Sunday, April 24, 2011

HDB flats - asset or home?

Apr 18, 2011
Perils of asset enhancement for younger Singaporeans

NATIONAL Development Minister Mah Bow Tan stressed the policy of keeping prices of new HDB flats pegged to resale market prices, and said there was nothing wrong in giving Singaporeans an asset that grew in value over time ('WP's housing proposal irresponsible, says Mah'; last Friday).

Such an 'asset enhancement' policy sharpens the divide between the rich and the poor. Households and families that have already bought an HDB flat would be able to enjoy the benefits of having the values of their homes rise, whereas young people who are yet to purchase a home, whether single or married, would be left sitting on the outside looking in.

[So this is not the divide between the rich and the poor, but the old and the young.]

In effect, the real value of the savings of persons who have not purchased a home, or who do not own property, are continually depressed by the rising values of residential assets caused by the asset enhancement policy.

[Arguing for the old, their savings are literally dwindling. The young, can increase their savings because they have income. You're running for the train and it has pulled out of the station, but once you get on it, you can relax. It's okay to have just the perspective from the young, but in trying to solve the problem, you may want to consider more than one perspective and a solution that does not impoverish another.]

The asset enhancement policy has worked in the past because real incomes grew faster than the rate at which property values grew, so the depreciating effect on the value of savings was not felt because savings grew faster than property values.

However, in recent times, two effects have set in. First, the maturing of our economy has led to slower growth in productivity, real incomes and real savings. Second, the large influx of foreign workers has driven up the demand for rental property, which has in turn made property attractive for the high rental returns they give to investors.

The young today must work harder, possess more qualifications, and earn higher real incomes to be able to afford housing of the same size and standard that their parents' generation were able to afford as they started out. This raises the danger that late bloomers today will be mired in a poverty trap, unable to afford to own their own homes, or start their own families.

Tan Jiaqi

[Seriously, review your expectations. As the population increase, housing will get more compact. That's a fact of life in Singapore and many other high density cities. If you want wide open spaces, you'll have to migrate to places like Canada, New Zealand, Australia and stay in small towns. If you want your parents or grandparents opportunities (wide-open kampung spaces, or bigger flats) you must also consider that they lived in a different time with different limitations (lower quality of healthcare, sanitation, and general quality of life), perhaps greater limitations and fewer conveniences and advantages than the young today (microwave ovens for food preparations instead of cooking from scratch, internet, travel, MRT that in effect shrinks the country and the world).

Like most critics of PAP policies, critics of housing policies only see the problem from their own perspective which is dangerous, because opposition politician can just leverage on their singular perspective and win their vote. Solve my problem, screw the others.]

Apr 21, 2011
Better an affordable home, than asset enhancement

THE Government argues that by enhancing the value of HDB homes (read: increasing the prices of homes), it gives a valuable asset to Singaporeans and a stake in the country ('WP's housing proposal irresponsible, says Mah'; April 15).

I find this problematic on several counts. First, for the majority, the home is an indispensable basic necessity, not a disposable asset. When prices of homes increase, the average home owner is not able to gain from it - while he is able to sell at a higher price, it also means he has to buy the new home at a higher price. Only the rich who can afford more than one home stand to gain.

[True. I am of the same opinion. The increased value of my flat is meaningless to me.]

Second, it deepens the divide between the haves and have-nots, for those financially less well off either find homes slipping beyond their reach, or face the heavy burden of financing a huge loan.

[Again, the haves = the older, the have-nots = the younger.]

Third, the objective of asset enhancement through rising home prices naturally conflicts with the objective of providing affordable housing. It is tough to balance the two and implement effective policies.

[Agreed! Good logical arguments regarding contradictory objectives.]

Fourth, the argument that asset enhancement ties Singaporeans to the country holds little water. Anecdotal evidence suggests that people who emigrate cite 'unaffordable housing' as a reason among others. Ironically, the rising property prices here means emigrants can use the gains from the property to buy a 'more affordable' home in a foreign country. In fact, a majority of Singaporeans are displeased with rising home prices.

[Okay, now we start to slide into speculative territory. If indeed anecdotal evidence is reflective of actuality, then we would see many Singaporeans selling their flats and migrating to other lands where the proceeds from the sale of the flats will finance their purchase of sprawling mansions. And the prices of flats in Singapore will fall due to the HUGE wave of emigrants selling their flats. And if a majority of Singaporeans are displeased with rising home prices, they would not be asking for ever-higher Cash-Over-Valuation. In fact, the COV would indicate that most Singaporeans selling their flats think the valuation is a little low. The Vocal Minority that are displeased are those that are trying to buy a flat and are being stymied by high COV. That makes them vocal. It does not make them a majority.]

Instead of thinking of increasing prices to enhance the 'asset value' of the home, we should start to recognise that an affordable home is an asset in itself. Keeping home prices low and affordable means Singaporeans, especially young people planning to start families and buy their first home, can rest assured that they will always be able to own a place to call their home.

I think this would provide a more rooted sense of belonging than that of an expensive house. We need to recognise that we are deriving much utility from that house even if its resale price remains stagnant. We need to appreciate that while stagnant prices may mean little capital gain when selling the current house, it also means not having to pay through the nose for the new one.

Let us go back to the primary objective of public housing - to provide affordable housing to the majority of the people. Let us recognise that affordable housing is an asset in itself, both to the individual and the nation.

Lai Nam Khim

[The problem is as much about timing as it is about quantity. Housing and city planning is a complex issue that is not always easy to anticipate and predict. The other point is that PAP is loathe to mess with market forces as this generally means creating artificial stress on the market that will lead to unintended consequences. What the govt should be doing is to look at the eco-system that supports the housing market to see where are the structures that can be tweaked. Simple illustration. If tomorrow the CPF effectively disallows the use of members savings to buy a flat, what do you think will happen to prices in the resale market?

The Govt recognised this contribution to the housing eco-system and tried to moderate it by capping the use of the CPF for paying HDB flats to the valuation limit. They can try lower the cap so that all purchases will require a cash component.]

Apr 21, 2011
Govt deserves due credit, but what's the endgame?

I REFER to Monday's letter by Mr Tan Jiaqi ('Perils of asset enhancement for younger Singaporeans').

While it is true that many Singaporeans have benefited from the People's Action Party's policy of 'asset enhancement', it was not that obvious a policy back in the 60s to the early 80s as I know of no records available of such a policy being articulated and deliberately pursued.

Therefore, the Government is but taking credit for what was not overtly apparent until recently. That said, credit must be given where credit is due.

[Yes. In a sense the problem is of the Govt's own making, in telling the people, you have an appreciating asset. That started the whole treating the home as a cash cow farce.]

Notwithstanding the development, the relevant question all concerned Singaporeans must ask is this: 'What is the endgame or exit strategy for such an 'asset enhancement' policy?'

If we use the records of the price development of public housing in the past 30 years (which also impacts the private one), is it sustainable? If not, what is the alternative 'enhancement' model?

Have our policy planners and political leaders done an econometric model to find out what the consequences of such a policy are? What are the various shocks in different degrees of gravity that Singapore will face from time to time and that such a policy will cause to our social fabric, if not livelihoods?

Law Kim Hwee

[Good Questions. Here are some speculation on my part.

First of all, there should be no endgame or exit strategy. That is the strategy of exploitative dictators who want to run after their fraud or ponzi scheme has crashed. The home ownership programme is intended as an on-going sustainable policy and programme.

So far no HDB flats have ran out of their lease. All HDB flats were built on land with 99-year lease. HDB is only 50 years old. Some HUDC flats were privatised and these are eligible for en bloc sales, which when transacted usually means the developer will seek a top-up of the lease back to 99 year lease. Thereafter the site is a private development, subject to the lease expiring or a topping up of the lease as required and if allowed.

For HDB flats, many old flats have been re-acquired under SERS, and demolished, and the land re-leased on renewed 99 year lease for either HDB flats or private developments. That would be the fate of all HDB flats. Prudently, HDB should start doing this when flats are over 50 years old with no flats older than 80 years old (i.e. less than 20 years left on the lease). There is probably no issue of HDB re-acquiring the flats. The relevant laws are in place, the compensation process and benefits are very fair (perhaps even more than fair).

So over the years, HDB will recover and redevelop flats, ensuring a constant renewal of flats. It is also possible that for some flats, HDB or URA may one day be willing to offer lease top-up (will need some legal framework for this) to HDB owners. The easiest would be to SERS the block, top up the lease and re-launch the block after some upgrading or re-furbishment. But this would only be done if the condition of the blocks are in excellent condition and the development is adequately intensive.

But that is a minor variation on the theme.

Over time the HDB SERS programme will continuously renew housing to match contemporary lifestyle and housing demands. At the same time the privatised blocks will pursue en bloc redevelopment as and when opportunities present itself.

What about costs? Can it be sustained? Will we have million dollar flats that parents buy and children pay off the flats that were bought before they were even born, like in Japan?

Maybe. Except that the SERS will be a way to give the people a leg up. 

May 15 2013 update:
I find my tone from two years ago, unduly upbeat. 
While I am still optimistic, the situation will need some adjustment and these are in the works. ]

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