Thursday, September 29, 2011

BNM Looking At RPGT

From the Business Times (excerpt):

BNM seeking inputs on property gains tax
Property developers are concerned that imposing fresh regulation will be an unwelcome game-changer.

Petaling Jaya: Bank Negara Malaysia had consulted property developers, seeking their inputs on increasing the real property gains tax (RPGT) to curb speculation, people familiar with the matter said yesterday.

Such a move, if announced in the upcoming Budget 2012, will be the second time the central bank will have moved to curb excessive speculation in the property market this year.

Early this year, the government capped loans for buyers of third property to 70 per cent.

Glomac Bhd's group managing director, Datuk FD Iskandar FD Mansor said the impact of RPGT will depend on what rate and form the RPGT will take.

"Such concerns were possibly relevant last and early this year, but since April, the situation has cooled down," said Iskandar after the company's annual general meeting yesterday…

…In the Budget 2010, government had reimposed the RPGT at 5 per cent, which took effect January 1 2010.

RPGT as it currently stands is pretty toothless…but implementing a more punitive measure can be distortionary, inequitable and dampen price appreciation from structural factors. More importantly, it’s also unlikely to be really effective (abstract):

How to Deal with Real Estate Booms: Lessons from Country Experiences
Crowe, Christopher W. ; Dell'Ariccia, Giovanni ; Igan, Deniz ; Rabanal, Pau

Summary: The financial crisis showed, once again, that neglecting real estate booms can have disastrous consequences. In this paper, we spell out the circumstances under which a more active policy agenda on this front would be justified. Then, we offer tentative insights on the pros and cons as well as implementation challenges of various policy tools that can be used to contain the damage to the financial system and the economy from real estate boom-bust episodes.

The paper looks at the policy options and historical experience with each across a wide range of countries (for a summary of the options and country experiences, check the tables from pg48 onwards). The verdict on RPGT and other property taxes? Slows transactions activities…for a while. The same with imposing loan-to-value ratios, where the effect on prices and loans is only in the short term (under six months), though it’s been shown to be effective in rapidly slowing price appreciation.

The most effective overall policy appears to be dynamic provisioning, where loan loss provisions are raised when property prices accelerate and lowered when the property market is slower. That effectively tightens loan standards during a boom and loosens it during a bust – but implementation is going to be a doozy.

Technical Notes:

Crowe, Christopher W.  & Giovanni Dell'Ariccia, Deniz Igan & Pau Rabanal, "How to Deal with Real Estate Booms: Lessons from Country Experiences", IMF Working Paper No 11/91, April 2011

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