Yet another political maneuver in housing policy

Donaldson Tan

HDB flats in Queenstown

HDB flats in Queenstown

Mah Bow Tan, Minister of National Development, recently announced a list of changes to rules regarding the ownership of HDB flats. These changes were summarized by Straits Time reporter Fiona Chan in her Sunday Times article “Before you make your next move”. According to the minister, the curbs are aimed mainly at deterring property speculators and investors – especially those who may be overstretching themselves financially – from dominating the market and pushing up home prices.

The changes can be categorized into 3 types. Type (1) involves quenching liquidity. These include measures such as increasing the cash component of upfront payment and decreasing the loan-to-value ratio from 80% to 70%. Type (2) involves curbing the supply of resale residential units in Singapore. Such measures include extending the mandatory occupation period (MOP) for HDB flats. Type (3) involves discouraging demand for HDB flats. For example, Singaporeans and Permanent Residents (PRs) are required to dispose their private residential properties (overseas or local) within 6 months of purchase of a HDB flat.

High demand for public housing

At first glance, these rule amendments seem comprehensive. Yet a closer examination reveals many of its crack lines. Firstly, speculators and investors are faulted for the skyrocketing of HDB flat prices. With the MOP in place all this while, it is very hard to ascertain whether buyers are participating in the public housing market as speculators, investor or prospective resident. However, even if they exist, speculators and investors don’t contribute to housing demand as they are not long-term dwellers.

Taking in account that only Singaporeans and PRs are eligible to buy HDB flats, consider this: the PR population in Singapore grew from by 271,300 in 1999 to 533,200 in 2009 (an increment of 261,900) while the citizen population grew from 2,958,400 to 3,200,700 in the same period (an increment of 242,300).

While the magnitudes of both population growths are comparable, the PR population would contain a much higher proportion of working adults who have the financial capability to purchase a flat. In contrast, the growth in citizen population represents expansion of family units through childbearing. Such growth does not contribute to immediate housing demand. In another words, the explosion of the PR population has led to higher demand for public housing.

Yet high demand cannot result into high price without inadequate supply. On the average, the HDB releases 8,000 flats per year into the market while the Singapore residential population increases at about 50,000 per year. Assuming an occupancy rate of 3 persons per new flat, there is barely enough public housing to go around. As the sole provider of public housing, the HDB essentially determines the supply. It is also the price-setter of the public housing market.

Does speculation exist?

While speculation is hard to ascertain, it certainly does not mean it does not exist. In fact, it is hardly surprising if the buyers are part-dwellers and part-speculators. The reason for this is because the incentives in the public housing market are skewed towards speculations, which originate from 3 sources: (1) housing grants; (2) the CPF; (3) Low savings interest rate. Is it any wonder if Mah Bow Tan’s new measures don’t target the root of the problem?

Young couples enjoy a housing grant between S$30,000 and S$40,000 for their first-time purchase of a HDB flats. Originally intended to reward residents for starting families, such housing grants encourage speculative behavior as the market subsidy ensures a minimum profit margin should the flat owners decide to sell the HDB flat into the resale market. Moreover, it is unlikely that the stamp duty will exceed the housing grant. For example, the stamp duty of a HDB flat at a resale price of a S$500,000 is S$9,600.

The typical interest rate of a savings account at a local bank in Singapore is about 0.6% per annum. Even fixed deposits in Singapore offer interest rate between 0.68% and 0.88%. On the other hand, Singapore’s average inflation rate between 1999 and 2009 is 1.01%. In fact, inflation hit the peak of 6.6% for the year of 2008. Given that inflation in Singapore erodes bank savings, it makes a lot more sense to park one’s money in the real estate market or other investments.

Although the CPF is supposedly a forced savings scheme, it plays a key role in fueling speculation. Although originally designed for retirement financing, the CPF scheme was liberalized to allow Singaporeans to use their CPF money for the purchase of HDB flats. This provides an incentive for Singaporeans to tie their retirement finance to real estate investment. CPF’s interest rate of 2.5% (subject to cap) per annum cannot outshine the prospects of resale HDB market. From 2004 to 2009, the HDB resale price index grew from 110.4 to 150.8 points at a compound annual growth rate of 5.6%. Purchasing HDB flat is probably the most lucrative use of CPF money.

Will the measures work?

It is important to realize that speculation doesn’t contribute to aggregate demand. Instead, speculation boosts liquidity of the real estate market. In terms of buyers and sellers, this liquidity translates into Singapore residents being able to quickly sell their existing flat to finance the purchase of a higher-end residential property or repay debt.

By quenching liquidity and boosting the administrative barrier in the buying and selling HDB flats, what Minister Mah Bow Tan achieves is not cooling down of the public housing market but rather the freezing of the public housing market. In another words, any transaction involving a HDB flat is prohibitively discouraged. With lesser transactions, the public housing market may exhibit higher degree of price volatility and thus more uncertainty for both buyers and sellers.

Worst of all, Mah Bow Tan’s new measures may not reduce the market price of HDB flats. Even in the absence of speculation, the demand for public housing tends to be inelastic because there is a significant time lag between a change in price and increase in the supply of HDB flats. In fact, the emergence of dual-income families in the Singapore society has led to single-income families being priced out for a HDB flat. Given housing is a need, using the price mechanism to eliminate shortage without providing any technological substitute is in fact a very bad idea.

In conclusion, the Minister’s new measures do not lead to the betterment of the general economic well-being of Singaporeans and PRs. While giving the layman the perception of the Minister’s active intervention in the public housing market, no tangible benefits will manifest for any buyer and seller in the public housing market. When asked by journalists if the new measures had to do with the upcoming general election, Mah Bow Tan said, “Housing has been a hot topic for as long as I can remember. (It is a) hot topic before all elections, and will be a hot topic in the next election, whenever that is.” Indeed, these new measures are simply political maneuvers.


Photo courtesy of Wikimedia Commons