STAMP DUTY REVISION: Deal with home prices instead

A RECENT news report quoted the Malaysian Developers' Association (MDA) as urging the government not to impose additional stamp duty or make changes to the current real property gains tax policy.

MDA claimed that with plateauing demand in the residential market and an increase in the supply of commercial office units, any change in policy will only impact negatively on the housing market and deter foreign investment in the country.

Any change to the policy will also affect property sales and occupancy rates, it said.

Before the government accedes to this request, it should undertake a detailed study of the property market by engaging other parties such as the Malaysian House Buyers' Association and the man in the street.

Today's residential property prices have increased substantially because developers keep raising the sale price after each phase of a project.

While increases in material prices, labour and other associated costs over the years may have contributed to the price rise, they do not justify the price increase.

In many instances, the price is way above the rate of increase of the cost of building the property. One can discern this fact in developers' annual reports, which show year-on-year increase in the percentage of profit for each phase of a project.

Some major developers have been enjoying a boom in sales and profitability in recent years. As a consequence, there is a ripple effect on the price of property in the secondary market.

The reasoning that an increase in stamp duty and changes to the real property gains tax policy will dampen the housing market and deter foreign investment may be partially true but it will not significantly affect real first-time home buyers.

The government should look at deterring speculators by ensuring new houses are sold to Malaysians first at reasonable prices while limiting foreigners to high-end ones.

If residential properties are more affordable, there will be greater demand and developers need not fear their units won't be sold.

On foreign investors, there are other factors besides additional stamp duty or tax changes that affect their decision to invest in property here.

Property prices in Malaysia are among the lowest in the region. Foreign investors are not necessarily affected in their decision to invest just because of an increase in stamp duty and tax policy alone.

Look no further than Singapore or Hong Kong where foreigners are still buying property, albeit at a slower pace and despite the high prices.

Many reasons can be given for investor confidence in our property market, such as stability of the ringgit, political stability and growth potential.

Surely, the government would not want to attract foreign speculators just to ensure that developers meet their sales target.

It is not uncommon for new residential projects to be sold out on the first day of the launch or even pre-launch with many genuine house buyers left out. Subsequently, one would see a deluge of advertisements for sale in the secondary market.

If one were to examine this phenomenon closely, one wonders where these buyers come from and what is their source of funding. Perhaps, the Inland Revenue Board should look into these "buyers".

In the light of the high debt to household ratio, Bank Negara has imposed stringent loan borrowing rules by banks to individuals for the purchase of property and vehicles to avoid a systemic risk to the economy.

The government should do the same to address this imbalance between high prices of residential units, affordability and the effect on the banks should there be a sudden economic downturn.

It should consider an upwards review of stamp duty on property, particularly for those who own more than one home.

In addition, the real property gains tax policy should be reviewed to make it more effective and weed out speculators.

At present, speculators are not deterred by the tax on property as the rate is insignificant and in most instances, speculators get away with it because of the 10 per cent rate for sale of the home in the first two years after purchase and five per cent between three and five years after purchase.

In practice, most new property launches would only be ready in the third or fourth year of construction and, therefore, a five per cent property gains tax is insignificant.

Property prices are supported by a combination of factors, including easy availability of credit, financing schemes, demand, speculation and limited policing of the price of new launches.

In ensuring that there is a sustainable demand for residential and commercial properties by Malaysians and foreigners over the long term, the government must develop a cohesive plan in consultation with the people to address the need to manage the prices of residential properties.

C.W., Kuala Lumpur