The role of an empty homes tax for Singapore
With current housing policies focused on disincentivising multiple homeownership, an empty homes tax could target another dimension by raising housing availability for renters.
28 September 2023
Housing availability and affordability, especially in dense urban areas, are matters of great import for various market participants, ranging from owner-occupiers and renters to developers and landlords.
Here in Singapore, land scarcity, in tandem with dense urbanisation, have led to a sustained increase of real estate prices, especially residential property, which has in turn triggered government intervention on a number of occasions when prices had appeared to surge ahead of economic fundamentals.
Overview of property cooling measures
Nearly three decades back in 1996, amid rapid price inflation, taxes on property gains, a seller’s stamp duty and a loan-to-value limit on bank loans were rolled out to curb speculative flipping and prevent buyers from getting overextended on debt.
In 2011, the Additional Buyer’s Stamp Duty (ABSD) was introduced. It was the first policy to specifically disincentivise multiple home ownership, and remained a mainstay among the various policy tools to support overall housing availability and affordability. From a relatively modest 3% for Singaporeans purchasing their third and subsequent property, ABSD today ranges between 20% and 35% for citizens and permanent residents buying their second and subsequent properties.
Other regulations in the suite of property cooling measures include the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR), which are aimed at constraining household debt obligations and encouraging financial prudence.
Disincentivising multiple homeownership
Singapore’s comprehensive set of property curbs – in conjunction with other fiscal policies – have been largely targeted at dissuading the multiple ownership of homes.
The property tax regime, for example, distinguishes between owner-occupied residential properties and those which are non-owner-occupied, which are defined as residential properties that the owner does not live in, regardless of whether it is tenanted or not. Property tax here is currently indifferent to tenancy status.
Given the Singapore government’s policy to encourage widespread homeownership across the population at large, owner-occupied residential properties here enjoy lower tax rates than those not occupied by the owner. For example, the property tax payable for an owner-occupied private residence with an annual value of S$36,000 is S$1,120, but increases to S$4,260 if it is non-owner-occupied. Likewise, for Singapore citizens, the ABSD for a second property is 20% of the market value of the property, and increases to 30% for the third and subsequent properties.
Property taxation policies in Singapore therefore focus on the distribution of ownership by ensuring that the housing stock is not overly concentrated among a select minority of wealthy landlords.
While the property curbs have worked to reign in overly bullish sentiments on the buyer-seller market, are there any measures that may be fruitfully applied to those who prefer to live in rental housing?
In their 2023 paper, “Frictional and Speculative Vacancies: The Effects of an Empty Homes Tax”, Han, Stacey and Chen investigate the impact of an empty homes tax (EHT) implemented in 2017 in Vancouver, Canada, and how it had raised housing availability in the rental market.
Penalising speculative vacancies
Frictional vacancies are temporary vacancies that arise when a property becomes available for rent or sale, but has not yet been occupied by a tenant or buyer. Generally, this phenomenon is short-term, an outcome of an imperfect market in the real world where time is needed to match buyers and sellers. Speculative vacancies, on the other hand, occur when property owners deliberately keep their properties vacant for various reasons, such as when waiting for property values to increase or for other investment opportunities.
In contrast to frictional vacancies, speculative vacancies could persist over time as investors and landlords take their properties off the market, crimping housing supply and adversely impacting housing affordability.
The EHT was therefore implemented to disincentivise such behaviours. Vancouver’s EHT currently amounts to 3% of a vacant property’s assessed taxable value annually, and a home is considered empty when it is unoccupied by a principal resident or tenant for at least 6 months in a reference year.
Empirical design and findings
At around the same time that Vancouver’s EHT was implemented, the foreign buyer tax (FBT) and speculative vacancy tax (SVT) were also implemented for the wider Greater Vancouver Regional District and the province of British Columbia respectively.
The researchers therefore exploited the different geographical coverage of the various policies as part of their identification strategy to isolate the causative impact of the EHT. Neighbourhoods just inside the Vancouver border were benchmarked against those just outside the border to filter out the effects of confounding macro forces and other policy interventions.
Via mathematical modelling and simulation, Han et al. conjectured that an increase in EHT rate reduced speculative vacancies, and the underlying mechanics were that the tax had triggered two behaviours in investors: investors who had deliberately withheld their properties from the market were pushed to rent them out, in order to avoid the EHT; others abstained from acquiring investment properties altogether.
A new insight uncovered was that the EHT concurrently reduced frictional vacancies as well. Participants in the owner-occupied market who put up properties for sale face the risk of having their properties exceed the 6-month threshold, as they await an acceptable offer. The EHT had therefore distorted incentives to supply homes to the owner-occupied market and instead skewed supply towards the rental market, where take-up rates were generally higher. In other words, the EHT could worsen both the availability and affordability of owner-occupied homes.
Han et al.’s research revealed that though a tax on vacant homes could see intended outcomes soon after implementation, the effects of policy intervention could be reversed over the longer term. At the outset, markets needed time to absorb the initial spike in housing supply set off by investors with speculative vacancies reacting to the EHT. The effect over the long term, however, was a net decrease in housing supply, which would be detrimental to home ownership.
The role of EHT for Singapore
Given that current housing taxation policies are primarily aimed at homeownership, in such a context, an EHT can complement existing regulations to address the needs of renters.
Although rents here are showing early signs of stabilising after a year-long boom, upward trends are still persisting, albeit at a softer pace. As at July, rents for public housing continued to rise for the 37th consecutive month, while condominium rents climbed by nearly 22% year-on-year. In tandem, the vacancy rate of completed private residential units rose to 6.3% in 2Q 2023, up from 6.0% in the preceding quarter.
Han et al.’s research showed that Vancouver’s EHT had skewed supply towards the rental market. In so far as an EHT here can achieve a similar outcome, the injection of supply into the rental market can contribute toward further easing of rents.
Home-ownership externalities
A downside uncovered by Han et al.’s study was the detrimental effect of an EHT on owner-occupied homes. This phenomenon runs contrary to the objective of encouraging widespread homeownership here.
Such an externality suggests that more thought needs to be given to the EHT, before it is co-opted into the existing suite of property taxation rules. For example, the 6-month deadline of Vancouver’s EHT may need be to be further optimised for a healthy flow of supply both into the owner-occupier market as well as the rental market.
Nonetheless, much like pushing idle money into circulation in the economy, the EHT may likewise push “idle homes” into circulation in the rental market, and in theory, it holds the potential to improve housing availability for renters in Singapore.
Authors:
Lu Han is the Nathan F. Brand Chair Professor in Real Estate and Urban Economics at the Wisconsin School of Business.
Derek Stacy is an associate professor in the Department of Economics at the University of Waterloo.
Chen Hong is Professor of Management Science at the Cheung Kong Graduate School of Business.