“Asset enhancement” of public housing is a sick joke on the people

by Foong Swee Fong

To keep Build-To-Order (BTO) flats offered by the Housing Development Board (HDB) “affordable”, the government takes the resale price of public housing flats in its vicinity as a benchmark and then applies a subsidy.

In so doing, BTO prices are pegged to “fair market price”, albeit at a discount.

However, in addition to market forces, property prices in Singapore, including public housing, are significantly affected by government policies rather than the usual market factors like economic growth and interest rate — a peculiarly Singapore trait.

In 1981, the government announced that mandatory personal retirement savings called Central Provident Fund (CPF), which till then could only be used for purchasing HDB flats which are public housing, could also be used for purchasing private property.

Almost immediately, private property prices shot up, and that policy continues to support prices, to the delight of property developers and their associates.

In 1989, a slew of new policies was announced:

  • the income ceiling for the purchase of HDB resale flats would be removed,
  • Permanent Residents (PRs) would be allowed to use their CPF savings to purchase HDB resale flats,
  • private property owners would be allowed to use their CPF savings to purchase HDB resale flats for owner-occupancy and
  • people who had bought HDB resale flats would be allowed to use their CPF savings to purchase private property for investment purposes.

Almost immediately, prices of HDB resale flats shot up, and within 7 to 8 years, more than doubled.

Chart from Creatiwerks based on HDB open data

While the liberalization of the purchase of HDB resale flats did not lead to a substantial increase in private property prices initially, it nonetheless had a significant positive effect on prices in subsequent years, and indeed formed a solid support for private property prices.

According to the Straits Times of 8 October 1998, the 13 major developers made a combined net profit of S$6.2B in the eight years following the liberalization, despite paying S$7.6B for land.

The Singapore government has also long used foreign liquidity to regulate property prices by loosening or tightening rules on foreign investment. Even though foreigners are not allowed to purchase HDB flats, private property prices have a ripple effect on the public housing market.

So, while the government takes the price of resale HDB flats as the benchmark when pricing BTO flats, since it is “fair market price”, it is not entirely set by market forces — rather, government policies have a significant impact on it.

For example, if the government were to suddenly announce restrictions on PRs buying HDB resale flats with their CPF, the price may well crash. But having implemented the rule, the price is supported at a higher level and seemingly a “fair market price”, but in fact, is created by the government.

Thus, taking the high price of resale HDB flats as the benchmark, which to a large extent is manipulated, the government sets a high price for BTO flats, which comes back to affect the resale price in a self-sustaining loop that keeps prices at a lofty level, supporting the prices of not only private property but also state land.

The property game is closely watched by property developers, banks and big investors as it affects their profits. If the “virtuous” cycle of high prices becomes unfavourable, there are many policies that the property players can influence the government, which oftentimes is on the same boat, to apply. It would be naive to assume otherwise.

Thus the so-called “asset enhancement” of public housing is a sick joke.

It is predicated on the government inflating prices on ever more inflationary policies that benefit the corporate sector but oppress the people, especially the younger generation. As it is, many of them will have to spend the rest of their most productive working lives paying off their housing loans.

Even worse, the policy, while it was good for securing votes as many owners saw their wealth increasing as prices started from a low base, is nonetheless reckless because the wealth is but paper wealth, and the upward momentum can’t go on perpetually. What will happen when the government runs out of levers to boost prices? Or if they won’t work anymore?

For example, if the people are fed up because their salaries have not kept pace with inflation and rising HDB prices and punish the People’s Action Party (PAP) at the polls, which then placates them by lowering BTO prices to try to stay in power, and investors, both local and foreign, sensing that the government is succumbing to the wishes of the people and thus a downward property cycle is likely and exit the market, first in drips, then in droves, and later, despite the government loosening the rules for property purchase, can’t stop the downward spiral, will the bubble then collapse?

If it does, many people will be sitting on negative equity, and the economy will be deflationary for years, even decades, not unlike the lost decade of Japan, only that it will be worse since Singapore is a “property state” and a disproportionate chunk of the economy is based on real estate.

This is thus the fundamental contradiction of “asset enhancement” that we have blindly walked into — we have to keep inflating prices to support “enhancement”, but at the same time, the high price and rental of property is the Achilles heel of many sectors of the economy as well as a burden for the younger generation, yet if we attempt to deflate it, we may unwittingly crash the economy — damned if we do, and damned if we don’t. The government should focus its energy on how to walk us out of this conundrum instead of turning a blind eye to it and squeezing as much profit as possible out of it in the meanwhile.

Furthermore, unlike big countries where folks can sell their house in the more expensive city area and shift to quality yet affordable housing in the less-expensive suburban area to enjoy retirement with the profits, there are no suburbs in Singapore. To cash out, owners will have to downgrade to smaller HDB flats, which are not popular or emigrate.

Last but not least, most of us have only one house, and it does not matter if “asset enhancement” inflates prices to stratospheric levels — we still need a roof over our heads, and as Lawrence Wong has pointed out, prices will come back down, and eventually to zero. Thus if we do not cash out around the peak but continue to stay on as we only have one house, the paper wealth will disappear. It is wrong to say that Singaporeans are “asset rich but cash poor” as if they are actually quite rich because they are not, as the asset cannot be cashed out unless they have at least two properties.

“Asset enhancement” is thus a sick joke for the working class, but it is the ladder upon which real estate corporations, banks, and their associates make their profits, and many of these entities are linked to state-owned Temasek Holdings.

It is the right of every Singaporean to have a roof over their head at an affordable price. As such, public housing must be for ordinary Singaporeans to live in, period. It should never be made into an investment commodity and manipulated to lofty heights, which are then traded for profits.

And certainly, public housing should never be used as a base to boost private property for corporate profits.

This piece was first published on Mr Foong’s Facebook page and reproduced with permission.

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