Buying a new home in the Cayman Islands is about to get more expensive – at least for some.
Changes to how stamp duty is levied on property purchases will increase the cost of buying in new developments and could cause a slowdown in the booming new property market, some developers have warned.
A new Stamp Duty Bill, which goes to the Legislative Assembly later this month, seeks to close what government describes as a “loophole” that has allowed home buyers to pay stamp duty on the land price, rather than the finished property, for various types of development. That has meant significant savings for buyers, worth tens of thousands of dollars, in some cases.
Avoiding the full impact of stamp duty has long been considered a perk that offsets the uncertainty of buying into a new development before construction.
Paul Pearson, of Davenport Development, which built San Sebastian and Vela, two of the largest recent housing developments on South Sound, believes the new rules will hurt middle income home buyers, inhibit development and cost jobs.
He said, “The Stamp Duty change will be detrimental to our ability to sell in our target market. Currently, it is the purchaser, not the developer, who benefits from the stamp duty law. With the proposed change in the law, if it goes into effect as gazetted, purchasers in our mid-range market will have to come up with close to 20 percent of the purchase price.
“This will definitely have a huge impact on their ability to purchase from us or other developers. We anticipate that this change will drastically affect the construction and development industry in Cayman, and we believe the change will cost Caymanian jobs.”
Stamp duty costs are not covered by bank financing, so the change will mean buyers now require significantly more funds up front before purchasing a home.
Dale Crighton, director of Crighton Properties, estimates it will mean buyers have to come up with an additional 10 percent of the total purchase price up front, as well as whatever equity is required for bank financing.
While he welcomes some aspects of the bill, including the expansion of concessions for first-time Caymanian home buyers, he said closing the loophole would impact the mid-range market.
He said, “This will only affect a certain sector of the market; however, this sector is made up mainly of locals and expats who will now find it more difficult to acquire residential properties.”
The changes relate to “linked property transactions” where the purchaser buys a plot of land in a development with an agreement to buy a finished property in the same development. It impacts all new condo and housing developments.
Matthew Wight, of NCB Homes, said linked transactions were necessary for developers to sell land plots before construction, while retaining control through the construction process. He said the changes would impact anyone buying into new developments.
“The difference in stamp duty in prepaying on a land contract versus a full development price is significant and you can be talking as much as 8 or 10 times the cost of stamp duty.”
He said he had no issue with closing the loophole for condo developments, which are typically building stratas that do not involve transfer of a land title. But, he said, the changes captured all types of development, including town homes, duplexes and single-family residences, and would inevitably have a slowing effect in the long term.
He said other parts of the bill, including increases to the threshold at which first-time Caymanian buyers become eligible for stamp duty exemptions, were necessary and welcome.
He added, “For a developer and people looking at multi-family developments, one of the incentives is being able to pay reduced stamp duty price pre-construction. I think that will have a natural slow-down effect, with people reconsidering whether they are willing to stomach the full 7.5 percent up front on the total purchase price from the onset.”
He said Cayman’s market was currently incredibly strong and with demand for new development surging, he questioned the need for the change.
“We’ve got record numbers,” he said. “Why handicap new development when we have a supply and demand issue as it is right now? We have a shortage of supply. There is a need for developers to be rolling out projects and this is going to have an effect at some point on people’s commitment to buying versus renting.”
Not everyone objects to the changes, however. Kim Lund, of RE/Max, said closing the loophole was only fair and in the best interests of the country in the long term.
He said, “While it will create a bit more cost to purchasers, it is a far cry from having to pay real estate property taxes every year, so any purchaser should be grateful for not having to face the alternative.”
He said annual property taxes are the norm in most developed countries, so the system of a one-time stamp duty means huge savings overall for anyone holding property for a few years or more.
In a press release accompanying the publication of the bill last month, Finance Minister Roy McTaggart highlighted the concessions for first-time Caymanian home buyers, saying the bill would make it easier for Caymanians to get on the property ladder.
“We are willing to forego revenue to ensure that the financially disadvantaged, as well as young Caymanian families starting out in life, get a further break. This is also Government’s way of trying to help all lower-income persons in the Cayman Islands attain property ownership.”
He added that closing the “loophole” on linked property transactions would mean anyone buying into a development on those terms would now pay 7.5 percent of the final property price for purchases over $300,000, and 3 percent for purchases of less than $300,000.