Wednesday, September 3, 2008

A deeper, longer-term problem?

Aug 30, 2008

The demand for subsidised rental flats has risen, a phenomenon highlighted by Prime Minister Lee Hsien Loong in his recent National Day Rally address. Is the surge temporary or here to stay, and can supply keep up with demand? Insight examines the issue.

By Goh Chin Lian

MR SHANKAR Ramu and his wife, both in their mid-20s, have been in the queue for an HDB rental flat for almost a year.

For now, the couple and their four-month-old daughter are holed up in a friend's two-room flat in Boon Lay.

Their year-long wait for a heavily subsidised flat is typical these days. In 2006, the wait would have been two to six months. Today, it is nine to 18 months.

The longer queue is a reflection of the current surge in the demand for HDB rental flats.

Officials, MPs and commentators have linked the surge to the recent rise in property prices.

They suspect that much of it has to do with people, especially the elderly, offloading their flats now, either to repay debts or simply to have more cash.

But experts also point to deeper social issues that may sustain or even increase the demand for subsidised rental flats in the longer term.

Having more budget rental options may be the way to ease this demand, they argue, but that will impinge on the current cornerstone of public housing policy for Singaporeans to own their homes. More on that later.

Cashing out?

FUELLING the current high demand for the rental flats, observers say, are those who bought their flats around the time when HDB prices peaked in 1996.

In the downturn that followed, many could not sell their units without making a huge loss.

But in the last year or so, the property market has picked up. Resale flat prices have rocketed.

The result, observers say, is that many people have been offloading their flats to repay debts.

Having done that, they find that they cannot afford to rent an HDB flat in the open market because rentals have also gone up.

Real-estate agency PropNex's CEO, Mr Mohamed Ismail, says they would have to fork out at least $1,500 to $2,000 a month to rent a three-room HDB flat. This is up from $700 two years ago.

The highly subsidised rental flat then becomes an attractive option.

Depending on their incomes, tenants pay roughly $30 to $180 a month for a one-room flat, and $60 to $240 for a two-room unit.

The rent is pegged at no more than 50 per cent of market rent. For those with little or no income, they may even pay less than 15 per cent of the market rent.

The profile of rental flat applicants appears to corroborate this theory.

Many of them do not appear outright down and out, even though they may meet the criterion of not earning more than $1,500 a month.

There is another eligibility criterion - they must not have sold a flat in the past 30 months - but applicants can appeal for this to be waived, on the basis of a lack of family support or other extenuating circumstances such as divorce and bankruptcy.

Of the 4,671 applicants last year, four in 10 were former home owners who were not affected by mortgage arrears or divorce.

If the current surge is indeed buoyed by higher property prices, it will be subject to the property cycle. This means that the surge will be temporary and will fade in a property downturn.

Mr Ismail, for one, does not see the current high tide of property and rental prices ebbing much in the next three years.

The pipeline of large-scale projects coming in during that period looks set to sustain the economy. More foreigners will be needed here to work, and they will rent homes and boost rental prices.

Demand for resale flats will also remain strong, partly because permanent residents increasingly find buying a resale flat better value than renting one.

'It makes no sense for them to rent a flat for $2,000 when they can buy an HDB resale flat and pay a monthly instalment of only $1,000,' he says.

However, a look at the number of rental flat applications for the last 15 years suggests that the link between property prices and the demand for rental flats is not so simple.

For instance, although the number of applications did decline in the period from 1996 (7,428) to 2000 (3,793), in line with property prices, the decline actually started in 1991.

The increase in rental flat applications began in 2001, even though the property market was still in the doldrums at the time, notes Associate Professor Tu Yong of the National University of Singapore's department of real estate.

So what other factors might have played a part in raising demand?

In October 2001, the Government announced that it would spend $170 million to upgrade rental flats.

This included having the lifts stop at every floor, repainting the blocks as well as installing new window and toilet fittings.

The result: These flats became a more attractive option.

The Government indicated last Saturday that it could put in place stricter rules to keep out applicants who may not be so needy.

One of them is that the HDB will scrutinise the assets, including private property, of siblings and children of applicants to ensure that they rely first on family for their housing needs, not on rental flats.

Another will require flat sellers to deposit part of their sales proceeds in their Central Provident Fund accounts.

These measures, if implemented, should go some way towards reducing the number of the not-so-needy people in the queue.

Expect even more demand

FOR many years, most of the people in rental flats were the truly needy - people with little or no income, no assets and no family support.

This is still the case today. There are 35,725 households (88 per cent) in rental flats who earn $800 or less a month; and another 4,293 (11 per cent) earning between $801 and $1,500.

They belong to Singapore's bottom 20 per cent of income earners.

Some 4,700 households also owe rent for three months or more.

HDB figures suggest that the majority of people living in rental flats today are older individuals, rather than poor, young families with many children.

Seventy per cent are residents above 50 years of age, and over 75 per cent are small households with fewer than three people.

However, over the next 10, 20 or 30 years, will the numbers in this group shrink, stay the same or grow?

Many factors come into play, including the state of the economy and the consequent level of sustained unemployment, as well as the efficacy of government policies and community efforts to help people break out of the poverty cycle.

Two groups are of particular concern: low-wage workers who have little education and skills, and the elderly.

Economist Tan Khee Giap reckons that current tenants of subsidised rental flats who are in their early 50s, with little skill and education, are likely to remain in the flats for the next 20 years.

He notes: 'These are the people who are the most difficult to be upgraded. They earn $1,500 and below, have low skills and low productivity. Such labour is in abundant supply in the region.'

Their children, coupled with a good education system, are their best hope of moving out of a rental flat, he said.

'Hopefully the next generation who are at least ITE (Institute of Technical Education) graduates wouldn't be in this position and will be able to command a higher salary.'

Another issue is the impending surge of seniors when the first batch of post-war baby boomers reaches 65 years of age in 2012.

The number of residents aged 65 years or older is expected to multiply threefold to 900,000 in 2030.

Particularly worrying are the lowly-educated women now in their 50s, says Dr Mary Ann Tsao, president of the Tsao Foundation, a non-profit group dedicated to helping the elderly.

They may have been housewives all their lives, with little CPF or private savings.

When they grow older and are widowed, chances are that they will sell their flats and move in with their children.

But if their relationships with their children or daughter-in-law turn sour, they may have to move out.

'They are not in dire poverty, but they would be better off in their own flat,' says Dr Tsao.

Why families cannot accommodate the elderly among them, and how this trend will play out in the years to come are complex issues.

Those who work with such families say that the elderly may want their own freedom, or the children may have their own financial burdens to bear.

The upshot is that many more people from this group may also want to join the queue for subsidised rental flats, if there are no good alternatives.

Currently, some can downgrade to a smaller flat or to a studio apartment.

Dr Tsao's view is that more solutions need to be explored, including the option to rent.

Some of the elderly may not want to continue to own a home. 'They do not have arrears, but they may not have a lot of cash,' she notes.

The Government's answer is a new plan for the elderly who own two- and three-room flats to sell part of their lease back to the HDB and receive $550 each month.

But it is still an open question if the scheme, to start from January next year, will provide enough cash, notes Dr Tsao.

She suggests providing rental options priced somewhere between those in the open market and heavily subsidised rental flats.

There could also be a subsidy for these elderly people which is not as large as that for the truly needy.

Re-examining home ownership?

SINGAPORE officials will go to Hong Kong next month to study the territory's rental flat system, where some 30 per cent of its population live in public rental flats.

This compares with under 1 per cent for Singapore.

Any suggestion of providing Singaporeans with more support to rent homes or providing public rental flats for those who are not as needy must contend with the overall policy of encouraging home ownership.

Mooted in 1964, the policy aims to ensure that Singaporeans have a stake in the well-being of the country, and will have an asset they can encash in their golden years.

As National Development Minister Mah Bow Tan noted in an interview with reporters last week: 'Our housing policy is premised on home ownership. Rental flats are there because we recognise that there is a small group of people who cannot afford to own flats.'

Indeed, every month, about 35 households move on from their rental flats to buy one, the HDB says.

Another 100 or so may move out to join their family members, or die of old age. Even so, 382 new applicants join the queue.

Experts say there will be people who would rather rent a flat and spend their money elsewhere, than invest in a home and struggle with mortgage payments.

Renting a flat is also more liquid. It does not subject a person's wealth to property cycles.

The issue of rootedness is also more than just about owning a home on the island and thus being willing to defend it.

Associate Professor Ngiam Tee Liang, from the National University of Singapore's social work department, said: 'We should not worry if it's not 100 per cent ownership.

'It does not mean that anybody who is in a rental flat will not be less rooted, just as it does not mean that those who purchase a flat will be more rooted, as they can sell their place and retire abroad.'

Can building keep pace with demand?

HDB has said that it plans to increase its current stock of rental flats from 42,800 to 49,860 by end-2011.

Asked about its projections, HDB says: 'We may build even more if need be. However, HDB remains committed to keeping home ownership affordable for the vast majority of the population. As such, we do not see the rental stock increasing indefinitely.'

PropNex's Mr Ismail notes that if the surge continues, the gradual increase in supply over three years may not be sufficient to meet demand.

He suggests a quicker way: Buy back old flats and rent them out.

Others have suggested converting more unsold smaller units for fixed-term leases.

Ultimately, the people who are waiting in line will be the ones who will bear the brunt of any mismatch of supply and demand.

Retiree Amy Tan, 75, had been renting a room in a friend's flat in Henderson Road while waiting for a rental flat.

'It's not easy to rent a room in someone else's flat. This thing you can't do, that thing you can't do,' said the single woman.

After a wait of 16 months, she finally moved into a one-room rental flat in Telok Blangah Crescent earlier this month.

Rentals in numbers

Number of households living in rental flats

Number of these households earning less than $800 a month

Number of these households earning between $801 and $1,500

Of those living in rental flats are aged 50 and above

Approximate cost of renting a one-room flat from the Government

Approximate cost of renting a two-room unit from the Government

No comments: