Wednesday, October 30, 2013

Why RPGT Won’t Make Much Difference

One of the measures taken in Budget 2014 is a hike in RPGT, effective January 1, 2014:

Disposal Current Companies Individuals Non_citizens
Within 2 years 15%      
Within 3 years 10% 30% 30% 30%
in the 4th year 10% 20% 20% 30%
in the 5th year 10% 15% 15% 30%
in the 6th and subsequent years 0% 5% 0% 5%

The idea is to limit speculative activity by imposing an additional charge on profits made on disposal of property assets.

But I think the change won’t really be all that effective against speculation because RPGT is a tax on profits, not a tax on chargeable income. If I can still make a profit on a property over my cost of capital and transaction costs, it’s still worthwhile doing. RPGT just raises the bar on what that breakeven point might be, but doesn’t eliminate it entirely.

In fact the impact might be somewhat perverse for new property developments, because it makes flipping properties more worthwhile than keeping it for a few of years in hopes of a lower tax rate – I’d only be paying interest on progress payments, rather than the whole sum of a loan. Even better if I get by just paying a deposit.

At bottom, the issue is this: RPGT doesn’t mitigate escalating house prices, because it will vary with the profits on speculation. In fact, it provides an incentive for boosters to pile on prices even more, as that ensures profits exceed the breakeven point.

What you need to have is an instrument that essentially taxes higher house prices, not just taxing higher profits on house prices.

If we’re serious about house price speculation, we should be looking at raising the stamp duty as well. This is currently 1% for the first RM100k, 2% for RM100k-RM500k, and 3% for RM500k and above. A house valued at RM1 million attracts stamp duty charges of RM24,000 – effectively a 2.4% tax.

We can change the brackets and the rates to be more progressive e.g. 2% for RM100k-RM250k, 3% for RM250k-RM500k, and 5% for RM500k+. That raises the effective tax rate on the same house to 3.65%. Note that this is over the whole value of the house, not just on the margin on disposal.

Of course, the empirical experience with measures such as these – even the stamp duty – suggests at best a short term effect on house price escalation. Even stamp duty has limitations – because it is at heart a tax on transactions, that should in theory reduce the number of transactions in any given period. But house valuations are set at the margin – just one transaction could set a benchmark for every other property in the area. Reducing the number of transactions limits liquidity and efficiency of the property market, which means the task of figuring out whether house prices are truly reflective of underlying fundamentals even harder.

But even in this context, RPGT is probably the least useful measure we can take.


  1. What if the RPGT is 90% for 1st year, 80% for 2nd, 70% for 3rd.... and so on?

    Maybe RPGT is not high enough?

    1. Well, if you put it up that high, then I'd have to agree. But 30%? Not so much.

  2. Actually the best method is simply to jack up property taxes on residential properties which are not being used as the owner's primary residence. I suggest a 1.5-2% annual tax to be assessed on the property's market value, which is based on prior transactions. You then reduce the attraction of residential property as an investment vehicle without diminishing or penalising transactions.

    The next step is then for BNM to further tighten home loans to ensure the sustainability of our mortgage market.

  3. Why all this convoluted taxes (RPGT / Stamp duty)? Why not set a policy whereby each person only allowed to purchase two residential units, period. This should be very easy to implement now, no.

    Zuo De

    1. Zuo De,

      That would just about kill the rental market, for which there would still be a need.

  4. Hishamh, alot of stuff out there about the american subprime crisis.

    What is the possibility that property prices will crash like in the US? Us pebeians are in the dark. Just need a Malaysia economist give a heads up.

    1. @anon

      I cannot rule out the possibility of a crash - we've had two property market bubbles and crashes in this country already, and 100% price increase in 3-4 years looks definitely bubbly to me.

      But there are some differences with the American experience:

      1. Securitisation - currently Cagamas is performing much the same function as Freddie Mac and Fannie Mae in the US; buying mortgage loans from banks and repackaging them as securities. This frees up capital for banks to lend further. However, we don't have anything like the equivalent of a Bear Sterns or Lehman Brothers, who took such securities and re-repackaged them as structured finance products that paid like junk bonds but were rated AAA.

      2. There has been no supply response to higher house prices - the pipeline of housing has halved in the last decade from about 200k a year to under 100k a year. Some of the element of the increase in price is reduced supply as well as developers concentrating on higher value/higher margin homes. In the US, the bubble was accompanied by a boom in the residential construction industry.

      3. Demographics - the US has a stable (cylindrical) demographic age profile; Malaysia's is a pyramid. There is considerable rising demand from the younger generation for housing, particularly in urban areas.

      4. Credit growth - In America, mortgages loans were increasing rapidly in the runup to the crisis; in Malaysia, mortgage loan growth has also been increasing - but well off the peaks. Loan growth was highest in 2001-2004. Credit standards have also been tightened, to an average 50% rejection ratio, compared to around 30% a decade ago.

      Again, can't rule out the possibility of a crash, but I don't think the fallout will that big either. Some banks may definitely take a hit, but I think the system itself is more robust than it used to be. Wish I could say the same for the non-banks though.

    2. Have been watching the property market for quite a while now. Here are my observations, vis a vis Hisham's:-

      1. Agreed. Risk from securitisation is minimal compared to the US.

      2. Partial disagree. While overall supply is not matching overall demand, this observation does not apply if we look at the market in terms of upper, middle and lower segments. There is clearly an oversupply of luxury properties, and an undersupply of affordable properties. My view is that, in the absence of rampant credit growth, the demand for affordable properties has very little impact on the demand for luxury properties. Luxury property demand seems mainly driven by speculators, and this demand can rapidly disappear once the market runs out of greater fools.

      3. Again, the vast majority of young Malaysians need affordable homes, not luxury properties, and are not going to be buying RM 500,000 ringgit homes any time soon.

      4. Like Zeti says, not the entire country is in a bubble, but we do have hotspots like Pg, KL and JB. Unfortunately, we do not have data on the concentration of credit growth. The doubling and tripling of prices in certain areas cannot possibly be purchased using cash, and must be funded by mortgages. I suspect that we should be wary of credit growth among speculators, investors who own nothing but property, and young Malaysians in the late 20s to early 30s. Existing owners selling to younger buyers and settling their mortgages may have a moderating impact on mortgage growth. The fallout from just investors, speculators and young buyers facing difficulties with mortgage payments may be significant enough to trigger a crash.

      Ultimately, on a country-wide basis a correction of between, say 10-15% is far more likely than a crash. However, it may well be that this correction reflects a 30% fall in luxury properties, and a 15% rise in affordable homes.

    3. @anon 5.45

      2. I think that was the same point I made - supply is falling, and what supply there is, is going into higher priced himes.

      3. Yup

      4. BNM has the data, but they're not sharing

      Last - I think you'll like my next post

  5. I agree with anon1:31 when it comes to increasing the RPGT to that extend. It may discourage speculator due to the holding period needed before they can break even, longer for comfortable profit margin.

    However hishamh I have to disagree with you in regards to increasing the stamp duty. It make no sense in controlling speculation because the tax value is small, 1-3%, compared to the amount that the RPGT gonna fork out of them 30%. It will only burden the genuine home buyer (such as myself) especially those in the middle income tier.

    IMHO its best to flood the market with affordable housing targeting first time home buyer. That will keep the supply side high and kept the speculator away, since that chunk of the pie is no longer a lucrative market. Hope they make a lot of those pre-cast PR1MA apartments.

    1. @dzuliskandar

      1. There are two competing influences here - RPGT decreases over time, but cost of capital (interest payments in loans) will accumulate over time. That;s one reason I don't think RPGT will make much difference.

      2. The higher RPGT rate applies only to profits made, while stamp duty applies to the whole value of the house.

      3. Absolutely. But that's one reason I'm more in favour of raising the stamp duty. We have a problem of deficient supply against higher demand. The supply side will take time to sort out - in the meantime prices will continue to escalate due to speculation and price expectations. By the time the pipeline starts flowing, prices could be well out of reach for most. So over the interim, you have to limit demand as well, hence why I think raising the stamp duty (at least temporarily) makes sense even if it burdens legitimate buyers.

  6. Dear all,

    As always, the propoerty market is always a hot topic to chat about. My 2 cents based on my four property investments (some says speculations) in past 3 years:

    (1) Agreed that boardly speaking there is a 2-tier markets, i.e. oversupplied upper market vs. undersupplied lower-end market.

    (2) The extend of property price correction mainly depend on (i) the degree of oversupply & speculators, (ii) the extend of monenatary tightening and (iii) economic outlook (i.e. confidence on the future economy and property market). If (i) and (ii) progress too fast in a short time coupled with a slowing economy, then a sharp correction will be triggered.

    For (i), my guess is oversupply is severe in high-end condo and shoplots due to the high and growing vacancy rates for a few years. These properties owner (if high percentage are speculators) will be forced to sell if interest rate increases further (not happen yet) as holding cost rises.

    For (ii), I have limited knowledge on economics so will let you guys comment. But BNM did the right things on 3rd house 70% loan limit and banks are slightly more prudent these days (but then again the high hosehold indebtness is also partially BNM fault - but how can BNM say no to govt to sustain credit growth to fuel the economy?). If interest rate rise 2% in the next two year then the market will be badly hit. Possible for a 2% hike?

    For (iii), this is the most difficult things to guess as it is a combination of many factors like govt policy, external environment, developers counter measures, consumer sentiments, foreign buyers appetites, unemployment rates, wage growth, inflation rate. In short, how long more will these 'feel-good' and investors' confidence level hold?

    (3) Higher RPGT plus DIBS ban are effective as property investors like myself is very cautious now to take any risks for the small potential profit. Perhaps i will monitor the market closely and wait for bargain to come, in the next 24 months...


  7. @Unknown (I like the name!),

    With respect to BNM, the growth in household debt was largely out of their control - most of the fastest growth has been through non-bank channels e.g. Bank Rakyat, MBSB and other cooperatives. These did not fall under BAFIA, which is one reason why BNM pushed through the new Financial Services Act which came into force in June. This allows BNM to go in and force better credit standards, and we're already seeing some effect in the loan market.

    I wouldn't discount any increase in interest rates next year, but at worse we're probably looking at 25bp-50bp (i.e. 0.25%-0.5%). 2% from here? I don't think that's likely over the short term.

  8. I don't see how increasing stamp duty will curb speculation more effective when the capital cost has risen even for first time homeowners. For me, RPGT is the most effective way. I only hope gov be persistent in their policy and not change it frequently.

    1. Khai,

      RPGT might be effective if only speculation was driving home prices upwards. But it doesn't look like it - there are fundamental factors driving up prices, which RPGT won't mitigate.

  9. Land cost is a big factor too.

    Zuo De