Budget 2022 is another nightmare of landlords

Last Friday (Feb 18) the government announced a list of progressive tax raises in Budget 2022. They aim to generate revenues for the Inland Revenue of Singapore (IRAS) in the coming three years.

When I told my friends and relatives overseas about Singapore’s latest budget, they all reacted with disbelief. At present, their countrymen are complaining about runaway inflation. Many are not happy with their government’s handling of the pandemic. Some stage protests against vaccination and lockdown.

In Singapore, we are reporting record breaking daily positive cases every week. Yet at this time our government can put forward tax raises across the board, including consumption, income, homes, cars and corporations. No wonder people overseas find it unbelievable.

What can I say? Singaporeans are incredibly resilient. In times like this, we are really “out of this world”.

Higher property taxes unlikely to dampen demand?

As if last December’s property cooling measures are not enough, just two months later private homeowners are slapped with higher property taxes.

For owner-occupied residential properties, tax rates for the portion of annual value in excess of $30,000 will be raised from the current 4 to 16 percent, to 5 to 23 percent from 2023, and to 6 to 32 percent from 2024.

For non-owner-occupied (rental or investment) residential properties, tax rates will go up from the current 10 to 20 percent, to 11 to 27 percent from 2023, and to 12 to 36 percent from 2024.

The Business Times was quick to come up with an article titled “Budget 2022: Property tax rates for homes to rise from 2023, analysts don’t expect demand to dampen”. As usual, the whole writeup is filled with quotes from agency spokespersons. They all agree in consensus that the rise in property taxes is manageable and it won’t affect the private home market.

While an increase in property tax does increase holding costs for property, it is unlikely to dampen demand as the increase in costs seem manageable, highlighted Wong Xian Yang, head of research at Cushman & Wakefield.

Nicholas Mak, head of research and consultancy at ERA, said: “Most of the increase in property taxes will fall on the more expensive properties with higher AVs. These residential properties are usually high-end properties in the Core Central Region that are owned by the wealthy, who can easily afford the increase.”

Similarly, Knight Frank’s head of research, Leonard Tay, does not expect the bump in the property tax rate to detract owner-occupiers from their upgrading aspirations.

– “Budget 2022: Property tax rates for homes to rise from 2023, analysts don’t expect demand to dampen”, The Business Times, 18 February 2022

Unlikely to dampen demand? Costs seem manageable? Can easily afford the increase?

Why are these words not from the mouth of a private home owner who is happy to pay higher taxes? Did they interview any landlord in the whole article?

I really wonder whether these so-called “analysts” have ever been an owner or landlord of a private residential property. Their comments sound like all private homeowners find the rise in property taxes reasonable and acceptable. And luxury home buyers and investors are either dumb or never bother to run the numbers before their home purchase.

In short, their remarks fail to soothe private homeowners nor convince property investors to go into the market. Instead, they sound like singing the same tune to reassure their agents and the developers that they still have business despite the harsh measures of soared ABSD and property taxes imposed by the government.

Why landlords hate rise of property taxes

I was once a multiple property owner for almost a decade. The top three bad news that would get on my nerves every time were:

1) Worst news: Received a letter from the bank, informing me interest rate has been revised up and the new monthly installment is now $xxxx effective (next month/immediately/a month ago) …

2) Second worst news: Received a letter from IRAS or the management office informing me the annual value or the maintenance fee of my property has been revised upwards effective …

3) Third worst news: Received a message from my tenant that he/she is not going to continue the lease due to …

To make matters worse, when one rental property got it, the other properties would soon follow.

1. Impact on yield of rental properties

Monthly installments, property taxes and management fees are fixed costs. They would affect the yield and net return of my properties. Property investment is a business. A dollar saved is a dollar earned. A dollar raised is a dollar lost.

Furthermore, the bank, IRAS and the management office can increase their rates any time. But the rent stated in the tenancy is fixed. As the owner, I can’t ask the tenant to make up the difference. As landlords, we have to stomach the unexpected increase in any cost during the tenure of the lease.

2. Impact on multiple property owners

If I remember correctly, the calculation of annual value is roughly based on the lowest rent fetched on similar units/houses in the same condominium/estate. For instance, if my unit can fetch a minimum rent of $3,000 a month, the annual value of my property will be $36,000. And I pay non-owner-occupied property tax of 10 percent or $3,600 a year. For the monthly rent I collect from my tenant, I have to fork out $300 for property tax plus monthly mortgage and maintenance fee.

Under the new property tax rates, I will pay $3,960 or $330 a month from 2023. In 2024, property tax will go up to $4,320 or $360 a month.

Paying $60 more a month is affordable? Not so when multiplying the amount for multiple property owners. Because the annual value of some properties can be much higher. Imagine compounding that with increases in interest rates, management fees, repair costs, etc.

3. Impact of rise in annual value versus property tax rate

For the longest time, non-owner-occupied private residential property owners pay 10 to 20 percent tax rate. It is not necessary to change the percentage because the annual value can go up and down, depending on the rise and fall of rental rates. This is reasonable and fair. When the rental market is good, the tenant pays a higher rent. The owner then pay a higher property tax after the increase of annual value.

What does that mean when property tax rates are raised now? The implication is: Even if the rents are unchanged, or are falling in a soft market, landlords are still required to pay higher tax rates.

Landlords can hike rents to offset higher taxes?

Meanwhile, Ismail Gafoor, chief of PropNex Realty, reckons that some residential landlords of investment properties could hike rents to help offset the higher tax payable.

– “Budget 2022: Property tax rates for homes to rise from 2023, analysts don’t expect demand to dampen”, The Business Times, 18 February 2022

I can’t help laughing after reading PropNex’s suggestion for landlords.

Since when private home leasing becomes a monopoly business that landlords can automatically transfer higher costs to tenants? Have they heard of the terms supply and demand, competition and market price from Economics 101?

The majority of Singaporeans are living in HDB flats. Many are instilled with the concepts that housing is a regulated market. The government set the rules for HDB flats and fix the prices of new BTO flats.

On the contrary, the private residential market, including the private home rental market, is an open market with prices determined by the market. It is not up to the sellers and landlords to set the prices.

Fancy thinking that home sellers can set an asking price to cover their losses, or landlords can set rents to cover their expenses. If they fail to use the market price as a reference, the sellers and landlords may need to wait forever to sell or lease their properties.

In private rentals, cost is irrelevant to asking rent. Because rental rates are affected by supply and demand in the market. When there are not enough tenants looking to rent, there is strong competition from other landlords who are willing to settle for less. To a landlord, getting low rent is better than having no rent at all. One month’s vacancy means one month’s rent is gone, on top of mortgage and other expenses that need to be paid.

The opposite is true in a landlord’s market. During the good old days of a robust rental market, even with my rental properties bought at such low prices, low mortgage payment and a double-digit net return, do you think I gave discounts to tenants or rented out to a tenant giving the highest offer?

Can landlords of private homes survive?

No one can tell when expat tenants will be back again, when rental in CCR will improve, and when prices will breakeven for investors who bought at the wrong time.

– “What rental viewings told me about the leasing market”, PropertySoul.com

Many private residential property landlords are already suffering from negative yield, especially those stuck with luxury homes in prime districts bought at the peak of the market between 2007 and 2011. How long can they hold onto their rental properties with miserable rental rates, higher interest rates, and now 12 percent to 36 percent property taxes?

1. Rental properties targeting expat tenants to be hit hard

Last August, our Prime Minister reassured foreigners that Singapore will tighten employment pass criteria gradually and progressively. Barely six months later, Budget 2022 revealed that, from this September the salary threshold for new Employment Pass applicants will rise from $4,500 to $5,000. In the financial services sector, minimum salary will increase from $5,000 to $5,500.

For high paying expatriates, Singapore is no longer a tax haven. According to Budget 2022, top earners, including foreigners who stay or work in Singapore for 183 days or more, will pay individual income tax at 23 or 24 percent. For comparison, the highest personal income tax bracket in Hong Kong is a much lower 15 percent.

According to the Ministry of Manpower, the total number of overseas workers has declined by 14 percent in 2020. The 2021 Population in Brief report shows that 10.7 percent or 176,000 foreigners left Singapore in a year. With a shrinking pool of foreigners, landlords whose properties are targeting expatriate tenants are feeling the pinch now.

Even if the locals venture out to rent CCR and luxury homes, their budget may not be able to match with the expatriates. In fact, Singaporeans are very often undesirable tenants to landlords. Many just sold their HDB or private homes and are waiting to buy back soon. Singaporeans consider renting as “throwing money away”. They only rent a place temporarily and won’t make the effort to upkeep the place.

Worse still, these landlords are actually “subsidizing” them to stay in their properties. The low rent may not even be able to cover the monthly installment paid to the bank.

2. High vacancy rate and no tax refund for vacant properties

It is not surprising to see an increase in rent due to higher rents fetched by newly-TOP private residential units. The more newly completed projects in the market, the higher the rental index. But on the other hand, rental rates are falling for the rest of the private homes.

The URA data only cover private homes that owners managed to rent out. They do not include data from owners who are unable to find tenants for their investment properties. In Singapore, the private residential property vacancy rate is estimated from the number of premises with no utility account. Even so, this percentage is not reflected in the rental index.

– Vina Ip, Behind The Scenes of The Property Market

According to the Urban Redevelopment Authority, as at the end of 4th quarter 2021, vacancy rates of completed private residential properties in CCR, RCR and OCR were 9.3 percent, 7 percent and 4.1 percent respectively. Don’t forget, private residential property vacancy rate in Singapore is estimated from the number of premises with no utility account. The actual vacancy rate can be much higher.

Since 2014, for vacant properties, there is no more refund for the difference of property taxes paid between owner-occupied and non-owner-occupied private residential properties. Landlords failing to lease their rental properties still need to pay higher property taxes at 11 to 27 percent from 2023, and 12 to 36 percent from 2024.

3. Rent is a better deal than buy

What about cutting loss and selling these private residential homes with low or negative yield?

For Singaporeans and residents, are they willing to buy an investment property with 12 to 30 percent ABSD, and pay 12 percent for property taxes?

For foreigners, will they buy a Singapore luxury home with 30 percent ABSD, and pay up to 36 percent property taxes every year?

Above all, Singapore will raise GST from 7 percent to 8 percent in 2023 and 9 percent in 2024. All sales transactions with GST will be 1 to 2 percent more expensive.

Isn’t it a better option to rent, and let the owner pay 12 to 30 percent ABSD, 12 to 36 percent property taxes, 9 percent GST for maintenance fees, agent commission, legal fee, renovation and repair costs?

Food for thought

Not all private residential properties are equal. Likewise, not all landlords of private homes face the same fate. What sort of private home landlords will be least affected by Budget 2022?

1) Those who bought many years ago and have their properties fully paid up or almost loan-free;

2) Those who bought their investment properties at the right time with a low price;

3) Those who picked up bargains from distressed sellers last time at a good price; or

4) Those who have holding power and can tide over the turbulent times in the market

Good luck to all landlords.

If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.

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