5 Alarming Impacts of Stamp Duties on Your Property Investment
How this sunken cost can adversely impact your rate of ROI growth
Stamp duty is a sunken cost and can weigh down on your investment considerably
Stamp duties are common taxation in many property markets, where buyers are required to pay taxes to the government when purchasing a property. While it is meant to provide revenue to the government, it can be a substantial cost to the home buyer that will have a significant impact on the profitability of the investment. In this article, we will explore five alarming impacts of stamp duties on property investment and how you can take advantage of investing in the New Zealand market without the burden of stamp duties.
Tight on time? Here’s a quick Summary:
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Nope. As a Singaporean or eligible investor, you do not have to pay any buyers’ stamp duties, ABSD or foreigner levis for your NZ property investment. Because it is an overseas property investment, you are also not subjected to Singapore stamp duties as they do not count towards your local property count
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The spend on stamp duties cost has a net zero ROI and will never contribute to your home equity. It can take many years of property growth for an investors to recover back the costs, before you turn a profit in on your investment
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The amount used to pay stamp duty could otherwise be used to buy another property, further scaling your property wealth. It could also be used to pay down more on your deposit on a single home and borrow lesser, saving on interests cost.
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With the high cost of stamp duties, investors may be priced out entirely and lose access to reap the benefits of property investment or worst still, find themselves concentrating all their invest-able resources in one property
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The unlevel playing field is created as a result of varying stamp duty treatment across different groups of buyers within the same market and they can drastically impact an investor's profitability, a much longer holding period to turn profitability, or in some cases being stuck with an unsold property
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The cost of stamp duties can form a huge % of your net deposit, and it can be extremely hard to play catch up with little room for error, investors may find themselves in a challenging financial situation for many years. It may take many years of growth before the investment starts to breakeven and then hopefully starts to generate positive returns from then.
Is stamp duty applicable to all countries for a Singaporean buyer?
Unfortunately, stamp duties do apply to many developed countries, in places where Singaporeans are keen to purchase investment property. This includes Singapore herself, where many property investors find themselves having to deal with increasing rates for buyer's stamp duties and additional buyer stamp duties (ABSD) on their second property onwards. Likewise, some markets have introduced foreign buyer stamp duties on overseas buyers such as Singaporeans, which has a similar effect to our ABSD here. While stamp duties amount can vary across different overseas markets, property investors need to take note of its impact on their investment profitability. Let's take a look at some of the popular investment destinations that impose stamp duties on property purchases which can affect your property investment.
Fortunately, New Zealand is one developed country where Singaporean buyers can invest in property without the burden of stamp duties and ABSD. This allows investors to maximize their potential returns and profitability without the added cost of stamp duties by building a portfolio of properties over time.
Let's dive into the impact of stamp duties on property investment and how they can impact your investment in the long run.
Huge Sunken Cost
One of the biggest impacts of stamp duties is the huge sunken cost that it imposes on property investors. Depending on the location, the value of the property, and the count of property you have (in Singapore context), stamp duties payment can be quite substantial, amounting to tens of thousands to even hundreds of thousands of dollars. This is an added cost to the property purchase price and can significantly drain your capital resources.
The impact:
Since stamp duties are a huge sunken cost, the spend has a net zero ROI that will never contribute to your home equity. Once the cash is paid out for stamp duties expenses, it will never come back to you. You would then have to depend entirely on your property price to rise over the years to offset such acquisition costs. This cost can take many years of property growth (if any) in order to recover back, meaning that investors are always racing to break even first, even before seeing the 1st dollar of profits. If you had entered the market at a high, the cost of stamp duties can further worsen the gap to profitability.
Why give up years of property growth potential when you can fast-track your investment returns in the New Zealand property market?
Since there are no stamp duties or ABSD in New Zealand and very little acquisition cost (other than legal fees) on property purchase, Singaporean investors can enjoy an immediate ROI on their money for every percentage rise on their New Zealand property investment.
2. Opportunity Cost
The stamp duty amount incurred could have been used to contribute to a higher deposit payment, which would result in a smaller loan and, therefore, incur lesser interest costs and higher profitability in the long run. Alternatively, the stamp duty amount could also be used as part or even the whole of a deposit to purchase another property, providing you with multiple growth opportunities.
The Impact:
By paying hefty stamp duty, investors could be losing out on the opportunity to expand and build a portfolio fast, or save on substantial interest costs, which could have a significant impact on their overall investment goals.
Why pay stamp duties when you can save them?
With the substantial savings from not having to pay stamp duties investing in the New Zealand property market, Singaporean investors have found themselves in a position to build and scale their property portfolio relatively easily with the same pool of cash resources.
3. Pricing You Out of the property game
With the already high property prices and a lower loan-to-value ratio in today's climate, the high cost of stamp duty simply delivers a knockout punch to property investors. Investors are finding property investments to be extremely capital intensive, which is pricing them out entirely, making it more difficult for them to afford. An investor may be able to put down the deposit for an investment property, but when the additional cost of stamp duty is factored in, it may become financially unfeasible. It may also take them many more years to save up in order to make their next foray into property investment, shortening their investment horizon and delaying their overall investment goals as age catches up.
In addition, they may find themselves having to concentrate all their investable cash in just one or two properties within one economy due to the high capital requirements as a result of stamp duties payable.
The Impact:
Investors may lose access to reap the full benefits from property investing entirely when they are priced out of this asset class totally. With the higher barrier of entry into markets with high stamp duty fees, property investors are left with limited investment options, impacting their ability to diversify their portfolio across different countries and potentially limiting the overall returns on investment.
Why focus only on markets with high barriers to entry if there is alternative market access to property investments?
With a much lower price quantum and the absence of stamp duties, New Zealand serves as an attractive option for Singapore property investors looking to diversify their portfolio and build scale in a cost-effective manner
4. Unlevel Playing Field to future profitability
Having to pay stamp duties in a market where not everybody has to pay or be subjected to the same rates, can put property investors at a huge disadvantage. The starting cost of the property can vary widely across different groups of buyers, creating an unlevel playing field for investors who have to pay additional stamp duty fees. This grants the buyer with the lowest cost an unfair advantage over others, by having a superior pricing power over those who had to pay more due to the hefty stamp duties.
For example, if you are a Singaporean buying a 2nd Singapore property (1st property is your owner-occupier home and 2nd being an investment property), you would be subjected to a usual buyer stamp duty plus an additional buyer stamp duty of 17% of the property purchase price. Assuming your neighbor beside your investment property is a fellow Singaporean and had bought the property as their first (without ABSD) at the same purchase price and all being things equal, who has the unfair advantage here in terms of pricing power? He could easily sell at a comfortable price with a decent profit and at the same price, you would have incurred a loss. You probably have to give up a few more years of gains before turning a profit that covers your stamp duties cost.
Likewise for some overseas markets such as Australia, where foreign buyers are subjected to higher stamp duty fees and other restrictions compared to local buyers. The impact of stamp duties is far-reaching and can result in significant disadvantages for property investors. For example, foreign buyers who purchase residential-related property in NSW must pay an additional 8% surcharge purchaser duty on top of any transfer duty (usual stamp duties).
The Impact:
The unlevel playing field is created as a result of varying stamp duty treatment across different groups of buyers within the same market and they can drastically impact an investor's profitability, a much longer holding period to turn profitability, or in some cases being stuck with an unsold property.
Why play a fair game in an unfair market? Instead, Play with an unfair advantage in a fair market.
Singaporean investors in the New Zealand market are treated the same as all local buyers, in terms of not having to be subjected to any stamp duty payment, among many other things. For example, there is also no ABSD for the locals and Singaporeans who is looking to scale their property portfolio in the New Zealand real estate market. In fact, Singaporeans have the unfair advantage of gaining access to invest in the NZ property market by being one of the two foreign nationalities (along with Australians) allowed to purchase property in New Zealand without any special requirements or additional fees. Read more.
5. Net Loss of Investments
When leverage is included, the net loss on investment due to stamp duty payable can be scary when further magnified. Stamp duties payment, as a percentage of a buyer's capital investment (down payment) of a property purchase, can be quite high.
For instance, using the above Singaporean buying a 2nd investment property as an example, below are some numbers to consider:
Assuming a loan-to-value ratio of 75% on a 1 million private condo in Singapore, (even this price point will be a tough search nowadays), these are the numbers:
Capital investment: $250,000 (down-payment 25%)
Buyers stamp duties: $24,600
Additional buyer stamp duties: $170,000 (17% for 2nd property, before recent increase to 20%)
Total Stamp duties: $194,600
Total Cash Outlay as investment: $444,600
(excluding other costs such as legal, valuation reports for easy illustration)
Stamp duty as sunken cost percentage of total cash outlay: $194,600 / $444,600 = 43.8%
Will you acquire an asset with a net loss of 43.8% from day 1? How many years of growth do I need to breakeven on this investment and what are the chances of it happening?
The impact:
With a huge net loss on investment from day 1 and a huge gap to get to breakeven levels, it can be extremely hard to play catch up and with little room for error, investors may find themselves in a challenging financial situation for many years. It may take many years of growth before the investment starts to breakeven and then hopefully starts to generate positive returns from then.
Why lose first then try to gain later?
Investing in the New Zealand property market allows Singaporean investors to begin the journey on a strong starting foot, without the burden of high stamp duty costs that can eat into their investment returns. In most cases, more than 99% of an investors cash outlay as a total initial investment goes into the housing equity, with the 1% for common expenses such as legal and valuation expenses. As such, they are ready to ride on the property market growth without the heavy drag of stamp duty costs from day 1.
In conclusion, stamp duties can have a significant impact on your property investment, and investors need to be aware of the potential consequences. While it may be tempting to purchase a property without a sizeable down payment, the cost of stamp duty needs to be taken into account. As with any investment, it's important to consider all the factors and make an informed decision that aligns with your investment goals and risk tolerance.
How can I get started to invest in property without the impact of stamp duties?
If you are reading this, you are probably keen to explore and get started on the investment journey in the New Zealand property market.
Perhaps you are unfamiliar with New Zealand or perhaps you already owned property there and looking to scale? Will New Zealand market be a right fit for you and your family? Is this a good time to buy an overseas property, or should you wait and see?
Well, everyone’s situation is different. There is no one size fits all advice. What has worked for someone, may not necessarily work for you.
At Brickzwealth New Zealand, our aim is to bring clarity to your investment decisions with extensive on the ground experience for the overseas market.
Whether you are a first time property investor or a seasoned buyer with a portfolio, we are here to provide an honest and objective view to your investment journey.
We can help you by:
1) Providing Strategic property advice that best fit the outcome you desire
2) Identify & spot investment opportunities that align with your goals
3) Providing access to value-able partners in your investment journey with us
Besides the resources available on this website, the best way to get started is to kick-start a conversation with us today.
Invest differently. Inspire your future.
Ryan Quah
Founder
Brickzwealth New Zealand
