Right policy mix to cool house prices
COMPREHENSIVE MEASURES: Raising Real Property Gains Taxes alone wouldn’t be enough to ensure affordable housing
TWO years after addressing cost of living was introduced as the seventh national key result area, food and fuel prices have fairly stabilised, save for the usual festive season hikes and the recent reduction in fuel subsidies.
House prices, however, have never stabilised. Cost of housing is still mind-boggling to many, especially in the large cities of Klang Valley, Penang and Johor Baru.
In 2011, houses were 10 per cent more expensive than the preceding year. Last year, the figure jumped to 12 per cent, despite the increase in Real Property Gains Taxes (RPGT) from five per cent to 10 per cent for disposal of properties within two years of purchase announced in the 2012 Budget. In the first quarter of this year alone, houses are six per cent more expensive than they were a year before.
The government’s affordable housing initiative through the establishment of PR1MA is undeniably commendable, but time lag and capacity issues limit PR1MA‘s ability to completely rein in house prices.
PR1MA houses will take a few years to complete construction, and by the time of completion no one can be certain on the country’s economic and housing market conditions. Would house prices already stabilise then?
In the meantime, the middle income group will still have to spend a significant amount of money on rentals. These are sunk expenditures on homes that they do not own.
The 2013 Budget tabled on Sept 28 last year further raised the RPGT rate to 15 per cent and 10 per cent for disposals within two and five years respectively.
To many quarters, the increase was meagre and is insufficient to deter speculators, widely believed to be the main culprit and beneficiary of escalating prices.
A further hike in RPGT was called for. The National House Buyers Association in particular, pressed for a reinstatement of the pre-2007 rates. The table (above) shows the RPGT from pre-2007 to the present.
There is indeed a basis to the above argument. Current RPGT rates seem to have not been able to cool down the property market.
Signs of spillover to the secondary and the rental market are beginning to manifest.
Demanding an exact rate, however, requires a solid justification.
An arbitrary demand for return of past rates, when economic and housing market conditions are no longer similar, can be damaging.
Policymakers should carefully consider well researched recommendation, ideally backed with carefully crunched data. It is unclear whether the more visible pressure groups have done so, instead of making a haphazard recommendation. Deciding the right tax rate is not an easy task. On one hand, the government would certainly want to avoid a burst in the property bubble, if there is a bubble at all, or a stagnating housing market.
On the other, does it have a target growth rate of house prices? Or is it searching for a solution to a problem that is increasingly getting out of hand, without a clear view of the desired end-point?
It must learn from the experience of our neighbour down south where even seven rounds of cooling measures have turned out to be insufficient. Various demand factors are at play and must be considered as the government formulates the next budget.
Skyrocketing house prices are not caused solely by speculative activities. The swelling middle income group is a crucial demand factor.
In addition, the even more ridiculous house prices in our neighbouring country mentioned above have pushed their citizens to find homes that are more affordable to them on our land, worsening our situation.
It is not getting any better as long as property developers in our major cities continue to race in building the more expensive bungalows and three-storey semi-detached homes that are clearly not catering for the affordable market.
Despite pledges to build more affordable houses, these have not really been manifested in concrete actions. The financial authorities have been decisive in tightening lending guidelines. To a large extent, these have worked in dampening demand, but have had little impact on cash-rich speculators, particularly foreign investors purchasing largely on a cash basis.
Despite rising land and construction costs, little has been heard about measures to cool down prices in these markets. The uptake of Industrialised Building System, or the use of prefabricated building materials, which was expected to drastically reduce construction costs, has been disappointing.
As in any other markets, measures to correct current imperfections in the housing market should be comprehensive. Supply-side measures should be included. RPGT would not be the right tool to address the cost factors outlined above. Nonetheless, it has to be included in the package. The question is, what is the right rate to set?