Why Malaysia’s Vacancy Tax Would Have Been A Good Thing

vacancy Tax

Why Malaysia’s Vacancy Tax Would Have Been A Good Thing

Last week an announcement was made by KPKT (The Housing & Local Government Ministry) on the implementation of a Vacancy Tax.

The Tax is meant to be for developers who are unable to sell their properties as part of their effort to reduce the growing property overhang in the country.

It will likely be similar to that of Singapore’s Qualifying Certificate of QC Tax which is a penalty placed on developers if they do not sell all the units in a completed development in 2 years following completion. The penalty is charged at 8% of the cost of the land for each year of delay increasing by another 8% each year up to a maximum of 24% each year.

This follows the second new tax coming from the Housing Ministry this year following the announcement of the Residential Tenancy Act in April.

The introduction of this new tax is expected to be fast-tracked as it will not require Parliament’s approval as it no amendment to the existing Act is required. KPKT has said that they plan to implement this Vacancy Tax as early as next year. [Edit: Today the announcement was made that they have agreed, due the ‘pressure from the public’, that now is not the right time for such a tax and will likely be delayed indefinitely.]

It would seem that the government has taken notice of the seriousness of the growing property overhang issue in the country. There is definitely a need to put a stop to this issue before it snowballs and runs completely out of control.

Dubai has already seen the effects of what happens when problems like these are not dealt with swiftly.

Developers are at the root of the problem as they are the ones with the resources to study the viability of new project sites and will be able to most accurately assess demand.

Building mega developments with more than 3000 units in areas that do not have the demand or the capacity to support the influx of new residents, is detrimental to not only the area at which the development is being built, but also to the owners of the units themselves.

Owners will have difficulty in selling or renting out these properties in the future if there is a massive oversupply of units that remain unsold. This will result in them suffering from reduced capital gains and rental yield.

The age-old trick of developers reserving a bundle of units for a number of years before releasing them should come to a stop, as this only artificially inflates the price of the units allowing them to feign scarcity when there is actually ample supply.

We may even see the disappearance of investor groups snapping up large quantities of units through compression loans.

It is absolutely necessary to put pressure on developers to do further research into their development projections and make a proper assessment on the demand of their product.

Building far more units than is actually required is irresponsible and can have much larger impacts in the long run than most people expect.

A Vacancy Tax like this will result in much more efficient planning on the developer’s side, shifting their priorities past simply just maximizing the use of the space for profits.

If what we want from our developers is more responsible building and building to fit what the market needs, instead of purely just building to maximize potential profits, then this is most certainly the best way forward.

There has been a lot of over-exaggeration and panic following the announcement of this tax with some saying that imposing this tax will cause the property market to crash.

The argument here is that implementing such a tax at this time in combination with the coronavirus recession, would result in an ‘avalanche of falling residential property prices across the board

I can agree that this could be true if implemented on all currently outstanding projects with balance units.

This would happen because developers would conduct ‘fire sales’ to clear off these balanced units to avoid having to pay the vacancy tax. This would then reduce the value on all other properties due to speculators rushing in to pick up these cheap properties for a quick flip, causing the entire property market to crash.

(I am not totally convinced this would crash the entire market but for the sake of discussion, let’s just say that this would happen if they imposed the tax on ALL units in the overhang)

But, let’s be realistic for a second.

How likely is the government to implement this tax on units that are already part of the overhang?

I would say, close to ZERO.

Surely, they know what the possible outcome would be of implementing a tax on developers for every single existing unit in the overhang.

The idea here is to prevent FUTURE overdevelopment by developers so the existing problem that we have does not continue to worsen.

The law would likely only be applicable for new developments that are going to take place and are still in the planning phase.

Housing Minister Zuraida Kamaruddin has already said during her initial announcement that, “In the future, (keyword being Future) they will do better projections when they develop houses, while ensuring the projects’ viability and developments that could attract buyers, and not just develop as they wish. With this preventive measure, they can plan better,”.

If something like this is not put in place, developers are going to continue to not take responsibility for overdevelopment.

The overhang problem has only been getting worse and worse each year.

The number that is being pushed around is that we have 30,000 residential units in the overhang but as I’ve already covered before, the real number is close to 50,000 or 48,619 to be exact, with another 114,392 units under construction!

The problem is far more serious and worrying than people are making it out to be. You cannot just sweep 163,011 units under the carpet and continue to build more, hoping that the excess units will just be absorbed by the market magically.

Such a task is too great even for the likes of Houdini and David Copperfield combined.

A problem like this, that if left unchecked, is what will really cause an ‘avalanche of falling residential property prices across the board’.

Left unchecked a property oversupply of this magnitude will most certainly result in the crash of the property market as a whole.

Whether it will be restricted to sub-prime areas or not is up for debate but it is undeniable that when there is a severe oversupply of any product, prices will have to come to down unless there can be a large influx of new demand.

It does not take an expert economist to come to this conclusion.

It only takes a pair of eyes and a calculator to see what awaits us if we do not stop what we are doing and fix the problem at its core. The fact of the matter is that we are going to run into some very severe problems down the road with even less options than we currently have on how to solve them if we do not act now.

The call that has been made here is to ‘let the market take its course’.

This new Vacancy Tax, in the way the it is being proposed, is by no means going to dictate the price of units or force the hands of either the buyers or sellers to pay a mandated price on anything.

Everything will still be up to the mercy of the market – it will still take its course.

Both parties will still be making an exchange between a willing buyer and a willing seller on a price that has been agreed upon by everyone.

What is being fixed here is that those responsible for putting out the supply do further research into the demand for their product and not just keep flooding the market with something that nobody wants or needs.

It is being said that this vacancy tax will not ‘solve’ the overhang issue and I am most certainly in agreement.

The Vacancy Tax is not being imposed to ‘solve’ the current issue at hand, but it is being put in place to prevent the issue from getting worse.

Much more effort is going to be needed to solve the current property overhang.

Suggestions like reopening the MM2H program and lowering the minimum property purchase price for foreigners are some possibilities that have been brought up but much more work and ideas are needed. It is going to be a long process, but the government has to start somewhere.

It is just like with a busted pipe in your house, before you can look at repairing the water damage to your furniture, you need to put a stop to the leak first.

The property overhang issue is no different.

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