Recently, two major real estate consultancies, in their recently published research reports, have forecasted that the Singapore property market may see further correction in 2017, and the consultancies believe that this may prompt the government to scale back its property cooling measures. In particular, one consultancy has drawn attention to the Additional Buyer’s Stamp Duty (ABSD) and advocated replacing ABSD on residential units with an annual tax on non-owner occupied units.

In recent years, multiple Asian economies, including my native Hong Kong, has implemented ABSD or similar measures to cool the property markets. However, ABSD is only a temporary measure, as its major function is to create additional costs for property transactions, so that, if successful, ABSD will alleviate pressure in the asset transaction market.

On the other hand, ABSD does not change the supply-demand dynamics for actual space. When the economy stays robust, pressure from any supply-demand imbalance will remain. Thus, the long-term solution is typical to increase supply and reduce demand, which has been government policies in Singapore in the last several years.

Over time, an economy’s ability to rebuild and enlarge its supply pipeline determines whether or not policies such as ABSD have been successful. An annual tax on non-owner occupied units, as advocated recently, may also help to maintain the level of supply in the market. When investors buy residential units in addition to the one they occupy, the reasonable strategy through time is to lease out the unit.

This generates income to the owner and allows someone else to use the space. By leasing out the unit, the owner allows the space to be circulated back into the space market and help meet any space demand.

Leasing out space, however, involves work. The owner will need to find a tenant, perhaps through an agent, and then the owner will need to service the unit. This is especially true with residential units, as the owner will typically need to at least maintain the kitchen and bathroom. Thus, when the investment yield is low, the owner may not have enough incentives to provide the level of work needed to keep the unit in the leasing market.

While whether to lease out a unit is an individual decision, if enough owners decide to stay away from the leasing market, the collective action can reduce the number of available rental units and artificially lower the level of supply in an economy. Thus, corrective measures to incentivise owners to keep their units in the leasing market can help alleviate imbalance pressure.

An annual tax, if implemented thoughtfully, increases the holding costs for the owner, and thus, incentivises the owner to keep a unit leased out. Other economies have tried similar measures, but many are difficult to implement even if they are theoretically sound. For example, a vacant unit tax aims to tax only those units that are left vacant.

In theory, this will create an incentive for owners to keep the unit occupied, but proving vacancy can be a difficult proposition. For example, an owner can always claim that a certain unit is used as a vacation home or that the unit is occupied by relatives, drawing out the tax assessment process and reducing the effectiveness of the policy. Other non-tax measures, such as a cap on rents, may distort the market and further reduce available supply, as owners would have even fewer incentives to keep units in the market if rents are capped.

In short, the real estate industry is at its most sustainable when long-term supply and demand are matched, but maintaining this balance involves multiple policy areas. Appropriate incentives for owners can help maintain a healthy level of supply in the leasing market. This will reduce pressure and volatility in the housing market through the medium term.