By Dr Tan Meng Wah

By many measures, Singapore’s public housing program has been an astounding success. Despite being so, concerns over public housing price increases outstripping income growth have been festering for several years.

The core of the issue is whether public housing is more a public and a consumption goods or a private and an investment goods. The debate, though seemingly academic in nature, is more than an exercise in moot.

As the sole provider of public housing as public goods, HDB’s monopoly allows it to more effectively allocate limited land resources and achieve economies of scale. In the end, homeowners enjoy high quality housing at a reasonable cost.

The flipside of HDB’s monopoly over supply is that if public housings are defined more as private goods and prices are set based on market forces, then the absence of competition works to the detriment of homeowners. To maximize its return locked away in the form of reserves, the government has the incentive to price all land at the highest possible market prices.

Even though many early homeowners have indeed benefited handsomely from rising property prices over the past decades, changes in domestic and external environments suggest that the run up is unsustainable and a fundamental relook at the existing public housing policies is warranted.

It should not be assumed, for instance, that an investment in a HDB apartment will continue to be a sure runaway winner, given the already high resale prices. In the event of prolonged depressed market conditions, homeowners may even suffer losses. HDB resale prices, for example, were depressed for 13 years between 1996 and 2009 before prices recovered to their 1996 high.

The high mortgage payment also means that risk of default increases in times of depressed economic conditions or when incidence of structural unemployment rises.  The number of households in arrears of their mortgage payments have been growing from 21,800 out of 540 000 households or 4.0 percent of the households in 2002 to 25,000 out of 517,399 households or 4.8 percent of the households in 2003, and finally to 33,000 out of 420,000 households or 7.9% of the households as of Jan 2009. From 2002 to 2006, 360 households surrendered their flats after defaulting on their mortgage loan repayments. As of end of 2007, banks had also repossessed 895 HDB flats financed with bank loans since January 2003 when financial institutions were allowed to offer HDB loans.

At the same time, it is also risky to assume that the current cohort of young Singaporeans will enjoy the same favourable economic conditions and hence high income growth over the next three decades. The risks of being hit with economic calamities are not limited to only the low income. The share of managers, professionals, executives and technicians among the unemployed has been rising steadily, from 14.7% in 1991 to 27.8% on 2001 and 36.2% in 2011. There is also a rise in the number of unemployed older workers. The share of workers in their 50s and above among the unemployed tripled from 7.3% in 1992 to 22.4 in 2010. The trends point to the unsavory possibility that high mortgage commitments may drive default rate up in the future as the working population continues to age and earning power wanes.

Finally, high public housing prices also have an adverse impact on social trends such as marriage and fertility as well as on fostering a society with greater diversity and entrepreneurial dynamism.

In short, while policymakers should continue to strive for public housings to rise in value at a pace in tandem with economic growth so as to reflect their true market value, asset enhancement should by no means remains the predominant tenet guiding governance.

One possible solution lies in reconciling the conflicts between the treatment of public housing as public and private goods. New apartments can first be treated as merely a public consumption good at the point of purchase from HDB and then as a private investment good at the point of resale.

In other words, new flats are sold by HDB at cost-based prices which can still be differentiated based on a location premium. The land value is announced but is omitted to keep selling price affordable. After the minimum holding period when a homeowner decides to upgrade and sells his first HDB apartment in the resale market, HDB will have the first right to reclaim the pre-determined land value from the capital gain. In the event if the capital gain is less than the land value, the shortfall will be borne by HDB.

Take, for example, a new $410,500 four-room HDB apartment in a matured estate for a prospective homeowner buying his first HDB apartment at the age of 25 (See Table 1). Under the current scheme, a $369,450 loan stretching over 30 years would entail a monthly installment of $1,480 and a total interest payment of $163,350. Under the proposed new pricing model, the payment for the land price, assuming to be 50 percent of the selling price, will be deferred to the time of resale. Given the lower selling price, the homeowner will need a loan of only $184,725 which he can repay over 15 years with a monthly payment of $1,241. Total interest payment will only be $38,655 giving him a saving of $124,695 compared to the current pricing scheme.

Assuming that the homeowner sells the first unit and buys another four-room apartment 15 years later, the new scheme again allows him to enjoy interest savings of $208,395. If he chooses to retire in his second home, he can put off paying for the land value of $265,250 until after he passes away and the unit is sold. All in all, his savings from the purchase of the two HDB apartments amount to $598,340 comprising of $333,090 from lower interests payment and $265,250 from the deferred payment for the land value of his second apartment.

The savings from the proposed pricing scheme may vary depending on the various assumptions made. Notwithstanding, the benefits from the lower loan amounts and shorter loan periods are obvious regardless of the figures used. Table 2, for example, shows a summary of savings for different HDB house types in mature estate.

Firstly, lower monthly mortgage payments and the shorter repayment period of thirty years for two HDB loans instead of the sixty years under the current system substantially reduces the risks for homeowners. Even if they have to take a job that pay less in their later years, the second 15-year loan mortgage would likely have been fully repaid by the time they are 55. If not, the low mortgage payments could be easily taken care of by their healthy CPF savings. Next, under the proposed scheme, homeowners end up with a cushy nest egg to fund their retirement without having to downgrade. This is in stark contrast to the current pricing model which sees `asset-rich and cash-poor’ Singapore households having as much 75 percent of their retirement wealth locked in housing asset upon retirement compared to the 20 percent for average American elderly households. Finally, and more importantly, lower public housing prices will unshackle the younger Singaporeans from oversized housing loans during their early and more productive years and free them to either procreate sooner and more or to embark on entrepreneurial and other worthy pursuits.

To further boost savings for retirement, the government can channel more of the monthly CPF contributions to the retirement account, given the lower mortgage payments. Any capital gain from the sale of the HDB apartments bought under the proposed pricing model can also be mandated to go into the retirement account. This will also remove the incentives for households to cash in their apartments during periods of high property prices.

To prevent the system from being abused, current restriction limiting every young Singaporean to the purchase of only two apartments directly from the HDB should stay. To promote family formation, singles can be limited to only three-room apartments while childless couples can own four-room apartments. Only families with children will be allowed to upgrade to five-room or executive apartments. Grants for low-income households can still be disbursed to achieve redistributive or other social goals.

For the public housing market as a whole, the decoupling of selling prices between new and resale HDB apartments will likely break the mutually reinforcing price spiral between the two sectors. Resale prices may adjust to a more realistic level but a drastic fall is unlikely since resale prices are determined more by the state of the economy, the supply of resale flats and the demand from buyers, many of whom are permanent residents and are therefore excluded from buying new apartments directly from HDB.

As for the government, since proceeds from land sales are destined for the reserves, the deferred payments would have limited fiscal impact. More importantly, given that housing represents the largest expense for households, the low mortgage payments leave households with higher savings in CPF and empower them to take care of their own long term needs with minimal handouts from the government. There will therefore be less need for extensive redistributive fiscal measures over time. Lastly, by declaring the land valuation and various costs upfront, the proposed pricing model also enhances transparency and helps the government regain goodwill towards an otherwise well strategized and executed national housing program.

Singapore’s public housing programme has been exceptional in providing the people with a high quality of living over the past decades. However, the high housing prices have attenuated the abilities of households to take care of both their current and future needs.

Property investment very often involves one-way wealth transfers for what is essentially an economically unproductive asset. Erecting a firewall around public housing helps to insulate the homeowners from the vagaries of speculative activities driven more and more by liquidity instead of real needs.

Furthermore, Singaporeans henceforth are likely to face increasing uncertainty due to both domestic and external factors. In times of rising uncertainty, it is the government, not the people, who should assume the increase in uncontrollable and unforeseeable risks.

The proposed pricing model that treats public housing as private investment goods only at the point of resale helps to substantially lower both the burden and risks of homeowners without adding on to the short-term fiscal burden of the government and may even help to moderate government’s long-term fiscal outlay with reduced need for redistributive transfers.

In short, the proposed pricing model is a win-win solution that helps to put public housing on a more sustainable and equitable trajectory for both the homeowners and the government.

Table 1 : Savings that 4-Room HDB Homeowners Enjoy by Deferring the Payment of Land Value:

Table 2 : Summary of Savings by Homeowners for Different House Types in Mature Estates:

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Dr Tan Meng Wah is a Research Fellow at IPS and works in the area of economics and business.