High-end house price crash hits Singapore

Money can flow out of a high-end real estate market for many reasons, most of which relate to government policy rather than natural market forces.

House_CrashLocal residents who don’t own real estate do not benefit from an influx of foreign investment because that investment drives up house prices and forces local residents to pay more. As a result, grass-roots political opposition grows to oppose foreigners buying local real estate — wherever that locality may be.

If legislators want to see less foreign investment in single-family residential real estate, they can tax it. Taxing a commodity or a behavior makes it more expensive, which thereby lowers demand, and if legislators selectively tax non-residents, the policy lowers the prices for local owner-occupants who must compete for the resource.

I originally proposed this idea last year in a story about how foreign investment drove up property values in New York City. (See: Non-resident homeowners should be taxed heavily) What I didn’t know at the time was that Singapore instituted the policies I advocated, and so far, foreign investors are not too happy with the results.housingbubble_cartoon_module

A High-End Property Collapse in Singapore


SINGAPORE — Lamborghinis, Porsches and Bentleys fill the driveways of multimillion-dollar villas in Sentosa Cove. Yachts line the 400-berth marina nearby. Some houses have guardhouses for security.

“We call it the Monte Carlo of Asia,” said Stephane Fabregoul, the general manager of the W Singapore hotel in Sentosa Cove.

But signs of a slowdown are just beneath the shiny surface. The grass on front lawns has turned brown from neglect. Two condominiums sold last summer for less than half their original price. Some houses are empty.

yardworkThis isn’t a rumor about a potential slowdown in price gains, this is documenting an actual price crash in real time, and just like the crash in the United States, when investors no longer perceive it’s in their best interest to support a property, they completely abandon it and let both bankers and remaining neighborhood residents deal with the consequences.

“So far, Sentosa Cove has been the worst hit because the market frenzy was probably most apparent there,” said Wee Siang Ng, head of research at Maybank Kim Eng Securities. The value of prime properties rose by 80 percent from 2004 to the market peak in 2013, according to Mr. Ng.

It was a free-for-all,” Mr. Ng said. “The global economy was picking up so people plowed money into Sentosa.” …

For those of you that still remember the housing bubble, this sounds very familiar, doesn’t it?


With the government unable to contain the heated market, the growing presence of foreigners and the rising cost of housing became a flash point for discontent. And Sentosa, with its new villas, yachts and luxury condominium towers, became a particular symbol of the rising inequality for many citizens.

In the 2011 general election, the People’s Action Party, which has been the ruling party since Singapore’s independence from Malaysia in 1965, won by the narrowest margin in its history.

Soon after the elections, the government took measures to reduce foreign investment.

need_an_fcbBroad-based grass-roots political pressure forced the elites in government to sacrifice wealthy property owners to preserve the government elite’s political power.

While it had already adopted broad-based measures to cool speculation, the latest moves were more targeted at the high-end market.

There was concern that was aired in the last election that foreigners participating in the property market were contributing to high prices,” said Christopher Fossick, the managing director of Jones Lang LaSalle in Southeast Asia.

Those same conditions exist here in the United States. How long before California residents rise up and demand taxes on wealthy Chinese and other foreign investors who drive up our house prices?

To slow demand, foreign buyers were charged an additional tax on top of a basic buyer’s stamp duty. This tax was raised a year later, bringing the total tax for foreigners to 18 percent.caddyshack_poolturd_ihb

Today, anyone who wants to resell a property within a year of buying it must pay a 16 percent tax on the sale price. If they sell within two years, the tax is 12 percent. The levy gradually decreases over the following two years.

Taxing the gains, particularly on flippers, is an effective measure to prevent speculation in the market that drives up prices for local owner-occupants.

The most effective measure taken by the government was to cap the amount of debt a borrower was allowed to take as a percentage of their income.

government successWe also instituted similar limits in Dodd-Frank when borrowers were limited to borrowing no more than the debt supportable by 43% of their gross income.

Since then, new property sales across Singapore have fallen strikingly; in 2014, the number of properties sold was half what it had been the previous year. Residential prices fell 4 percent last year, and some analysts forecast double-digit declines this year.

We would need to see these cooling measures removed before we see some recovery in prices,” Mr. Fossick said.

In other words, prices are inflated by government subsidies and incentives, and if these subsidies and incentives are removed, prices fall to their natural levels — levels far below today’s prices.


It isn’t only Singapore that figured out that taxing foreigners goes over well politically at home.

U.K. Closes a Tax Gap for Foreign Owners

For the first time, U.K. homeowners from overseas will need to pay capital gains tax when they sell their property.

By Ruth Bloomfield, Feb. 12, 2015high_end_air

For the overseas investors who have funneled billions of dollars into London real estate over the past few years, the party may not be over, but it’s about to become more subdued.

The British government is acting to close a long-standing loophole in its tax code: In April, for the first time, U.K. homeowners from overseas will need to pay capital-gains tax when they sell their property.

The move means the taxman will collect up to 28% of the profit earned on a property at the point of sale—the same tax that British home sellers pay. …

I find it astounding foreigners were given such an enormous incentive to buy real estate. This serves no purpose other than to drive up prices and make life harder on the local population.

I suspect such a poor policy was probably instituted to attract dumb money to the market after one of Britain’s previous housing crashes to bail out their banks.House-on-the-Cliff

“The changes will throw cold water on the increasing London market because prime central London has historically been snapped up by international buyers and that has consequently pushed prices through the roof,” he said.

“I have someone on my books from Saudi Arabia, who bought a £2.25 million [$3.43 million] house on the river in Richmond and has rented it for years. She has had a five-year contract in place, but now wants to pay the contract out and sell up prior to April to avoid the new 28% tax.”

If you were a local there, wouldn’t you say “good buy and good riddance?”

“There are no barriers to property ownership in the U.K., and no significant annual charges. There isn’t a residency requirement as there is in several countries,” he said. “The U.K. is one of the easiest countries to acquire property, and long-term growth has outperformed almost every other major asset class.”

That performance is a direct result of the policy, not the desirability of the asset class.

Based on the two stories above, it certainly appears the local populations are demanding change. When will we?coastal_california_fall

What would cause a Coastal California high-end house price crash?

Money flows into high end real estate for two reasons: (1) wealthy people have the money, and (2) wealthy people believe real estate is a better asset class than the alternatives. If either of those factors change, the money could flow out as easily as it flowed in.

Predicting a crash in house prices at the mid- to low- end of the housing market was easy because prices in those markets depends on the terms and availability of financing. The obviously unstable terms of Options ARMs was obvious, so the effect of the crash was equally obvious.

Predicting a crash in high-end house prices is more difficult because the market is not dependent on financing. That market is governed by the flow of capital and the incentives of the wealthy.

Over the last 5 years, the wealthy have enjoyed a 100% increase in the value of their equities holdings and a significant bump in the value of their real estate. Further, they enjoy a low 20% capital gains tax rate, so they can easily liquidate one investment class in favor of another. This means the wealthy have the money to buy real estate if they want it — and sell it if they don’t.market_forces

Also over the last 5 years, the federal reserve held long-term interest rates near zero. This policy nearly eliminated any cash returns on available investments: savings account pay just over nothing, 10-year Treasuries recently hit 2%, and bond yields are extremely low across the spectrum. Relative to these investment alternatives, high-end residential real estate — with it’s historically low cash returns — is a better investment; therefore, wealthy people buy expensive homes and inflate prices. Couple that with the dumb money flowing in from overseas, and high-end residential real estate is doing relatively well.

But what happens if real estate isn’t the best alternative? What happens with the rest of the economy does improve and investors find competing opportunities with better returns? Wouldn’t the wealthy sell investment homes to pursue these better alternatives? And wouldn’t that outflow of money put pressure on high-end prices?

Further, what happens if a grass-roots political movement against high house prices forces politicians to tax foreign-owned real estate like Singapore or Great Britain? Wouldn’t that reverse the flow of foreign investment in California real estate?

Either scenario I described above could cause money to flow out of high-end real estate, and although I consider the grass-roots movement less likely, over the next few years, competing investment opportunities will appear, making high-end residential real estate a relatively poor investment.

When interest rates rise, the high end will get hurt, not because that market depends on financing, but because that market is inflated by the lack of competing investment alternatives.


Thank you

I have several readers who email me articles, and I greatly appreciate the help finding pertinent stories. I would like to thank Bill for his frequent contributions including today’s article, and to all the others who’ve contributed articles over the last 8 years: thank you.


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