Since the global financial crisis, central banks of major developed economies have adopted quantitative easing to reignite the domestic economy. Interest rates have fallen to a record low, while global inflation has dipped on the back of weaker oil prices. Amid this disinflationary environment and with cheap and plentiful capital, foreign buyers and local investors alike have driven up asset prices, particularly residential prices in key cities. Housing prices in some Asian markets have risen sharply, causing concern among policymakers around the region.

Singapore policymakers were at the forefront of this structural change in the global capital markets, introducing several unpopular property-cooling measures, such as additional buyers’ stamp duties (ABSD), targeting local speculators and foreign buyers. The volume of units purchased by foreign buyers in Singapore had thus reduced by more than 80% from the peak in 2011 to just slightly more than 900 units a year in 2015.

Several calibration rounds later and with the macro-prudential policy targeting the property financing market, the frothy activity in the housing market finally came to a halt. Based on the Urban Redevelopment Authority (URA) island-wide Property Price Index, prices of all private residential homes (landed and non-landed) have softened by over 9.4% since 3Q13. The monthly CPI in Singapore has also fallen continuously since Nov 2014 to -0.3% in August 2016.

With a weak global and domestic economy, we should explore the possibility of using the property market to shore up domestic growth and ease the mounting disinflationary risk. The tax on Singaporeans buying their second and third properties, coupled with the low return and the lack of sufficient alternative investment instruments locally, have driven some Singaporean buyers to neighbouring emerging markets in recent years. We should gradually reduce the ABSD rate for Singaporean buyers, and contain this outflow of capital by encouraging them to buy locally instead. In turn, this could generate more domestic growth and ease the disinflationary pressure.

While the recent low interest rate environment justifies additional taxes to raise buyers’ effective costs, stamp duty is generally regarded as the least economically efficient form of tax. As it is a tax on capital, which is the most mobile factor of production, the additional stamp duty disrupts the efficient allocation of capital in the housing market in the longer term.

Since interest rates are likely to remain low for a while, this additional cost of entry may be better transferred to the holding period of the asset through the property tax rate instead. This would steer investors to evaluate the capital investment against the longer-term holding costs, such as property taxes, asset management and maintenance fees and capital expenditure on the physical asset. It would shift the investment decision toward a longer-term perspective.

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