Eventually, this could exert downward pressure on property prices in general.

Therefore, when we look at the middle tier investors who will be seeing less profit, it may dampen their enthusiasm, discouraging some of them from buying units purely to seek rent. It may even cause some existing ones to pull out. This might have a temporary dampening effect on property prices which may well be a positive influence on the realty market in the long run. Investors will be thinking twice before dabbing into the market beyond their financial means and we can look into some immediate taming of the fast escalating property market.

However, when we look up the scale to the high end investors focusing on luxury properties. The absolute quantum of a couple of thousands of dollars in relation to the few millions which they were already willing to spend might not form much deterrence to their buying decisions. Therefore, I think this structural change might have minimal impact on this end of the market.

As we look forward to 2014 when the new structure comes in place, let us observe further on the ground to see how the market forces is shifting especially towards the 2nd half of 2013.