By Dr Daniele Gambero
Amidst the hue and cry, the Goods and Services Tax (GST) took off. Still in its infancy, the full impact has yet to be seen though some have started feeling the pinch and are beginning to tighten their belts. In the property market, developers are pre-empting tightened purse-strings and responding by expanding their offer within the affordable bracket.
I fully support a proper implementation of GST, which will eventually result in a more transparent and fair taxation system as it will charge “only” the added value for each transaction. Most analysts think that the GST, also known as the Value Added Tax (VAT), is the best form of general consumption tax as it raises revenue in a neutral and transparent manner.
Faced with a chronic budget deficit problem for over 43 years since 1970, the Government blames this mainly on tax evasions and decreasing tax revenue from import levies due to increasing trade liberalisation, offering GST as a counter-measure.
Certainly it will help reduce tax evasion, as seen in most countries which have implemented GST, such as my home country, Italy. If properly executed with appropriate tools granted to the enforcing and controlling agencies, there will be a guaranteed positive impact in the fight against tax evasion.
As an example, Singapore and many other countries have implemented a cross-checking software which allows the enforcing authorities to have an instant picture of the tax evader.
However, GST is only one of the tools to address the budget deficit. The more pertinent ones are a more efficient public administration in terms of actual enforcement of existing laws, reduction of corruption and a higher transparency for all public transactions.
Malaysia is possibly five to 10 years late in implementing GST compared to other countries in the region. In fact, excluding Singapore, which is already at stage three of development level, Malaysia is the only country in the SEA region, which is in a transition stage between being efficiency-driven (stage two) and innovation-driven (stage 3) growth without GST. It is certainly about time for Malaysia to enforce this new tax system. However much more needs to be done by the authorities in terms of public education, anti-profiteering agency controlling and sanctioning powers, SMEs’ support as update of accounting system and staff education.
Inflation is generally voiced as a concern as a good 80% of the population do not fully understand the application of GST or how the GST works. From my previous experiences in other countries, I’m also expecting to see in Malaysia a sharp increase of consumer price index (CPI) during the three to six months following the GST implementation followed by a subsequent realignment of values down to more appropriate rates.
As I said, a critical factor for a smooth implementation is how the anti-profiteering agencies will actually monitor value trends and enforce sanctions for the many who will surely try to bypass the newly implemented tax.
In a residential development we have multiple cost-generating factors. Some are subjected to GST and some are not. My forecast is an increase of no more than 3% to 3.5% in the final selling price. In my opinion though, the increase should not be borne by the public. Looking at the current trend, in all the major areas prices have dropped between 4% and 8% already.
Fear of the “empty pocket” will impact overall consumer sentiment, as GST will certainly affect monthly budgets. But if the market refocusses on the supply of affordable homes, there will be less pain for the industry.
Against general expectation, there wasn’t any “rush to buy” before GST and I had not expected any towards the implementation date. Most ordinary folks had adopted the wait-and-see attitude as they are concerned over how the GST implementation will affect their personal budget. Fear of not being able to service bank loans has been primarily slowing down residential transactions during the last quarter of 2014 and first quarter of 2015.
It is a normal market reaction – when the public buys less, developers will reduce the rhythm of new launches. One thing has to be taken into consideration though, Malaysian developers have been delivering an average of 150,000 to 160,000 units of residential space every year for the last 10 years and demand for houses has been and still is far above this number. As such, developers shouldn’t be affected by this wait-and-see behaviour.
Malaysia is a land of perception and most of the business decisions are made based on general perceptions of negative public feeling. It’s a kind of vicious cycle and nobody knows who starts it. I am not expecting a massive reduction in terms of house supply but we will see a shift in the type of products developers will offer for the next two to three years. Most of the residential offerings will be directed towards affordable homes for first-time home buyers.
The multiple cooling measures are quite effective but a bit late. Budget 2013 and 2014 introduced curbing measures that unfortunately, for the greatest part, have only been implemented during recent months.
Nevertheless, these policies, together with GST, have certainly contributed to normalising the market which is now showing clear signs of a more sustainable direction based on demand-driven products instead of “concept-dream-driven” ones.
Impositions like the Real Property Gain Tax (RPGT) will not deteriorate the housing supply but redirect it. During the 2010-2014 period most of the products released in the market were above RM800psf, especially in the hotspots. Since the end of 2014, the majority of developers have re-positioned their offer of residential properties with nett prices between RM250psf and RM700psf at maximum.
I don’t think there will be fewer new launches despite the weak ringgit and stringent lending rules. In the first quarter 2015 we have actually seen a good number of new launches of affordable residential properties. Projects which have been put on hold are mainly from minor developers, which will take longer to re-position their offerings, or for different types of products mainly designed for the upper market.
In conclusion, the most affected group should be the lower income one as in general it will see a minimum 6% impact on their monthly budget without receiving a corresponding rise in household income. Eventually we can say that GST will affect Malaysian household monthly budget, subsequently their “property purchasing power”. This is something that has not yet been looked at properly. The cost of living, repayment for car loan and others will be impacted with a minimum 6% by the implementation of GST and this is something that needs to be taken into consideration in planning for new developments of affordable homes.
Dr Daniele Gambero, CEO and co-founder of REI Group of Companies, gives presentations on the property market and welcomes feedback at: [email protected]