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The problem itself is not too difficult to understand.
In the last 20 years (1990-2009) median household income doubled while property prices more than quadrupled. When this happens, you borrow more to purchase your home and the cost of housing starts to cannibalize your retirement funds or your making it harder for you to achieve a good quality of life as a large part of your income goes to servicing your housing debt. As seen from what happened in Europe, Japan and USA, when housing prices rises too much relative to median income, it causes an expansion of housing debt (credit) that later causes severe economic problems when unsustainable housing prices fall. Over 45% of Singapore home loans have tenures exceeding 30 years[Link] and bank credit has expanded $460B from about $200B just 4 years ago.
.
SDP's proposed solution to our housing problems is to have HDB build a class of flats (NOM = non open market) sell it at the cost of building to Singaporeans. To prevent profiteering, owners can only sell the flat back to HDB, I suppose at a roughly the same price adjusted for inflation and depreciation. The whole idea is to eliminate the possibility of huge profits from all parties - the owner and the HDB. Details of the scheme can be found here - SDP suggests selling price of $70K for 2 room flats and $240K for 5 room flats. Owners are not allowed to buy private property when they are on this scheme.
This idea is not completely new. When former Minister Mah was confronted with the problem of rising HDB prices was asked why new HDB flat prices are linked to OM (Open Market) prices. He replied that if there is no link then flat buyers can cash out on the open market making massive profits. He then said that if HDB sold flats cheaply then buyers would have to sell it back to the HDB for the same price to prevent such profits....so this idea did cross his mind.
Because there is no possibility of capital gains on either side, the NOM scheme approximates to a highly subsidized rental scheme in which a 'buyer' locks on to low rentals and chooses when he exits from the lease and get all his capital back. Banks would be ready to lend to such a scheme since it is no risk as the value of the property is guaranteed - they would be willing to lend the full amount and have you service only the monthly interest (since the risk of defaulting on the principal is zero) ...in which case, it looks like a pure subsidized rental scheme, in which you pay rent in the form of interest to the bank. A 'buyer' can also pay the full amount for the property and stays in it for free until he is done with it...he can just return the flat and gets back his entire 'deposit' adjusted for inflation and depreciation back.
Unlike other govts that depend on land sales to fund its annual budget, the Singapore govt today collects enough in tax revenue to fund its budget without proceeds from the sale of land. In Hong Kong, the govt includes proceeds from land sales in its revenue and uses much of it to fund its social programs. The proceeds from land sales which includes land sold to build HDB and private property goes straight into our reserves "filling govt coffers" so there is no question the govt can afford NOM but should our govt actually do something like NOM? Are there better ways to solve our housing problems?
For the lowest income bracket, the HDB already provides rental flats with highly subsided rentals. There is no choice unless we are willing to see homeless people because the rising income gap, rising housing cost and stagnant incomes of low wage earners have priced a segment of the population out of property and rental market. For newly weds and new home buyers, the govt provides grants that are supposed soften the impact of high property prices but the way the housing market has risen in the past decade means these grants are not enough to quell the rising unhappiness.
Singapore has not always been in this unhappy situation when it comes to housing. In the 90s, home prices were indeed affordable. Prices rose but did not become detached from median income and at one point, things were going so well, the HDB thought it could stop building rental flats and tear them down because even those in the lowest income bracket looked like they could have a shot at the Singapore dream of home ownership. But the next 2 decades did not turn out as expected. Today this high housing prices is a threat to the middleclass ...and it has created a growing underclass that cannot afford to own or rent a place. There is no govt in the world that does not intervene in the housing market in cities and completely leave it market forces [public housing around the world]. In Hong Kong, 31% live in heavily subsidized rental flats[Link] and 17% in discounted flats putting roughly half the population in public housing. Without these schemes, you will see about 10-20% of the HK population priced out of the market for decent homes living on the streets or slum housing. The free market is not going to produce a social outcome acceptable by most if not all modern societies. The question is not whether you should intervene but how much intervention is right.
The PAP govt could have kept housing on the right track by adequately supplying the market, regulating mortgage repayment period, putting restrictions on foreign buying and containing the foreign influx. The PAP did little as prices rose and Minister Khaw stepped in to do some of the things that should have been done when when Mah Bow Tan was minister. Whatever the intentions of the PAP govt, the govt coffers filled up as prices rose and the burden on Singaporean families became heavier allowing critics to accuse the govt of building reserves at the expense of Singaporeans. It does not help that the Singapore govt does not use the money for social programmes so Singaporeans see no benefit of those fat coffers built from money 'extracted' from them - Minister Mah made a critical error of saying that selling HDB flats more affordably would be equivalent to "raiding the reserves"[Link]. This remark destroyed any remaining trust that Mah would step up efforts to solve the housing problem. Minister Khaw is now doing what Mah should have done years ago but it really looks too little too late - prices are already too high.
Prices are too high.... so lets solve it by supplying the market with cheap flats with zero cost of land ...make sure nobody profits from it to prevent abuse - what can simpler than this? Unfortunately, unlike preventive medical care, public transport and university education, for housing, you cannot supply all demand for cheap housing. Suppose, the govt decides to give subsidized or free mammograms to Singaporean women above 40 years old, they can set aside the money and resources to meet all demand. But for the housing market this is just not true - the idea of pricing land at zero of near zero is highly problematic. Suppose NOM gets implemented tomorrow. HDB sells 5-room flats in Woodlands, Tiong Bahru and Bedok at the cost of construction, say $200K. The demand for flats in Tiong Bahru will be much higher than the other 2 locations - and you can't meet all the demand for Tiong Bahru because you only have so much land in Tiong Bahru. In a market system, the price of Tiong Bahru flat rises to price out some people and push them to other areas - the difference between a the price of a Tiong Bahru flat and an identical one in Woodlands is price of land. Since you can't meet all demand, you can try to ballot or allocate using a FCFS (first come first serve) queuing allocation so the property goes to those who are willing to queue ...in the case of a ballot system it goes to the person who is luckiest. If you price the Tiong Bahru flat higher to solve the problem, you end up doing the same thing as the market in a less elegant manner.
The NOM scheme is so attractive existing home owners will want to switch to it at some point in time. A person owning a 5 room worth $600K-$800K on the open market will sell it, use $200+K to get a NOM 5-room flat live in it for "free" keep the remaining $400K to $600K, whenever he wants he can get out of NOM and get his $200K back. There is no reason why a person staying in a 4 room flat worth $400K on the market wouldn't want sell it to switch to a 5 room NOM flat costing $200+K and keep the difference Who wouldn't want such a deal? You will see queues building up for sure because such a scheme will attract all existing flat owners who would like to encash their flats at the high prices we are seeing today. The queues will get so bad the scheme will probably fail. You can try to fix this by tightening the criteria for NOM, say by allowing only 1st time buyers to get on-board There is already something similar that the HDB does for 1st time buyers in the form of grants however these grants are not big enough to push 5room flat prices down to the $200+K level to do this the govt would have to give grants upwards of $200K. Since there is no way to meet all demand for these flats, you need apply a criteria to limit the demand - you have to limit and it makes sense to limit it to 1st time buyers to give everyone just one round of benefits from the scheme. Such a scheme will shift almost all the 1st time buyers from 2-4 rooms flats straight to 5 room flats.
There are 27,000 new marriages and the HDB can build about 25-35K flats with the current construction industry resources. If the land cost per 5 room flat is 200K, the govt forgoes $5.4B that is supposed to have gone into our reserves.
Once you get the qualification criteria restrictive enough to limit the demand to match what the HDB can supply and fix the problem of unequal demand for various locations, it looks almost like a free lunch for newly married Singaporeans....at the expense of growing our reserves. If the PAP has been spending the money from the land sales on nursing homes, pensions for the old or medical care for seniors ....then NOM would mean that the govt has to cut down on these to balance its budget and you would think twice about implementing NOM. The money from land sales can potentially to fund other social programs and we have to ask ourselves how we can best optimize our financial resources to maximum the gains for our society.
NOM once implemented becomes almost irreversible. I can't imagine giving one batch such a generous scheme then taking it away from the next.
There are underlying causes of the real estate boom that push prices up so fast relative to median income. The money to chase property up has to come from somewhere...if not from the income of Singaporeans, where was it coming from? Easy credit in the form of low interest rates is one factor, another is foreign speculators/investors and the large influx of foreigners that drove up demand. All of these could have been contained by the govt but nothing was done until the problem became so large. If you look at the housing bubbles around the world from Japan to USA to Spain to Ireland, they have all fallen apart and taken the real economy along with it. One suspect our decision makers and economic planners would like to keep the wheel spinning a little longer by persuading us to keep the door open to the foreign influx - but history has shown you cannot keep bubbles inflated for too long,,,,the bigger the bubble the greater the damage when it starts to deflate. While it is commendable that the SDP put forth a proposal to deal with the high price of property, what we may be grappling with in the coming years may not be the unaffordability of high property prices but the unsustainability of today's high prices....we just need to open our eyes to see what has happened to the economic powerhouses of Japan and US, when the artificial prosperity from high real estate prices vanished.....
In the last 20 years (1990-2009) median household income doubled while property prices more than quadrupled. When this happens, you borrow more to purchase your home and the cost of housing starts to cannibalize your retirement funds or your making it harder for you to achieve a good quality of life as a large part of your income goes to servicing your housing debt. As seen from what happened in Europe, Japan and USA, when housing prices rises too much relative to median income, it causes an expansion of housing debt (credit) that later causes severe economic problems when unsustainable housing prices fall. Over 45% of Singapore home loans have tenures exceeding 30 years[Link] and bank credit has expanded $460B from about $200B just 4 years ago.
.
SDP's proposed solution to our housing problems is to have HDB build a class of flats (NOM = non open market) sell it at the cost of building to Singaporeans. To prevent profiteering, owners can only sell the flat back to HDB, I suppose at a roughly the same price adjusted for inflation and depreciation. The whole idea is to eliminate the possibility of huge profits from all parties - the owner and the HDB. Details of the scheme can be found here - SDP suggests selling price of $70K for 2 room flats and $240K for 5 room flats. Owners are not allowed to buy private property when they are on this scheme.
This idea is not completely new. When former Minister Mah was confronted with the problem of rising HDB prices was asked why new HDB flat prices are linked to OM (Open Market) prices. He replied that if there is no link then flat buyers can cash out on the open market making massive profits. He then said that if HDB sold flats cheaply then buyers would have to sell it back to the HDB for the same price to prevent such profits....so this idea did cross his mind.
Because there is no possibility of capital gains on either side, the NOM scheme approximates to a highly subsidized rental scheme in which a 'buyer' locks on to low rentals and chooses when he exits from the lease and get all his capital back. Banks would be ready to lend to such a scheme since it is no risk as the value of the property is guaranteed - they would be willing to lend the full amount and have you service only the monthly interest (since the risk of defaulting on the principal is zero) ...in which case, it looks like a pure subsidized rental scheme, in which you pay rent in the form of interest to the bank. A 'buyer' can also pay the full amount for the property and stays in it for free until he is done with it...he can just return the flat and gets back his entire 'deposit' adjusted for inflation and depreciation back.
Unlike other govts that depend on land sales to fund its annual budget, the Singapore govt today collects enough in tax revenue to fund its budget without proceeds from the sale of land. In Hong Kong, the govt includes proceeds from land sales in its revenue and uses much of it to fund its social programs. The proceeds from land sales which includes land sold to build HDB and private property goes straight into our reserves "filling govt coffers" so there is no question the govt can afford NOM but should our govt actually do something like NOM? Are there better ways to solve our housing problems?
For the lowest income bracket, the HDB already provides rental flats with highly subsided rentals. There is no choice unless we are willing to see homeless people because the rising income gap, rising housing cost and stagnant incomes of low wage earners have priced a segment of the population out of property and rental market. For newly weds and new home buyers, the govt provides grants that are supposed soften the impact of high property prices but the way the housing market has risen in the past decade means these grants are not enough to quell the rising unhappiness.
Singapore has not always been in this unhappy situation when it comes to housing. In the 90s, home prices were indeed affordable. Prices rose but did not become detached from median income and at one point, things were going so well, the HDB thought it could stop building rental flats and tear them down because even those in the lowest income bracket looked like they could have a shot at the Singapore dream of home ownership. But the next 2 decades did not turn out as expected. Today this high housing prices is a threat to the middleclass ...and it has created a growing underclass that cannot afford to own or rent a place. There is no govt in the world that does not intervene in the housing market in cities and completely leave it market forces [public housing around the world]. In Hong Kong, 31% live in heavily subsidized rental flats[Link] and 17% in discounted flats putting roughly half the population in public housing. Without these schemes, you will see about 10-20% of the HK population priced out of the market for decent homes living on the streets or slum housing. The free market is not going to produce a social outcome acceptable by most if not all modern societies. The question is not whether you should intervene but how much intervention is right.
The PAP govt could have kept housing on the right track by adequately supplying the market, regulating mortgage repayment period, putting restrictions on foreign buying and containing the foreign influx. The PAP did little as prices rose and Minister Khaw stepped in to do some of the things that should have been done when when Mah Bow Tan was minister. Whatever the intentions of the PAP govt, the govt coffers filled up as prices rose and the burden on Singaporean families became heavier allowing critics to accuse the govt of building reserves at the expense of Singaporeans. It does not help that the Singapore govt does not use the money for social programmes so Singaporeans see no benefit of those fat coffers built from money 'extracted' from them - Minister Mah made a critical error of saying that selling HDB flats more affordably would be equivalent to "raiding the reserves"[Link]. This remark destroyed any remaining trust that Mah would step up efforts to solve the housing problem. Minister Khaw is now doing what Mah should have done years ago but it really looks too little too late - prices are already too high.
Prices are too high.... so lets solve it by supplying the market with cheap flats with zero cost of land ...make sure nobody profits from it to prevent abuse - what can simpler than this? Unfortunately, unlike preventive medical care, public transport and university education, for housing, you cannot supply all demand for cheap housing. Suppose, the govt decides to give subsidized or free mammograms to Singaporean women above 40 years old, they can set aside the money and resources to meet all demand. But for the housing market this is just not true - the idea of pricing land at zero of near zero is highly problematic. Suppose NOM gets implemented tomorrow. HDB sells 5-room flats in Woodlands, Tiong Bahru and Bedok at the cost of construction, say $200K. The demand for flats in Tiong Bahru will be much higher than the other 2 locations - and you can't meet all the demand for Tiong Bahru because you only have so much land in Tiong Bahru. In a market system, the price of Tiong Bahru flat rises to price out some people and push them to other areas - the difference between a the price of a Tiong Bahru flat and an identical one in Woodlands is price of land. Since you can't meet all demand, you can try to ballot or allocate using a FCFS (first come first serve) queuing allocation so the property goes to those who are willing to queue ...in the case of a ballot system it goes to the person who is luckiest. If you price the Tiong Bahru flat higher to solve the problem, you end up doing the same thing as the market in a less elegant manner.
The NOM scheme is so attractive existing home owners will want to switch to it at some point in time. A person owning a 5 room worth $600K-$800K on the open market will sell it, use $200+K to get a NOM 5-room flat live in it for "free" keep the remaining $400K to $600K, whenever he wants he can get out of NOM and get his $200K back. There is no reason why a person staying in a 4 room flat worth $400K on the market wouldn't want sell it to switch to a 5 room NOM flat costing $200+K and keep the difference Who wouldn't want such a deal? You will see queues building up for sure because such a scheme will attract all existing flat owners who would like to encash their flats at the high prices we are seeing today. The queues will get so bad the scheme will probably fail. You can try to fix this by tightening the criteria for NOM, say by allowing only 1st time buyers to get on-board There is already something similar that the HDB does for 1st time buyers in the form of grants however these grants are not big enough to push 5room flat prices down to the $200+K level to do this the govt would have to give grants upwards of $200K. Since there is no way to meet all demand for these flats, you need apply a criteria to limit the demand - you have to limit and it makes sense to limit it to 1st time buyers to give everyone just one round of benefits from the scheme. Such a scheme will shift almost all the 1st time buyers from 2-4 rooms flats straight to 5 room flats.
There are 27,000 new marriages and the HDB can build about 25-35K flats with the current construction industry resources. If the land cost per 5 room flat is 200K, the govt forgoes $5.4B that is supposed to have gone into our reserves.
Once you get the qualification criteria restrictive enough to limit the demand to match what the HDB can supply and fix the problem of unequal demand for various locations, it looks almost like a free lunch for newly married Singaporeans....at the expense of growing our reserves. If the PAP has been spending the money from the land sales on nursing homes, pensions for the old or medical care for seniors ....then NOM would mean that the govt has to cut down on these to balance its budget and you would think twice about implementing NOM. The money from land sales can potentially to fund other social programs and we have to ask ourselves how we can best optimize our financial resources to maximum the gains for our society.
NOM once implemented becomes almost irreversible. I can't imagine giving one batch such a generous scheme then taking it away from the next.
There are underlying causes of the real estate boom that push prices up so fast relative to median income. The money to chase property up has to come from somewhere...if not from the income of Singaporeans, where was it coming from? Easy credit in the form of low interest rates is one factor, another is foreign speculators/investors and the large influx of foreigners that drove up demand. All of these could have been contained by the govt but nothing was done until the problem became so large. If you look at the housing bubbles around the world from Japan to USA to Spain to Ireland, they have all fallen apart and taken the real economy along with it. One suspect our decision makers and economic planners would like to keep the wheel spinning a little longer by persuading us to keep the door open to the foreign influx - but history has shown you cannot keep bubbles inflated for too long,,,,the bigger the bubble the greater the damage when it starts to deflate. While it is commendable that the SDP put forth a proposal to deal with the high price of property, what we may be grappling with in the coming years may not be the unaffordability of high property prices but the unsustainability of today's high prices....we just need to open our eyes to see what has happened to the economic powerhouses of Japan and US, when the artificial prosperity from high real estate prices vanished.....
