1. Effective 27th April 2023, the Singapore Government introduced a new round of Additional Buyer’s Stamp Duty (ABSD) rate hikes on residential properties. Foreign buyers purchasing residential property will bear the brunt with an ABSD jump from 30% to 60%1. Why has this happened?
2. Whilst the quantum of the increase has come as a surprise to the market, we are not surprised by the substantial use of the ABSD as a macroprudential tool.
3. As mentioned in our Singapore Real Estate Outlook on our Lion Global Investors Youtube Channel (“Let’s Talk Trends Episode 16”), we expect cash buyers to be the price setters in the Singapore residential market. As a result, the ABSD is a more appropriate macroprudential tool to directly address the demand of cash buyers.
4. This contrasts with the more effective tool of the pre-COVID decade, the Total Debt Service Ratio (TDSR), which targeted property buyers who were able to set prices by taking advantage of low interest rates in a Quantitative Easing (QE) global macro environment to fund property purchases through larger and larger mortgage quantums. Therefore, whilst the TDSR was a predominant feature of the Singapore residential market prior to COVID, we expect the ABSD to be the predominant tool for this decade.
5. We expect more cash buyers to be the marginal price setters in the residential market because of a major shift that is happening in the global economy that could directly impact the way the residential market in Singapore develops over the next 5 – 10 years.
IS 60% ABSD FOR FOREIGNERS OVERLY PUNITIVE?
6. Whilst the headline 60% ABSD appears large, we note that the cost for a prime residential property in Singapore could still be below that of Hong Kong. Inclusive of the 60% ABSD charge, Singapore prime residential properties would command around US$ 2, 800 per square feet (psf), well below the US$4,070 psf of Hong Kong property (see Table 1)2. There could still be selective arbitrage to be made between Hong Kong and Singapore. Thus, foreign buyers from Hong Kong may not entirely be deterred by the new ABSD measures.
Table 1: Selected Prime Residential Capital Values2
WHY CASH BUYERS WOULD DRIVE PROPERTY MARKETS
7. The major shift that is happening in the global macroeconomy right now is a transition from a decade characterised by QE after the Great Financial Crisis (GFC) of 2008 through to pre-COVID in 2020, to potentially a decade ahead of government directed stimulus spending post-COVID until the 2030s. This changes the way cash is distributed in the global economy.
8. During the global pandemic, governments across the world ran budget deficits to inject cash directly into the economy through, for instance, direct cash stimulus to households and businesses. This cash injection was supported by money creation by the US Federal Reserve (the “Fed”), as reflected by the growth of the Fed’s balance sheet (see Chart 1)3.
Chart 1: US Federal Reserve Balance Sheet Assets (US$ trn)3
9. As a result of this money creation and direct cash injection into the global economy, property prices rose, not just in Singapore but also across the world (see Chart 2)4 . In some countries, property prices have started to cool off, in tandem with the decline in Fed balance sheet assets in 2022. This illustrates the significant impact of how the money created by the Fed drives global residential property prices.
Chart 2: OECD Property Price Index4
10. We can also observe the impact of the China’s directed stimulus post GFC on the Hong Kong Property market. China embarked on a significant state directed stimulus in 2009 to resuscitate its economy in the aftermath of the GFC through infrastructure spending. We can observe how the excess cash generated from this stimulus impulse drove cash buyers from China to become price setters for the Hong Kong residential prices (see Chart 3)5.
Chart 3: China Credit Impulse a significant driver of HK property prices5
11. After a decade of QE, global economic growth remained moribund. In particular, US politics has become more bipartisan due in part to slow economic growth. We believe that the path of least resistance for political parties in the US would be to continue to embark on the path of state directed stimulus in order to generate employment through large scale infrastructure projects, such as in the areas of green infrastructure and renewables energy security. In other words, the US could embark on a similar path of state directed infrastructure development through the 2030s just as China did in 2009.
12. Under such conditions, the global macroeconomy would likely benefit from direct cash injections. This is why we expect cash buyers to be marginal buyers of residential property across the world, including Singapore.
Footnote:
1″Higher ABSD: Singapore citizens buying 2nd home to pay 20%, up from 17%; rate for foreigners doubles.” The Straits Times, 27 April 2023
2Savills Prime Residential Index, February 2023
3Bloomberg data, April 2023
4Property price Index shown is the composite nominal residential prices amongst OECD countries, OECD Data, www.data.oecd.org.
5Bloomberg data, April 2023
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