Who is driving the Singapore property market up?

After over 4 years of successive quarterly declines in residential property prices, the Singapore market has finally seen a reversal. From its peak in September 2013, the property market fell nearly 14% before registering its first increase of 0.7% in September 2017. Reports suggest that the December 2017 quarter will add to this gain.

Property prices are rising despite the continued existence of ‘cooling measures’ such as high rates of stamp duty and credit rationing. The stamp duty tax on property transactions ranges from 3% for Singapore Citizens who purchase a single property to live in, up to 18% for foreigners on any property purchase. Singapore Citizens are charged 10% on their second property and 13% on third or subsequent purchases. SIngapore Permanent Residents are charged 8% on their first property and 13% on subsequent purchases.

The point is that Singapore Citizens pay the lowest rates of stamp duty by a large margin.

In neo-classical asset pricing theory, the ‘marginal investor’ determines the price. A marginal investor is the trader who is active in the market. They typically have the lowest marginal tax rates and/or the strongest demand for the asset. On this characterisation, the Singapore Citizen would be tagged as the marginal investor since they face the lowest tax rate and they also form the majority of the market.

The Singapore authorities have expressed their ‘concerns’ that property prices are rising again. Foreigners and PR’s were blamed for the previous run up in prices from 2010 to 2013, hence the disproportionate impact of the cooling measures on this group. But clearly, with stamp duty still considerably above that of the Singaporean citizens category, the current increase in property prices cannot be blamed on foreigners this time.

Since Singaporean Citizens (and single property owners most likely) are at the margin of current property transactions, it must be this group that are driving up prices. This fact is extremely difficult for the government to deal with. If the government wants to fight the market and control property prices then it must focus its tax increases on the Singaporean. This would be electoral suicide for the reigning PAP. A second difficult fact to swallow is that there is room to lower rates of stamp duty on the highly taxed categories, like Foreigners and PRs, since they are not responsible for the price pressure. Foreigners and PRs’ are now incentivized to rent, rather than own, which is a reason that rents have not fallen as much as property prices.

Arresting a ‘property bubble’ was the stated reason for the cooling measures from 2009-2013. In hindsight, there was no bubble. Market forces are strong animals and the current upward pressure on prices, despite the cooling measures, is entirely rational. The government must accept this or risk its very existence.