To Buy a Home in Singapore?
My girlfriend and I often walk around Tiong Bahru and, while doing so, look at the beautiful old walk-up condos. We play a game of choosing the ones we would want to buy and live in, commenting: “This apartment looks modern and nice,” “That one has a pretty garden,” “The one on the top floor must have a great view.”
With high rental costs in Singapore that “magically” make money disappear from bank accounts each month, the question often comes up for ourselves and clients: should we buy property in Singapore?
This article relates reasons for and against buying property in Singapore or, in Shakespearean vernacular: to buy or not to buy?
Benefits of Buying
Build Equity
One main reason to buy property is to build equity. When renting, each month, the paid amount leaves your bank account and is gone. However, upon buying property, the monthly payment partly goes toward interest and partly toward principal. Even though the interest goes to the lender, the principal payments go into your pocket (i.e., if you sell the property in the future, you can access the built-up principal payments in the form of sale proceeds). While at first the majority of the mortgage payments go toward interest, over time, this gradually shifts toward a higher percentage of the monthly payment going toward principal and building up equity. If intending to live in the property for a long period of time, this built-up equity can amount to a significant sum.
Price Appreciation
In-line with building up equity, there is also the potential that while you own the property, the housing market appreciates increasing the value of your home. This can lead to it being a good investment and turning a profit from the sale. However, it is also possible to sell in a down market and have a financial loss from the purchase of the property. In Singapore, there is currently no capital gains tax from selling property at an increased price, but, if you are a US person, you are still subject to US capital gains tax even on Singapore real estate and there is the potential for foreign exchange gains/losses.
Rent Protection
Over the last few years, we have seen over and over again our clients rental expense increasing 30%, 40%, and even 50%. While it is true that rental prices generally decreased during the COVID-19 pandemic, this was still a massive price jump, which was a rude awakening to many people. Even in more normal times, it is typical for rental prices to increase every 1–2 years.
One benefit of owning a property is that you would no longer be subject to rental price increases. Saying that, it is important to mention that mortgage interest rates in Singapore are only fixed for a certain number of years, and if the rate increases after the fixed term, monthly payments could increase depending on the interest rate environment.
Your Own Home
On the personal side, some people feel more of a connection with a home when owning it. You can renovate, paint the walls, choose the style of fixtures, and create a space that is yours, rather than someone else’s. It can feel good to have a place that is truly your own and is your home.
Reasons Not to Buy
Stamp Duty
One of the main reasons to not purchase a property is Stamp Duty. In Singapore, there is Buyer’s Stamp Duty (BSD), Additional Buyer’s Stamp Duty (ABSD), and Seller’s Stump Duty (SDT). The amounts depend on your nationality, immigration status, and length of time owning the property, and can add-up to a significant amount.
For example, Oliver is an Australian citizen on an Employment Pass in Singapore. He wants to buy a S$2MM property in River Valley. At the time of purchase, he would owe a BSD of ~S$70k and an ABSD of $S1.2MM! With a required down-payment of 25%, he would owe S$1.77MM (~$1.27MM + S$500k) up-front.
However, if Oliver decides to wait a year and becomes a Permanent Resident before purchasing, his ABSD would decrease to S$100k, and he would only owe ~S$670k up-front. Moreover, Singapore has a Free Trade Agreement with the USA, Iceland, Lichtenstein, Norway, and Switzerland, which enables citizens of those countries to avoid ABSD even if they’re on an Employment Pass. Singaporean citizens and Permanent Residents can utilize the CPF Ordinary Account to pay the downpayment and monthly mortgage.
It is also important to consider Seller’s Stamp Duty, which applies if you sell the property within three years of purchase. This amount decreases from 12% (months 0–12) to 8% (months 12–24) to 4% (months 24–36). If Oliver were to purchase the property and then leave Singapore 18 months later, he would pay ~S$170k in BSD/ABSD and then S$160k in Seller’s Stamp Duty. Quite a lot!
Short Time Horizon in Singapore
When we run a cost-benefit analysis for clients considering renting vs. buying, the answer of whether to buy generally comes down to the expected amount of time they will live in Singapore. This is due to Stamp Duty causing a large up-front cost, which can amount to several years of rent that would have otherwise been paid.
Going back to the above example, if Oliver were paying S$7k/mo in rent (S$84k/yr), the BSD and ABSD would equate to approximately two years of rent up-front. If he buys the property and then decides to relocate to another country one year later, he would have been better off not buying the property. He could rent the property out, but there are different rules that would have to be adhered to depending on the type of property (e.g., private condo or HDB).
This is a common dilemma as many expats come to Singapore for a “two-year adventure” and then are still here 10+ years later. Sometimes the move-back date is unknown, which makes this a difficult decision.
Foreign Housing Exclusion for Americans
For Americans, one other consideration is the Foreign Housing Exclusion. This is one of the big tax benefits Americans receive while living abroad. They can deduct a portion of income on their US taxes based on rental expenses. In 2023, this was a maximum potential deduction of ~$64k (Singapore residents). However, if you own a property and don’t rent, this benefit is no longer available, which can cause higher taxes. Saying this, you can still deduct mortgage interest paid as an Itemized Deduction.
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Even though my girlfriend and I might find the Tiong Bahru apartments beautiful, it doesn’t necessarily mean it would be a good investment to buy. Like many areas of personal finance, there is not one correct answer and the decision of to buy or not to buy depends on individual circumstances.
For more information, please reach out to one of our wealth planners.
This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/ and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.