The dilemma of housing Singaporeans

Christopher Pang

HDB flats in Clementi, Singapore

HDB flats in Clementi, Singapore

General Election 2011 is around the corner and during the past few weeks, we had seen the PAP and the Opposition debate on issues most likely to concern voters. Livelihood issues such as the cost of living, unemployment, wages and housing prices were raised. Some have made good logical arguments, whereas some made arguments with no common sense at all and some refused to debate after being challenged. Let us take a closer look at some of these statements which our politicians have made during this period of campaigning.

“Housing prices reflects the prosperity of a nation and the owner’s confidence of the nation’s outlook.” PM Lee during Question Time with Prime Minister (Mandarin)

Housing prices are merely references of transactions between buyers and sellers in the market. For every buyer, there has to be a seller. For every confident buyer, there is a fearful seller that prices will correct from the recent price increases. If every owner is indeed confident, there would not be any sellers in the market, therefore no prices. Developers will build condominiums and hold to a future date when they can monetize at a higher value. Of course rising house prices are mainly attributed to demand exceeding supply but there are a couple of reasons why there is a higher demand than supply which would be elaborated later.

“Well the Build to Order (BTO) is a very important initiative because it enables us to gauge the demand, the real demand for flats. So I think using the BTO programme where people have to commit to buying a flat before we build is helpful for us because we know it is real demand. I think this is one clear benefit. And we will also know whether we are oversupplying or undersupplying based on gauging the demand from the BTO flats.” Mr Mah Bow Tan

Governments should NEVER be in the business of housing. Despite all the statistics available and demographic studies conducted, our government have proven time and time again they are extremely poor at anticipating market demand and preferences of the market. They built bigger flats when market preferred smaller flats. They built more when markets needed less. To prevent such problems, they then decided on BTO because they are such a poor forecaster of market needs. In this situation, they will never face this problem of making losses because of their poor forecast. As supply will never exceed demand, prices will continue to escalate no matter what cooling measures are in place.

As long as you are willing to wait, the flat will be ready for collection within 2-3 years. PM Lee during Question Time with Prime Minister (Mandarin)

This is an example of how one policy screws another policy and yet the ministers remain oblivious to what is going on. In this case, the housing policy indirectly affects people decision to get married and also the birth rate. Gen X and Y are extremely particular about privacy and personal space. Staying with parents is most likely a no go given the possible friction when so many people are staying in a flat. There are many instances where children will stay close to their parents and give their parents keys to the apartment for easy access but not staying together.

The BTO programme inevitably delays the process of getting married and forming a family. The ministers see the problem as Singaporeans do not want to get married and give birth. One of the underlying problems is the higher cost of living attributed by housing, food and education. Today, in order to finance a mortgage, both husband and wife have to be working. Singaporeans have to work overtime and weekends without complaints for fear of losing their jobs due to increasing competition from influx of foreign workers.

On CPF, there are many levels to the answer. Every Singaporean should perceive the minimum sum component as his principal for retirement. It should only be used as when one is no longer capable of working. It should be part of your savings, not your only asset … If you consider recent purchases, you will find that many Singaporeans do not have to pay cash. They finance their mortgage with their CPF monies.” – PM Lee during Question Time with Prime Minister (Mandarin)

Savings is a choice between current consumption and future consumption. From a libertarian standpoint, CPF violates the liberty to opt for current consumption by forcefully directing income to savings. Furthermore, it violates property rights of the owner to use this money for any purpose by restricting the purposes and limits the owner can use it for. The intention of CPF is so that people have a decent figure to fall upon when they grow old. Unfortunately with the rising costs of living, the purchasing power of these retirees’ monthly withdrawal can hardly cope with these escalating costs.

CPF increases liquidity for two asset classes in Singapore, mainly stocks and HDB flats. As contributors to CPF realize their monies can only be used for certain purposes, it could possibly drive more risk taking and speculation within these two asset classes, creating a demand which otherwise would not have been sustained if without such diversion of funds created by the CPF scheme. If people has access to these money, they might start their own business, spend, or save elsewhere.

“If one is no longer capable of working, he can depend on monetization of his HDB flat. I believe every Singaporean owns a HDB flat and its value would be very high. High value is good thing to a home owner.” PM Lee during Question Time with Prime Minister (Mandarin)

Firstly, not every Singaporean owns a flat. Technically no one in Singapore owns a flat because we are effectively leasing these flats from HDB. Technical issues aside, full rights of ownership only begin after full repayment of the mortgage. If one is in arrears of the mortgage payment, the creditor, whichever bank or even HDB has the right to sell your property to get their monies back. Therefore the true “ownership” numbers is not as high as previously claimed by these politicians as the highest among the world.

Secondly if one is no longer capable of working, it does not necessarily mean he can monetize his flat given he could still be repaying his loan on his flat. Duration of mortgages can go up to 30 years today and supposed this random person is still repaying the mortgage but is no longer capable of working, he would not be able to monetize the value. How is he to monetize the value if he has nowhere else to stay then?

High price is only good for sellers and not owners. Value is not equivalent to price as I have explained in this article. Value is determined by every individual and price is determined by the market. Value is what a buyer perceived to have. Price is higher than value when seller sells. Value changes according to price changes as well.

On WP proposal to peg housing prices to income – “What happens to those people who want to sell, who are in mortgage arrears? It will be negative equity.” Mr Mah Bow Tan

When a home owner takes up a debt to purchase a home, it is similar to any other asset class which he has purchased or invested. He should understand the risk that is involved and that prices can rise and can fall. He should know in the event that prices fall below the amount he is invested in, he has to make up the difference. It is not Mr Mah’s responsibility to ensure that home owners who are also debtors remain in positive equity. He should take a hard look at the mission objectives of HDB, which is to provide affordable homes, not profitable homes.

Rising housing prices benefit 3 groups of people. The first group is home owners. It makes them feel wealthier. Did the HDB flat grew bigger in space or did an additional room suddenly appear in that flat? The fundamentals did not change for that flat/apartment. In fact, based on a lease agreement, the value of a HDB flat should be declining over the years, instead of appreciating. How did a SGD110,000 flat in 1987 ended up today a SGD500,000 resale flat after 25 years of depreciation and lease life? An under-supply, influx of foreigners entering the resale housing market and devaluation of our purchasing power are all contributing factors to the rising prices.

The second group of beneficiaries are property agents. Rising prices of property makes it easier to sell properties. Common sales talk include “If you don’t buy now, prices will continue rising and you will lose out on the appreciation.”, “You are throwing your money away to rent.” and “Home prices will continue to rise because land is scarce in Singapore, and if you don’t buy, there are many other potential buyers already waiting to view this apartment.” Furthermore, property agents take a percentage cut of the transacted price. The higher the price, the higher in absolute amount they earn.

The last group of beneficiaries are tax authorities. The tax authorities benefit in 3 ways directly and indirectly from HDB controlling supply of housing and with an influx of foreign workers. Firstly when there are influx of foreign workers, be it PRs or on work permit, demand for housing, be it rental or resale apartments would be higher. This drives the prices for both rental and resale flats up. The tax authorities benefit from (1) collecting higher stamp duties on higher transactional value, (2) higher property tax based on higher annual value as computed based on rental income and (3) higher incomes of property agents.

Photo courtesy of Wikimedia Commons.