Singapore property prices likely to drop after large new tax targets foreign investors

Alex Kennedy, Associated Press, On Thursday 8 December 2011, 17:24 SGT
SINGAPORE (AP) -- Singapore property prices, which have soared to record highs this year, will likely drop in the coming months after the government imposed a large new tax on property purchases by foreigners, analysts said Thursday.

Foreigners and companies must pay an additional stamp duty of 10 percent of the value of residential property purchases, the government said in a statement. Permanent residents who buy a second property and citizens who buy three or more properties will pay an extra 3 percent. The measures take effect Thursday.

Finance Minister Tharman Shanmugaratnam said the government is seeking to cool demand now to avoid a major price crash in the future.

The new taxes are the first to discriminate on the basis of citizenship. Foreigners, who account for more than a quarter of the city-state's 5.2 million people, made about 18 percent of property purchases in the third quarter and account for a third of purchases in the luxury market.

In parliamentary elections in May, the ruling People's Action Party suffered its worst result since independence in 1965 amid growing gripes by voters that a surge in foreign workers during the last five years has helped keep wages stagnant while boosting housing prices.

Analysts said real estate prices could fall sharply, especially those of luxury condominiums and houses favored by foreigners. About 80 percent of Singaporeans live in government-subsidized housing.

"This is severe and is likely to have a significant and negative impact on the residential property market," said Wendy Koh, an analyst with Citigroup in Singapore. "We expect a significant decline in volume in the short term and believe this is likely to be the catalyst for price cuts in the prime districts."

Shares of the country's two biggest housing developers, CapitaLand Ltd. and City Developments Ltd., dived about 8 percent Thursday amid investor concern the new tax will undermine profits.

Singapore property prices have risen for nine straight quarters. They are 13 percent above the previous peak in 1996 and 70 percent higher than in 2006.

Singapore's low corporate and income tax rates, safe and clean streets and political stability have attracted foreign companies and workers -- and caused real estate costs to soar.

Measures implemented during the last two years to ease demand -- such as raising the seller's stamp duty and boosting mandatory down payments for mortgages -- have succeeded in slowing the price surge. Prices rose 1.3 percent in the July-to-September period after rising 2 percent in the previous quarter.

Singapore is anticipating its economic growth will slow next year as global demand for its exports wanes. Last month, the government forecast gross domestic product will grow as little as 1 percent in 2012 from 5 percent growth this year and a 15 percent expansion in 2010.

"Due to the various cooling measures and the economic downturn, the risks for property market prices are tilted to the downside," said Wei Ho Leong, an analyst with Barclays Capital in Singapore. "However, we don't think a crash is likely. We think a gradual downward correction is more probable."

The government has pledged to increase the supply of public housing and land for private development. The government said it would sell land in the first half of next year that could yield 14,100 private homes to add to the 41,000 currently under construction.

"Investment flows into our property market are now larger than before, and unlikely to recede as long as interest rates remain low," Tharman said. "The additional buyer's stamp duty should help cool investment demand."