Despite High ABSD, Long Term Property Returns Looks Decent
In the past 10 years, the government has stepped up ABSD 3 times to halt the demand for property purchase.
This kinda threw some of my peers into disarray. After you got your career going, have surplus free cash flow, you would like to build wealth for your retirement.
These ABSD serves as a deterrent for some to purchase. For others, they would still go ahead and purchase because they have no alternative, or believe that property investment is good long term.
I decide to build on last week’s post on the short term and long term returns of a 24-year-old private condo purchase with a look at how that property would do if ABSD was levied at different rates.
The long story short: If you are in it for longer-term, the ABSD seem to matter less.
The Additional Buyer Stamp Duty (ABSD)
Singapore Citizens, Permanent Residents, and Foreigners thinking of buying residential property in Singapore may have to pay an additional buyer stamp duty (ABSD). This is on top of the buyer stamp duty (BSD) that they have to pay.
For Singapore Citizens:
- They do not have to pay ABSD on the first property
- ABSD is 12% currently for the second property
- ABSD is 15% for third and subsequent property
For Permanent Residents:
- ABSD is 5% currently for the first property
- ABSD is 15% for second and subsequent property
- ABSD is 20%
For Developers, entities, trustee:
- ABSD is 25%
The ABSD was lowered in the past. They could range from 3% to 10%.
A high ABSD is impeding people from buying these properties.
The reasoning is that, with low returns, they are not sure if paying the extra ABSD will be worth it. Many prospective investors, homeowners are very reluctant to make a bet using their money.
And the government is perfectly fine with this.
But the question on my mind is… how badly does this affect your property investment?
What if ABSD was levied in 1995?
My last post broke down the long term returns we will get if we invest in a private leasehold condo Astoria Park during 1995.
The property value gain 73% from 1995 to 2019. This is an annualized gain of 2.31% a year. Not super fantastic.
However, if we include the rental expense that you save if you were to invest in stocks and bonds, the return ranges from an XIRR of negative to 8% to 5%, depending on how long you hold on to it.
What I could simulate is how the returns would be, if we have ABSD levied on our property in 1995.
How ABSD Affects Your Property’s Returns.
If there is ABSD levied back then, it should psychologically impede investors from investing in private condos just like now.
The range of ABSD can be between 3% to as high as 25%.
If I need to pay a 5% ABSD on Astoria Park in 1995, the returns will range like this:
Your returns do go down.
You would pay $37,500 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 25%.
Instead of a peak XIRR of 8.41% in 2005, the peak XIRR was 6.92% in 2008.
The stabilized XIRR is still around 5.58% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.
This means that if you held the private condo long enough, the effect of a 5% ABSD is not felt.
What if the ABSD is like 12% Today?
This is the kicker that turned many away.
You would pay $90,000 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 60%.
Your compounded total return curve would look like this:
Instead of a peak XIRR of 8.41% in 2005, the peak XIRR is 5.71% in 2012.
The stabilized XIRR goes down to around 5.12% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.
What we observe is that the XIRR curve becomes smoother and smoother between the peak XIRR and the stabilized XIRR.
What the ABSD Does to Investors
Here is the Range of Returns if a different level of ABSD from 0% to 21% is applied:
There are a few things you might notice:
- The Peak XIRR goes down. No surprises there.
- You needed more initial cash outlay. No surprises there. It restricts additional property purchases to those who could.
- The Peak Year goes down. The maximum that you could extract from your property gets delayed longer and longer.
- The Stabilized XIRR goes down but in terms of percentage not as much
- In the grand scheme of things, this affects the absolute gain if you sold off at year 40, but not by a lot
- The Peak XIRR approaches close to the Stabilized XIRR with greater ABSD
And I guess this is how the ABSD lever work. It delays your return and make investors wait longer. Unless there is a short term price spike (that is speculation)
For foreigners, if they wish to extract value, they could still do it. Same for locals and PR. They just have got to sit on this long.
If you are long term into a residential property like this, the benefits that you could extract from your property can be much more than these short term measures.
This can be rental income, can be rent saved so that you do not have to rent another place or price appreciation.
The unique thing about the Astoria Park example is that many commenters expressed that this is not a good example because it is at a peak in the 1990s.
If you asked me, this is probably the best example since, if it is so challenging, and it does decent, then what about times when it is less challenging?
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