Article en anglais initialement écrit en août 2015 pour http://myanmarpropertyinsider.com
Part One: Singapore
Overheating markets are due to a temporary or constant imbalance between offer and demand, The best examples where constant imbalance is present — where wealthy people are competing to grab the best properties regardless of price — are the very limited and exclusive markets like Monte Carlo or a select prime, well kept streets or squares in London, New York, and Paris.
Taxing has a very limited effect in these markets, with only some rules restricting foreign ownership would eventually impact the price frenzy. However, in most cases, the latter would be rendered unnecessary given the multinational culture inherent in these locations, and the over-all positive effects on the local economy.
Although Singapore is not one of these markets, foreign buyers have certainly contributed to its house price increases. It is important to note, however, the difference between foreign buyers who are residents and those who only invest in the country’s real estate market.
Singapore now has the sixth-highest percentage of foreigners in the world: about 38% of the population are foreigners, of which 10% are permanent residents, and the remaining 28% are expats (June 2014 data). This occupier group is actually living and contributing to the country’s economy.
The price growth is due to Singapore’s attractiveness in terms of business and stability. But the rise, to quote Lee Su Shyan in The Strait Times, is also due to the fact that “many Singaporeans have the funds to invest. With a growing emphasis on retirement planning, many people are searching for more ways to build up their nest eggs. Physical property there still remains one of the easiest ways of parking one’s money. Stocks and shares are risky, require some understanding and research and offer less scope for leverage than with property.”
A portion of this price increase has been partly due to the increasing liquidity of central banks around the world, with much of this cash finding its way into Asian property and boosting prices before developers can counter price rises with an increase in offer. At the peak, in the fourth quarter of 2011, overseas buyers accounted for over 20% of non-landed property transactions in Singapore, according to Maybank.
In January 2013, Singapore increased tax on foreign property buyers as part of new temporary measures to cool its residential housing market which has seen continued strong demand despite previous efforts to curb prices. Foreigners and corporates who buy residential property in Singapore are since then subject to an additional buyer’s stamp duty (ABSD) of 15% of the purchase price, up from the previous 10%. Singapore citizens buying their second homes were also hit with an ABSD of 7% while people with permanent residency status paid an additional stamp duty of 5% on their first home purchase.
As a result, in the third quarter of 2014, foreigners accounted for only 10% of transactions (half of the peak period). At the same time, in the Core Central Region, prices of non-landed private residential properties fell by 4% in 2014. In July 2015, prices were down about 6.7% from the third quarter of 2013. Which brings Lee Su Shyan to comment: “If cooling measures are not lifted, it could go all wrong in the twinkling of an eye, given that a projected 22,000 units will be completed this year and a further 21,000 next year. It will soon be a confluence of factors that make it a perfect storm […]”
And not to mention the effect of the global economic deceleration, the Chinese market slowdown, and the potential threat of a global financial crisis. Should Singaporean authorities pivot, take a step back on the taxes introduced in 2013, it will be difficult to reverse the present trend; ushering in an imbalance with property buyers from 2013 at a disadvantage.
Questioning the policies that regulate foreign property ownership through higher taxes has merit given that similar goals are achieved when limiting the percentage of properties foreigners can buy in each development or existing building.
Taxes often introduce market distortions, unlike clear non-monetary regulations. By and large, taxes are easy to implement and onerous to suppress as very few administrations are willing to cut an income source.
It is important for local citizens to understand that policies which objectives are to limit foreign speculations or overheating can have the following side effects if based on taxation:
- alienating the foreign money that contributes to the development of the offer
- sending negative signals to foreign investors in general
- distorting the markets, as in the case of Singapore amplifying the downtrend caused by external factors and making a recovery harder and more difficult to achieve
- transferring to the public sector money that could possibly benefit other private businesses if not taxed (in the case of resident foreigners or citizens acquiring a second home)
Let’s move on to the case of London.
Part Two: London
In London, a conjunction of strong demand (attractive world city plus foreign investors looking for safe assets to protect their capital) and weak offer (strict land regulations and other administrative burdens penalizing developers) has been lifting prices for decades.
This happened in spite of UK having the highest levels of property taxes in the developed world and more than twice the average for the 34 rich countries in the Organisation of Economic Co-operation and Development (OECD). Property taxes including council tax, stamp duty, inheritance tax and capital gains tax amount to 4.1% of GDP in the UK – the highest in the OECD and well above the average 1.8%.
There is a popular pressure to tackle this price issue impacting Londoner’s cost of living. In a pre-electoral move, the Tory government decided to raise stamp duty from 7% to 10% for homes which value exceeds £925,000 and 12% for homes which value exceeds £1.5M. This huge increase was targeting well off citizens and mainly these wealthy foreigners accused in some press of grabbing flats and house they would then leave empty for years. As a consequence the purchaser of a £2 million London home has to find £153,750 to cover the stamp duty, against 100,000 before the shake-up.
This tax hit on buyers of properties above the £925,000 threshold is supposed to finance the decrease in stamp duty paid by most people (the ones acquiring a home less than £925000).
Qualified by some as a permanent blight on the market above £1.5M, it had the foreseeable consequence of hitting the market above this price. It is now down 30% for properties above £2M and unexpectedly for the government the Treasury incomes crunched of 26% compared with the second half of 2014.
More important, as accessibility to larger properties becomes increasingly expensive for people who look to get more space, another consequence is to slow down mobility on homes below the £1,5M threshold, thus increasing prices and certainly reducing Treasury incomes on lower price bands too.
Not only it confirms the saying that “too much tax kills the tax,” but it is also worsening the problem that was addressed in the first place, and this when all competent voices agree on the fact that price increase is due to the lack of supply.
To quote Paul Cheshire, professor of economic geography at the London School of Economics, “The housing crisis – worst in London, but bad across Britain – is fundamentally driven by lack of supply. For the past five years, we have been building fewer houses than in any peacetime period since before World War One. But house building has been on a downwards trend since the 1960s.(…) We may have 32,500 hectares of Greenbelt land within the GLA (Great London Authority) (…) but we have concentrated new supply where prices relative to earnings are least unaffordable and job prospects worst. And we are not just building too few houses; those we have been building do not satisfy demand. We have an endemic crisis of housing supply – caused primarily by policies, like Greenbelt, that constrain the supply of housing land. No wonder house prices are rising at over 10 per cent a year.”
Part Three: Myanmar
Myanmar real estate market experienced a strong push in demand in the years from 2012 to the end of 2014. A part of it was due to real demand, and another part to strong speculation following the promises of Myanmar considered as the new frontier market.
A slowdown started end of 2014 due to different factors :
- many developers underestimated the cost of the project,
- lack of suitable contractors,
- lack of confidence following the suspension and cancellation of five projects near to the Shwedagon Pagoda in Yangon,
- uncertainty ahead of general elections in November, and
- international situation leading people, especially speculators, to fly back to the dollar safe haven.
Some observers estimate property prices are now 30% off their peak last year. Obviously such prices amplitudes in a short time are not to be wished for the attractiveness of the market and the visibility of investors and individual buyers, whether they are local or foreigners.
It is with no doubt a good thing policy makers did not chose to face the overheating and speculation hitting foreigners with taxes. First, because it is most of the time impossible to differentiate between a buyer with real needs and a speculator (unless having the expenses of a plethoric administration and the delays necessary for such controls). Second, because this tax burden would have with no doubt worsened the present decline and made difficult the path to a more sustainable grow that must be looked after from now.
The long awaited Condominium Law is still not finalized and as reported by the Myanmar Times: “The four issues are: whether land used for building condominiums should be designated as collective land, whether foreigners should be eligible to buy condominium units, whether developers should be allowed to sell units before a project is complete, and whether foreign sales should be limited to units higher than the sixth floor.”
Our view is that foreigners should be eligible to buy condominium units, as well as any other kind of property, as long as their investments are limited by clear rules. The two main reasons are that Myanmar markets need the foreign money to develop, and that forbidding access to foreigners would be a wrong signal to international investors. I think the principle of limiting foreigners access to property in percentage seems to be a healthy way to control market speculation without creating distortions. Such a rule has the advantage of being judged fair by the population, understood by the foreigners, and easy to implement. Another advantage is it can be modified in time according to the market needs. The percentage allowed to foreigners can be raised in a situation of depressed market, and later lowered back to its initial level. These changes are not likely to produce market distortions and don’t have the unfairness of higher taxes applied to buyers in need for a home at the wrong time.
This concern of clear rules must be extended to the laws regulating developments and the property laws. Many serious investors sentiment can still be summed up in these words of Lucas Chow, chief executive officer of Far East Orchard Ltd., a unit of Singapore’s largest closely held developer, Far East Organization, at a press conference in Singapore July 2, 2013: “Ambiguous laws related to construction and ownership of property are keeping some away.” And talking about Yangon : “It’s a very cowboy town, the rules are not exactly clear; the laws are not exactly clear; the concept of mortgages is not clear; condominium laws are also not clear. So many things aren’t clear, so I don’t think we have an appetite for that kind of market.”
Besides clear rules limiting foreign ownership, the Condominium Law should answer such concerns in priority with a short and clear set of laws, understood by everybody and which does not need long administrative delays to be implemented and controlled.
Among the necessary issues to be regulated:
- make sure developers can finance a project before they are allowed to build.
- make sure the capital from off-plan sales goes into an escrow account which can be used only for the purpose of building the project.
- instaure a titling system – not only for condominium projects but also for apartments, as property right is a fundamental base for any market.
In the lights of London and Singapore experiences, we believe Myanmar should avoid the taxing temptation should this opportunity be considered at some point.
It should also limit the involvement of the administration in too many phases of the development (cf chapters 21, 22, 30 and 33 of the Condominium Law draft) as it is a source of delays, costs and possible corruption. Most of the topics treated in these chapters can perfectly be managed through private contractual relations.
Finally, our opinion is that limiting access of foreigners to Myanmar property through a percentage as already proposed in the draft is the best way to limit the risks of market overheating due to speculation, and offers the necessary flexibility adapting limits percentage according to market situations.