By Jeremy Chen
The Singapore government has introduced various measures to resolve Singapore’s housing issue. These include attempts to reduce excess demand by ramping up the supply of HDB flats, and introducing indirect price curbs such as ceasing to publish information on median Cash-Over-Valuation by town.
However, there are serious shortfalls in these measures. In particular, their effect can only be limited due to the combination of (i) the expectation of making at least a small profit on resale, (ii) the mark-to-market pricing policy for new HDB flats, (iii) the supporting effect that high prices for new HDB flats has on the prices of resale flats, as well as (iv) the feedback loop between (ii) and (iii). In fact, given the ramp-up in construction in the context of the Built-to-Order (BTO) scheme where flats are only built after firm demand is registered, in the absence of major global economic or geopolitical developments, it is reasonable to expect prices that are stable or trend upwards slowly.
Current tweaks might be viewed as being only partially effective, having stemmed only the runaway increase of housing prices, leaving the cost of public housing to remain merely expensive. Furthermore, the controlled ramp-up in construction via the BTO system generates a long lead-time of three to five years for young Singaporeans, amounting to a tremendous cost in terms of their “life plans”.
I’d like to submit, for consideration, an alternative public housing system that addresses, in a principled manner, the following problems in Singapore’s public housing system:
- Affordability (and reduced retirement adequacy)
- Availability of flats (long waits for buyers and eligibility for the “sandwiched-class”)
- Inability of the current balloting system to adequately consider the preferences of prospective buyers, forcing them to strategize during balloting
Furthermore, the proposed model is fiscally sustainable by design, achieving the above objectives without having to draw on external subsidies.
For the interested reader, I have published the full proposal on my web site, which includes an executive summary with the various components outlined in point-form. But before going any further, I would like to state that upfront that the following proposals will bear more than a passing resemblance to the proposals for public housing put forth by the Singapore Democratic Party (SDP), which I contributed to drafting.
One of the reasons for publishing this is that, in drafting the SDP plan, it was decided that major components on allocation and pricing would be omitted due to their perceived complexity. Unfortunately, in the proposed “overall cost-recovery” regime, no reasonable solution was put forth to ensure equity in final allocation and pricing outcomes. (For example, it would not be equitable to price a 4-room flat in Marine Parade the same as a 4-room in Bukit Panjang and allocate them by ballot.) This, I see to be a fatal flaw and would like to correct it so it will be clear that there are workable public housing alternatives to what the PAP offers.
The key aspect of the proposal is to introduce a new land use dedicated to “housing Singaporeans” in recognition the value of that objective to the state. The land use will be designed to largely eliminate speculative premiums associated with revenue generation/capital gains. Furthermore, it will only be applicable to public housing and a zero land cost component will be charged (to the HDB) for land thus zoned.
On land thus zoned, a class of “non-open market” flats will be built, which will be sold on the basis of “overall cost recovery” – non-profit generating for the HDB but with possible cross-subsidies between buyers. Resale will be possible only between lease-owners and the HDB at well-defined prices based on the consumed lease. A levy will be placed on rental revenue, and proceeds from the levy will be returned to the reserves (to be consistent with the land-use terms of reference). Estimated price decreases will be in the ballpark of 35% or 40% (depending on pricing principles) vis a vis current BTO flat prices. These estimates include estimated cost of reacquisition for redevelopment.
It is also proposed that a buffer stock of flats be built up to ensure flats may be obtained in a timely fashion and to establish a more humane balance of risk between state and citizenry (inventory risk v.s. “life cost”). Building up a buffer stock will also have subsidiary benefits that will be touched on at a later point.
It is also proposed to enable owners of existing “open market” HDB flats (so termed due to provisions allowing for open market resale and rental) to convert their flats to non-open market flats in return of a (partial) refund of the “land cost” component charged to them. As a form of “partial land acquisition”, this does not amount to a “raid on the reserves”. In business speak, conversion is retrospective unbundling where Singaporeans may correct past overpayment for rights (open market resale and rental) that were overpriced. More questions on this are answered in the full proposal.
The forgoing is consistent with the SDP proposals, albeit with revised exposition and estimates. The subsequent content will mostly touch on allocation and pricing, which was side-lined in the SDP proposals. Details on the compromise that was struck is mentioned in the full proposal.
Equitable Pricing and Allocation under Overall Cost Recovery
It is proposed that allocation and pricing of flats of various types be done through a VCG-based mechanism. Prospective buyers may indicate their interest in multiple flat types (locations, sizes, even floor ranges; instead of just one flat size in one location) and specify personal valuations for flats of each type. This mechanism will select prices that will provide the “best deal” (in terms of consumer surplus vis the above valuations) for each buyer, by offering prices that are as low as possible but still “clear the market“. This is because it uses the stated valuations to select “best deals” as opposed to extracting revenue. While this may seem auction-like, recall that allocation and pricing will be done within the framework of overall cost recovery.
The best way to understand how all a VCG-based mechanism works is to (i) think of consumer surplus as price under true valuation (the larger the gap, the better the “deal”), to (ii) think of demand for a specific type of flats as the number of prospective buyers that think of that flat type is the best deal given its price, and (iii) think of “market clearing prices” as a set of prices such that supply satisfies demand. This might be visualized as prospective buyers continuously checking every acceptable option and stating their interest in what they see to be the best deal while prices adjust to a point where supply satisfies demand for all flat types. In short, this is automated shopping less bargaining.
Due to such “best deal” characteristics, given an allocation, a buyer would not be interested in swapping what he was allocated and its price with those of another buyer, as this is the best possible price he would have been able to afford. As such, prospective buyers achieve the best personal outcomes by accurately stating personal valuations, in turn allowing economically efficient allocations due to accurate information being provided and used.
Such an allocation and pricing mechanism also significantly improves upon the existing balloting system and enables equitable allocation and pricing under a cost-recovery regime.
Furthermore, the previously proposed buffer stock also ensures that affordable flats are always available even if some highly sought-after flat types have their prices bid up. Recall, that those proceeds go towards cross subsidization. As such, the buffer stock also serves the purpose of ensuring affordability (for entire batches of flat types).
It is also useful to note that all these properties are well established in the economics literature.
Another major variation to the SDP plan, which would probably have been included anyway, is extending the public housing franchise to all Singaporeans, regardless of income. However, a progressive levy on household income above a given threshold would be applied and the proceeds used, in the framework of overall cost-recovery, to cross subsidize others.
Now, with all these components being combined (along with others in the full proposal), it will be clear (after some thought) that together, they make up a holistic and workable system that will achieve the objectives it sets out to achieve. Some details are not filled in such as exactly what subsidies/discounts should be made available to whom, but those may be filled in with proper visibility of the relevant data.
I am putting the above components together again and publishing them because I think there is a real need for actual innovation in public policy as opposed to veiling polemic with a thin veneer of policy commentary. I believe that the problem of Singaporeans “possibly not understanding” policy recommendations should be addressed by working to improve exposition rather than by omission. Also, though this charge will be inescapable, I would like to make clear that I am not claiming sole credit for the ideas (details on credit attribution may be found in the full proposal). My main interest is in advancing public policy.
Although rigorous market principles underlie it, the plan leans towards the ideological position of ensuring a strong social safety net through securing the provision of modern necessities – in this case, housing – and having the government absorb inventory risk to support Singaporeans in living their lives more fully. Certainly, there will be some who prefer a substantially more laissez faire approach, but let’s have a detailed plan on the table so it can be evaluated, discussed and compared.
On a broader note, Singapore needs workable alternative policies that address the big problems that citizens face (e.g.: housing, manpower, retirement provision, healthcare, education). Although polemic “raises awareness”, it is arguable that Singaporeans are well aware of the issues and have been aware of them since before the turn of the decade. What we, as a nation, need is a rigorous discussion of public policy.
We need to ask ourselves: Where are the policy gaps? What are the alternatives? What is workable? What should we do? On the issue of public housing, at least, I hope this work contributes to arriving at an implemented improvement.