Pre-Budget 2014 - Tackling the property bubble conundrum

Nothing is certain in life except death and taxes.

With the current economic climate and ever-escalating property rates these days, it is increasingly difficult for the average young professional and budding families to afford their own property, much less those in the low-income group. Even well-to-do families are looking at snapping up properties for their school-going children.

Suffice to say that one of the rakyat’s main concerns at this juncture is the continuous price hike in the housing market. It is a gripping concern that is not only felt by the rakyat but acknowledged by the Government as well.

In light of the upcoming Budget 2014 announcement, let us look at the primary cause of this conundrum. And what steps have been and will be taken to address this issue.

Supply and demand

The economic constant that influences prices is always supply and demand. There is much speculation as to why home prices are shooting through the roof.

Some have mused that it may be the inadequate supply of homes that drove up prices. But others have argued there is no sudden surge in the nation’s population and there should be a healthy supply of homes.

However, in all the clamour of trying to damper the price hike of homes in our nation, we seem to have ignored the groups who need affordable homes the most – the low-income group.

Thus, it would be prudent for the Government to continue its efforts in constructing housing projects that are affordable for the rakyat. Various initiatives such as the setting up of 1Malaysia People Housing Programme (PR1MA), which is charged with the task of building affordable quality homes, must be doubled and intensified.

Recently, PR1MA approved 15 affordable housing projects with a total gross development value of RM5bil, which will see 20,000 units of PR1MA homes made available to middle-income earners across the country.

The latest effort by 1Malaysia Development Bhd (1MDB) on affordable housing projects in Penang is also a good example of PR1MA at work.

Other efforts undertaken by the Federal Government is the assistance extended to the State Government and local authorities in constructing the Housing Project for the Hardcore Poor (PPRT). The PPRT is aimed at building affordable homes which are then rented to the poor at very affordable rates.

Recent efforts undertaken by Johor government to punish developers who refuse to build more affordable homes may appear harsh but a necessary evil.

Careful selection of contractors by the Government involved in these housing projects is crucial as those with excellent track record in safety should be selected to build the houses at the lowest base cost so that houses can be sold to eligible buyers at affordable prices.

The key here is to deliver the homes that are affordable yet does not compromise on quality and safety.

Having said that, allowing free market forces to take their course entails that property developers be given the utmost liberty when it comes to developing the type of properties that they prefer.

However certain levies and charges can be directed at these developers to help the Government finance low-cost housing projects.

Curbing speculation

The rise in short-term demand of properties can be attributable to speculators who flip properties for capital gains. Fiscal and non-fiscal measures, if implemented carefully, could aid in reducing such speculative activities.

One non-fiscal measure is to ban the Developer’ Interest Bearing Scheme (DIBS) where it encourages property speculators to make a sizeable gain with low initial costs. While the recent Bank Negara ruling in tightening credit facilities for buyers may not bode well with some quarters, this move could reduce speculation as well.

Of course, fiscal measures remain as the primary mode in curbing speculation. These measures are not new as the Government has used the fiscal measure in the past, going as far as 40 years ago, when it enacted the Land Speculation Act 1974 (LSA).

The LSA somewhat created a lot of uncertainty and with a rate of 50% on disposals occurring within two years of acquisition of asset, this had deterred genuine disposals. But one could not deny that the LSA played a role in curbing the speculative activities then.

The LSA was replaced by the Real Property Gains Tax Act 1976 (RPGT Act) with effect from Nov 7, 1975. The RPGT Act was more of a holistic piece of legislation compared to the LSA. Over the last decade, the RPGT saw a fair share of changes. As it stands, the RPGT rate will be enforced at 15% where it will be imposed for a holding period of up to 2 years, a 10% rate for a holding period exceeding two years to five years and 0% rate for a holding period of more than five years.

Of late, there have been calls to increase the rate further, while some feel that the increase of RPGT rate may not effectively curb speculation. Without RPGT, I believe that speculative activities may run rampant and this is evidenced in 2003 when RPGT was lifted for a while. Countries that have reduced capital gains tax over the years like Australia have experienced price surges in their property sectors.

An increase of 10% to 15% of RPGT for each category would be a good starting point. Also, a minimum rate of 5% of RPGT should be introduced even if the holding period is more than five years. After all, there is one life-time exemption for each of us.

The proposed increase of tax rate is expected to change the behaviour of investors. It may not solve the housing crisis but it could aid in reducing market instability.

Malaysia is not acting alone. A UK independent think-tank has suggested that the introduction of a property speculation tax could stabilise the housing market. The report argues that the move would “curb excessive volatility in the property market” and prevent a housing bubble threatening economic recovery.

In this respect, the proposed increase in property tax levied on properties owned by foreigners in Johor, depending on the scale, may yield positive outcome in dampening speculation.

As for newly developed properties, the calculation of the holding period should begin from the date of completion as opposed to the date of the sale and purchase agreement. If there is any sale prior completion, the highest tax bracket should apply.

While RPGT is imposed on the seller, the present law requires stamp duty to be borne by the buyer, unless agreed otherwise between the parties. In this instance, stamp duties on the second and subsequent properties should be increased to curb speculative buying of properties.

Moreover, seller stamp duty could also be introduced. In Hong Kong, stamp duty on certain real properties has been doubled to 8.5% to cool off the property market.

Changing the rates of RPGT, stamp duty and other forms of property taxes are temporary measures that are both practical and flexible in dealing with the property price hike conundrum. On the macro scale, all the stakeholders including the developers, home buyer associations and the Government should come together with a view to finding a viable long-term solution.

Tan Hooi Beng is executive director of Deloitte Malaysia’s tax practice and leads the business tax service line. - by Tan Hooi Beng (The Star)

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