The Property Tax has some Merit

By TAN Kee Wee
MediaCorp 938LIVE’s Money Talks, Thursday, 27 August 2009, 7.50 am and 7.20 pm)

Last week, the government backed away from introducing a tax on profits from property investments. This was after Singaporeans voiced against it. Or maybe the sellers were against it. On reflection, the whole economy might be better served if we had welcomed the tax. There are two reasons for this.

The first reason is that it would probably stop a lot of weak investors from going into property and hurting themselves after this bull run. This is important because when weak investors get hurt, strong investors will also get hurt.

Singapore property investors are in a buying frenzy now because they think that high inflation and higher property prices are inevitable, given the state of global liquidity.

Of course, some inflation is expected when global economies recover. But it would be a mistake to think that we will get the kind of inflation that would lead to another surge in property prices worldwide.

This is because the US Fed is unlikely to repeat the mistake of not raising interest rates fast enough as it did not in 2003. But that is a problem we have to deal with later.

Right now, the problem is the ongoing global deleveraging process. Deleveraging is when businesses and consumers cut back on bank loans, and reduce spending to pay back these loans.

The current state of global leverage is enormous. Let’s take the US economy as an example, namely its debt to GDP ratio. This is a good indicator of how leveraged the economy is.

In the early 1950s, the US debt to GDP ratio was about 1.3. Thirty years later, in the early 1980s, this ratio had risen modestly to 1.6. It was only in the thirty years between 1980 and last year that this ratio exploded more than 2.3 times to 3.7.

This means that if the US economy were to deleverage back to the level last seen in the early 1980s, it would have to reduce loans by a gigantic US$30 trillion, or double the US GDP figure for year 2008. Repeat this for other countries and you can imagine the problem.

No one knows how much and when this deleveraging process will stop. Hopefully, it won’t take decades. But it is highly unusual to see inflation in a deleveraging world. Global deflation and falling property prices are more likely.

Hence, if Singaporeans had welcomed the property tax, we might steer a lot of weak property investors away from years of substantial frustration.

There is another reason why we should have welcomed the property tax. And that is to discourage Singaporeans from over-investing in property. This is an old argument. Basically, instead of channeling our savings into bricks and mortar, we should channel them into businesses that we can sell and export to the world.

The tendency to move into property is understandable. That’s because it appears easier to become a landlord then to run a business. At the peak of their empires, many rich Britons in the 19th century, and many rich Venetians in the 14th century, also took this path to property.

Perhaps, embracing the property tax now could help stop Singapore from becoming a nation of landlords and avoid the disadvantages that it brings along.

Knowing Singaporeans, if and when property investors lose their pants, they will not blame themselves for rejecting this tax law. Like many Minibond investors and retired men exploited by charming foreign women, they will blame the government for not keeping their pants on.