On 19th August 2020, the Housing and Local Government Minister, YB Zuraida Kamaruddin, announced the government intention to implement the “Vacancy Tax” on developers who fail to sell their properties in an effort to reduce the huge overhang of residential units in the country.
The rationale of this tax is to induce developers to be more sensible and responsible in their projects carrying out more in-depth and thorough feasibility studies to ensure project viability.
An Appropriate Solution at this Time?
Malaysia is already facing a myriad of challenges to overcome its economic woes with low oil prices, regional trade war as well as the pandemic induced recession taking its heavy toll with no light to be seen yet at the horizon.
Besides superstar performance in the glove industry that brings in foreign exchange, other industries such as property development are a few of the pillars providing employment and downstream economic activities. Therefore, any measure such as vacancy or overhang tax by policy makers must take into consideration wider implications and other options that are available to tackle the issue of property overhang.
The Overseas Experience
There are so far five countries and one territory in the world which have implemented or attempt to implement Vacancy Tax, namely France, Australia, Canada, Singapore, China and Hong Kong. Their experiences are briefly elaborated below:-
1) France—France implemented the tax in 2015 with a levy on the first year of vacancy at 10% of loan amount, 12.5 % on 2nd year and 15% on the 3rd year. There was a lot of public commotion on the matter and no improvement shown in the overall vacancy under such initiative.
2) Australia–introduced in 2017, applicable to only foreigners owning residential units in Australia, with units not rented out for more than 183 days (6 months). Its intention is to impose upon foreigners to make their units available for rent and increase available housing in general. However, the local survey showed that such policy was not truly efficient but discouraging foreign investment.
3) Canada–a similar tax was introduced in Vancouver. Its objective is to return empty or under-utilized properties to use as long-term rental homes for people who live and work in Vancouver. As the general rental is high, the policy was initiated to motivate owners of empty homes to rent out their properties and increase available housing for rental. It work reasonably effective in Vancouver but not the other part of BC, reasons being Vancouver is the city with the most Hong Kong (“HK”) high income immigrants during the year 1997 when HK returned to China.. Many of the housing units in Vancouver are owned by rich HK residents. Other residents living and working in Vancouver are earlier immigrants from other countries with their income level ranking pari passu with Hong Kongers’. Hence the Vacancy Tax issue seems to have little economic impact.
4) China–Introduced in May 2017, the once talked about “Ghost Town” developed in Heilongjiang province of China where massive vacant units in the entire development project prompted the Provincial Government to levy heavy penalty on developers. The concept was later modified and introduced in Shanghai and Beijing on those “sold but remained vacant units” which targeted mostly at house speculators. The rich groups in those highly demanded location invested heavily for sub-sale profit with proven years of escalating house prices and many of such units (Mid and high range price products) were left vacant in the process. The speculators had even come out with amazing planned and scheduled on re-sell strategies to make profit hence prompted the Authority to implement Vacancy Tax.
5) Hong Kong–A policy being planned for some time but never able to be implemented due to various reasons and factors of consideration. As Hong Kong is the world’s most recognized “Free Market” in Asia and practise the driving principle of “laissez-faire” economy minimum government intervention and involvement. The free market forces of demand and supply determine the vibrancy and dynamisms of the economy throughout the decades and it is viewed as the most equitable and preferred market for long term businesses.
6) Singapore– introduced in 2011 on Additional Buyer’s Stamp Duty (“ABSD”) on unsold properties after 5 years after the date of acquisition. Again, it is a tax to discourage speculation during the booming periods.
It is noted from the above overseas experience that the implementation of vacancy tax was formulated towards attempting to curb the element of “speculation” rather than aiming to “effectively fill up” vacant units.
In Victoria state Australia, there were massive exodus of Chinese high net worth individuals in the past and effective 1 July 2015, there was an immigration incentive for foreigners with introduction of Significant Investor Visa (“SIV 188C”) of investing AUD$ 5 Million for a Australia PR Residency, and later lifted to another class of Premium Investor Visa (PIV) for those ultra-high-net worth investors who are able to invest AUD$ 15 Million in Australia. With those kinds of investment amount and net-worth of investors, the imposed Vacancy Tax is totally negligible. That explained why Melbourne has been staying consecutively in many years as the top 10 most liveable city in the world. However, the rest of the states in Australia have not been so successfully implemented with such policy which goes to show that “Vacancy Tax” is essentially a levy geared toward curbing “speculation” by investors primarily and NOT targeting DEVELOPERS.
Impact on the Economy
Let us examine the fundamental issue of supply and demand.
Supply and Demand: If we examine the fundamental economic model of the supply and demand curve by operation of market force, the curve forms a pendulum pattern whereby when demand exceeds supply and with favourable financing environment, supply will pick up and will eventually surpass demand.
By operation of market forces, supply and demand will eventually find its balance, in theory at least. During 2010 to 2015, the property market was in the mode of demand exceeding supply, hence prices were moving upwards, and liquidity was abundant. The market became naturally speculative as buyers were chasing after relatively easy gains. At that point, the policy makers took appropriate measures to cool speculative buying to avoid an overheated economic situation in the industry. Unfortunately, that crucial measure was perhaps not adequately in place as after all, everybody wanted to believe good times will last somewhat longer. The musical chair syndrome prevailed.
What we have in today’s situation is one whereby supply exceeds demand, hence property prices are slowly adjusting downwards toward the balance point.
If we look at the National Property Information Centre (“Napic”) data 2020, the supply situation is trending down, too. In short, by the operation of market force, the law of supply and demand is adjusting itself progressively.
On hindsight, the policy makers should have interfered earlier to avoid the oversupply situation. On the contrary, some statutory bodies also joined the band wagon on affordable housing, more often or not, at wrong locations. Therefore, it will not be fair to blame the overhang solely on private developers who are already saddled with unsold Bumiputra units, having to cross subsidise low cost and affordable housing, high regional infrastructure costs and very high compliance costs imposed by federal, state governments, local councils, statutory bodies and even utility companies.
Any abrupt interference, especially a punitive measure by the policymaker at the wrong stage of the economy will harm the property market significantly. This in turn will put the national economy at risk, especially when we are on the verge of recovery from the Covid-19 pandemic.
At this point of time, any imposition of vacancy tax or overhang tax on developers will not be appropriate and other available economic options must be thoroughly considered and discussed with industrial players before the introduction of any punitive tax measure. The following are some possible options that may be worth to consider.
- Deferment of supply – Some developers have committed the purchase of land during the heydays and are now under intense pressure to launch their projects in order to repay their hefty bank loans. Imposition of any form of overhang tax at this stage will render the projects un-bankable, thus increasing high risk of NPLs.
Therefore, instead of mooting this punitive measure, Bank Negara Malaysia should perhaps consider assisting developers to restructure their loans for longer periods so that they can delay their supply to a later date while looking for cash rich white knights to take over projects . In a normal economic cycle, a repayment deferment period or moratorium of 3 to 5 years is sufficient to push the supply into the future.
- Economic impact – Developers borrow large sums of money for development with distribution of funds through a chain of downstream activities such as consultancy work, material supplies, manufacturing, construction, estate agencies, etc.
While we can blame the overhang of properties on developers, we should not ignore the vast contribution by developers to the national economy during the heydays. At this point of time, any punitive measure will be totally unjustified and will have a reverse effect on the overall larger economy. Instead of applying the blanket rule for overall market, the policy maker may want to look into the statistics and identify the problematic sectors and address the problem in sectoral manner.
- Value of properties and wealth – The imposition of overhang tax at this point of time will drive property prices down in a very abrupt manner, thus causing loss of property values, overall wealth reduction with banks recalling mortgage loans which will further damage our economy.
Property values should not be allowed to arbitrary fall downward spiral as the impairment will have far reaching consequences on the rakyat.
- Forms of control – Overhang or vacancy tax in any form is only relevant when the market is behaving speculatively and not to serve as a punitive measure at the end of a real estate boom. In fact, there are many forms of control which can be deployed by the authorities during the upcycle. Bank Negara had rolled out various policies in 2014 which effectively curbed the speculative market. From Napic’s 2020 statistic, the supply situation is already behaving predictably in a downward trend. Banks are currently very stringent in approving housing loans and this is already leading to drop in property launches or smaller phases curbing supply. Planning authorities are also strict in density zoning and development approvals reducing future supply.
- Positive economic measure – Malaysia should create a positive economic environment to attract new investments and businesses. At this point of time, the policy of wealth creation is far more important than rolling out punitive measures. For example, we started the visionary high education sector to attract foreign students to Malaysia to stimulate the economy. However, the sector in general has not been able to move up in terms of qualitative standard. It has apparently been unable to sustain its growth.
This is despite the reality that high education will create a talent pool which will eventually attract MNCs and technology investments. By doing so, it will create a positive environment for the property sector with spin-off effects on the downstream economy. Melbourne is a glaring example – without foreign students’ spending, the city faces grave consequences.
We must immediately restart the MM2H programme with enhancement so that we can compete with neighbouring countries favourably. We only have a population of 32 million, and with a huge overhang of high end properties especially in Penang and Johor, we believe MM2H had been extremely attractive to wealthy foreigners looking at Malaysia as a wonderful peaceful place to live and retire. Let’s roll out the enhanced programme immediately, no reason for the delay.
In short, Malaysia must look outside the box to resolve the problem of property overhang rather than roll out punitive measures at this wrong time. There isn’t any one size fits all solution. We need to study in-depth the problem and tailor different solutions and assistance programmes accordingly to help the industry. Nevertheless, we must learn from past cycles, the authority must anticipate the next economic cycle to plan and put in place measures to manage the situation at the beginning of a speculative market while expanding the economic pie.