Exceptionally high tax, transaction and other costs discourage the provision of housing in Asia, according to a report released today by the Global Property Guide. These are seen to lead to urban slums and unaffordable housing units.
There are about 250 million slum dwellers in South and South East Asia, 178 million in China alone. Countries with serious slum problems include Indonesia (with 21 million slum dwellers), Philippines (20 million) and South Korea (14 million). These are the same countries that have serious housing affordability conditions.
“The market cannot efficiently provide housing, if it is saddled with unnecessary costs,” says Prince Cruz, senior economist at the Global Property Guide. “Total transaction costs in Taiwan, Thailand, Indonesia the Philippines and South Korea are above 10%. In the Philippines, the round-trip transaction costs of buying and selling a property can easily reach 35% of the property value because of the 12% VAT. This is on top of the 6% capital gains tax and 5% agent’s fee. For these countries, the bulk of the costs are real estate agents’ fees, and sales and transfer taxes.”
On the other hand, round-trip transaction costs on property purchase-and-sales are generally below six per cent in China, Hong Kong, Japan, Malaysia and Singapore.
In a study involving a detailed comparison of housing purchase costs in Asia, the Global Property Guide finds a clear correlation between high transaction costs, and unaffordable housing (measured by house-price-to-income ratios). House-price-to-income ratios are generally regarded as the best measure of housing affordability. (See: Housing Sales and Rental Markets in Asia)
Condominium prices are high compared to average incomes in Shanghai, Jakarta, Manila and Seoul. Countries with the least affordable housing are the same countries that have high ratios of urban slums.
“These high housing prices can be traced to high transaction costs and several policies that discourage property owners from participating in the real estate market. Reducing transaction taxes can lead to more efficiency and transparency in the market,” says Cruz.
Aside from high transaction costs, corruption is also a major factor in most countries in Asia. In China, bribes to government officials and bureaucrats for property transactions are considered standard business practice. These corruption costs are transferred directly to homebuyers, leading to higher house prices.
Other highlights of the study:
- Countries with high transaction costs tend to have expensive houses - and large slum populations.
- Countries with less transparent markets and more registration procedures have higher real estate agent fees (particularly the Philippines and Indonesia).
- Developing countries in Asia do not provide sufficient protection of property rights. Poor governance and weak control of corruption are also observed in China, Indonesia and the Philippines.
- Foreigners face several ownership restrictions in Indonesia, Thailand and the Philippines. On the other hand, the real estate markets of Japan, Hong Kong, Singapore and South Korea are general open to foreigners.
- Tenant eviction is a serious problem in some Asian countries, generally because of cumbersome and inefficient court systems.
TABLE 1 – Round trip transaction costs in Asian cities:
TABLE 2 – Condominium affordability in Asian cities