News Commentary: HDB flat prices and the lease decay issue

The problem of Lease Decay was created by the government. And a lot of the problems built on initial misstep (or outright mistakes) and the magnitude of the problem escalated beyond their expectations and control.

There were three problems or three stages to this ballooning problem.

1) They should not have allowed CPF savings to be used for resale HDB flat purchases. 

Using CPF to buy flats DIRECT from HDB was safe. The prices were controlled by HDB, and HDB were not profiteering. So there is no vicious circle or spiralling costs. Allowing flats to be sold was also not an issue. It allowed for population mobility, flexibility and geographic and other adjustments. 

However, allowing CPF savings to be used to purchase resale HDB flats created a distorted market, and with it, distorted price.


Why and how? If you had to buy a resale flat with cash, there is an opportunity costs in spending that cash on a resale flat. However, with CPF savings, the opportunity costs is so far in the future (your retirement) that it is almost always discounted. So in effect buying a resale flat with CPF is like buying with NO opportunity costs. Which means that buyers bid the sky and the heavens for a resale flat. Without a perceived opportunity costs, buyers were unrestrained in their bid to secure their "dream" home.

And constrained only by their balance in the CPF.

As a result, resale flat prices rose uncontrollably.


2) Having allowed the use of CPF for resale flat purchase, they should have tried to constrain or contain it subsequently

In the beginning, buyers were cautious and tested the waters and bid conservatively. If others had paid $50k for a flat, it would not do for them to bid $400k simply because that was what they had in their CPF. So they bid up the price, testing the limits. And found that there were NO LIMITS. 

So prices rose higher and higher. And the govt instead of realising that this was a problem that is fueled by CPF members lack of restraint over the use of money that had no (perceived) opportunity cost (and so is not real money) to them, and who are literally mortgaging their retirement, simply rode the rising prices, and euphorically called it "asset enhancement".


3) instead they aggravated it when they decided to peg the prices of new HDB flats to the "market" rate.

They gleefully (and ignorantly) took credit for the increasing prices of resale flats, and called it "asset enhancement". It was a bubble inflated by captive CPF cash that had only ONE outlet - property. But they were swept up in the euphoria, and seemed pleased with their own "cleverness".

Then HDB decided that they were missing out on the action. So to get a slice of the action, they pegged the prices of new flats to the market rate, thus ensuring a vicious circle and HDB flat prices spiralling out of control.

Two problems emerged at this point. One prices of HDB flats were fast rising out of the reach of many Singaporeans.

Two, to get a home, some young Singaporeans were transferring their CPF to older flat owners to finance their retirement. This seem like an autistic conspiracy until one asks the obvious question: would there be someone to transfer their CPF to the young Singaporeans today when they are old?

To be fair, the govt tried to correct some of their mistake. First they delink the costs of new flats from the resale market (eventually!).

Second, they tried to constrain the use of CPF for flat purchases. But their efforts were halfhearted and did not go far enough. To be fair, if they went as far as they should, it would have been a bloodbath and would spook the market. (What do you think would happen to the property market if CPF was not allowed to be used for resale or private property? If you said the market would crash, you are right. It would take YEARS if not DECADES to recover.)



Of course, part of the cause of the problem is due to imprudent spending by the public. Part of the problem is also the media playing up million dollar resale flat transactions that set up unrealistic expectations. But all the while the govt was playing up the "asset enhancement" line.

The media in SG is not allowed to play up stories of lottery winners. That rule should also apply to million dollar flat sales. That should also be considered a "lottery win".

That said, the govt has to bear the burden of the cause of this problem. Because after the effects of all these mistakes (1 - 3 listed above), instead of correcting it immediately (they did try subsequently), they leveraged on the effects of those mistake as "asset enhancement" and made political capital of it.

And now it is coming back to bite them.

Or not

Many of the angry comments on FaceBook are saying we should vote the PAP out of office in the next GE, for the way they have mishandled the Lease Decay issue.

Which drew this response:

So you vote out the PAP. In the next GE - say 2020. Then what? 

WP will solve the problem? Tan Jee Say will solve the problem? Kenneth J will solve the problem? Chee Soon Juan will solve the problem? 

Say they have a plan. What will Singapore be like by the time they are done "solving" the problem? Will their solution involve raiding the reserves to pay for all the SERS required for the 350,000 flats with less than 50 years of lease left? 

And isn't that the OBVIOUS solution - SERS every flat when its their time? I can think of it. You probably thought of it, I'm sure the opposition politicians can think of it. So the PAP cannot think of it? Because they are STUPID? Or stubborn? Or they are MORE concern about the bigger picture, the larger issues, the greater consequences? 

At least greater than political expediency. 

The problem is a big one - 350,000+ HDB flats is not a small problem. But it is not an IMMINENT problem. It is at least 20 - 40 years down the road. Your flat's value will not be $0 tomorrow. Or 2020 (unless you are one of those at Geylang Lorong 3, and those are not flats). 

But here's the best thing you can do for the PAP: Vote them out before they need to solve the problem. Then, it's not their problem! 

At least, not theirs to solve.

Which struck me as a BRILLIANT political strategy!

The PAP could dangle the need for a solution to the lease decay issue in front of voters saying, "this is a problem. It's not an imminent or immediate problem, but it is a problem. We are working on solving it. We are close to a solution. But we need your support so that we can carry out the solution. Vote for PAP!"

The unspoken message is, do you trust WP to solve this for you? Do you trust Tan Jee Say, or Kenneth J, or Chee Soon Juan to solve this for you? If you do, please vote us out. 

Or maybe I'm just engaging in melodrama.

A PAP MP has already mentioned the solution.


Solutions

Did you get it? She suggested, 

"... so rather than selling new land plots for private property, allow the private developers to top up the land lease of HDB flats for future development,”

Allow HDB precincts to be privately developed enbloc.

[Update Jan 2019: Solutions in summary (link)]