What if homes were sold only for occupation and not investment?

Jan 25, 2023

Leslie Yee

LAST month, I took some time off work and allowed my mind to wander. I imagined an alternate universe in homeownership in Singapore, where homes are almost exclusively used for occupation and not investment.

I have been writing this column for about two years. I started in January 2021 as a freelance contributor, with the column running on a bi-weekly basis. I have since become a full-time staff and the column runs on a weekly basis.

My column focuses on physical real estate, not that in the metaverse, which my school-going daughter is much more familiar with than I am. Fortunately, the physical property space in Singapore is rather eventful, hence giving me material to dissect.

Over 2021 and 2022, there were, among others, two major rounds of property cooling measures, the introduction of the prime location public housing (PLH) model, hot private home launches such as AMO Residence, Lentor Modern and Pasir Ris 8, the sale of more Housing and Development Board (HDB) resale flats at over a million dollars each, the revival of activity in the Central Business District, various privatisations of listed real estate groups and mergers of real estate investments trusts.

The homeownership rate in Singapore is high – almost 90 per cent of resident households own their homes. One’s home is a key asset whose value can be unlocked to fund retirement needs. Many homeowners also enjoy the feel good factor of seeing their net worth rise as home prices rise. Some people own extra homes for recurrent rental income and/or capital gains.

Homeownership helps to anchor Singaporeans to Singapore. It has also helped many people grow their wealth. But there can be downsides to wealth creation via homeownership. Inequality may be exacerbated by rising home prices. Young people may find it hard to reach certain housing aspirations, and some people may find taking on large multi-year home loans stressful.

Perhaps residents can get high quality shelter, a place to create memories and be rooted to Singapore via homeownership without homes being investment instruments. Major policy changes can help render homes as predominantly places of shelter and not investment instruments.

A different housing paradigm

Think about it. An HDB home can be bought directly from the HDB based on subsidised prices and with housing grants available for eligible buyers, as it is today. But policy can mandate that such homes be resold directly to HDB only – pricing can be based on an inflation index and the number of years of land lease outstanding. HDB can resell such homes at prices that it sets.

As for private homes, policies can restrict homeownership to one home per Singapore citizen or permanent resident (PR). Maybe new citizens and new PRs can be made to wait for some time before being eligible to buy a home. Homeownership by non-PR foreigners can be prohibited, and HDB homeowners can be barred from owning private homes.

Instead of individuals leasing out homes, listed residential trusts that are widely held by disparate local individuals can be used to own homes for leasing to foreign talent as well as locals.

As it is, certain policies reduce the attractiveness of homes as investment instruments. For PLH flats, there is a longer minimum occupation period of 10 years versus five years for build-to-order (BTO) flats, before the flat can be resold. Renting out of whole PLH flats is not allowed, and PLH flats can only be resold to buyers who meet the criteria to buy BTO flats.

With private homes, there are high transaction taxes for investors. Singapore citizens and PRs buying second and subsequent homes and non-PR foreigners buying any home pay hefty Additional Buyer’s Stamp Duty (ABSD).

Moreover, all residential landlords will pay higher property tax rates in 2023 versus 2022. And the rates will rise further in 2024. Owner-occupiers of pricier homes are also hit with higher property taxes.

Managing prices versus income

Collecting more taxes from homes, such as stamp duties or property taxes, is useful as government expenditure rises to fund growing healthcare needs. However, having punitive taxes does not stop wealthy foreigners from buying homes here, possibly as a form of insurance. Some foreigners may view paying ABSD for a Singapore home as paying an insurance premium. Perhaps, more foreigners may stump up hefty ABSD payments to buy homes here if Singapore’s safe haven premium rises in a volatile world.

Non-PR foreigners accounted for under 5 per cent of private home transactions in 2020, 2021 and 2022. Still, the buying of homes by foreigners adds to overall demand. Also, even if home buying by foreigners is skewed towards the top end of the market, there can be possible spillover effects across other segments.

The story of homes as good investments can be powerful. One may know a friend or relative who owns a home bought a few decades back that has appreciated by much more than the rate of inflation. Tales of juicy gains made from investing in homes plus positive news flow on new home launches can push some people to buy for fear of missing out, and lead some cash-rich parents to buy for children who are minors as a hedge against future price rises.

With housing developers hungry for sites, there are successful en bloc sales of older residential developments. And beneficiaries of en bloc sales, flush with liquidity, add to the strength of housing demand.

Possibly, various factors may drive private home prices to rise faster than income growth of residents for protracted periods.

However, any major policy changes to the HDB resale and private home markets could produce messy outcomes. Housing prices might undergo a major policy-induced price correction, that affects home loan providers and consumer sentiment. Can we wean ourselves off homes as investment instruments without a hard landing for the homes market?

As we welcome the Year of the Rabbit, perhaps we need to have a deep conversation on whether there is a need to reset the parameters of the homes market and how to go about executing such a reset.