How to Create A Housing Bubble

Why cooling measures and subsidies offer no solutions to rising prices and declining fertility


The question I’m most asked by Journalists is, “What are the issues this coming election?” The answer I most often give is that they haven’t changed that much from the previous election. There is really only one key issue this coming election. It is housing, it is immigration, and it is the cost of living. They are one because they are all part of the same.

When you take a closer look at supply and demand as it relates to HDB housing it becomes clearer that the issues remain the same because the government is a behemoth incapable of reacting fast enough to changing circumstances that it is itself responsible for.  An analogy might be a brontosaurus with several primitive brains in different parts of the body so that there is no central coordination. Immigration and housing are specifically two sides of the same coin. In its simplest form we have too many people and not enough housing.* According to Singapore in Figures 2010 ** the stock of HDB flats rose by only about 11,000 units between 2004 and 2009. At the same time the Singapore resident population rose by 461,000 between 2000 and 2009 and the total population rose by nearly a million.

Another journalist asked me for my opinion on the statistic, widely disseminated around the web, that 85% of Singaporeans own HDB housing. That figure originated with a senior civil servant responding to The Reform Party’s proposals for easing our HDB woes. Crucially it was that 85% live in HDB housing not own it. I re-educated that journalist who corrected the mistake but the wider public don’t make the distinction and a myth is peddled.

At this moment the resources are not available for me to calculate the exact statistic but the number of HDB managed units at end 2009 was 888,143. If we divide this by a resident population of 3.7 million this comes down to roughly 25% ownership.  Then you need to factor in children and joint ownership and we don’t know what the actual percentage of that 888,000 is rental. The actual ownership percentage is probably below 50% of adults. So the majority of Singaporeans would benefit from lower prices as it would enable them to gain a foothold on the property market or move to a bigger property.

However falling property prices can have serious consequences for the economy if they lead to curtailed consumption and negative equity.  We therefore need to be cautious about the release of new land and new building so as not to cause too rapid an adjustment.

So who is responsible for the high prices that the government is failing to cool? Well, the government is directly responsible. The government is the owner of the bulk of the country’s land and could therefore be said to have a vested interest in keeping prices high and rising. The government is also the owner of the HDB and furthermore through CPF it is the provider of the bulk of the nation’s housing finance. The HDB is directly responsible for not having coordinated its policies with the other government ministries responsible for immigration. It has been too slow to react to the imbalance in supply. It is not as though they could claim that it is an honest mistake and they could not see it coming. They only need to wait for a bus or attempt to get on an MRT as I do every day, to see how crowded we are!

This imbalance between demand and supply has been exacerbated by the government’s previous decision to allow 100% of CPF ordinary account balances to be used for housing together with the provision of subsidies in the form of the Housing Grant and the Additional Housing Grant. In August 2010 the government announced a number of cooling measures for the property market.  They could not however, resist extending the Housing Grant to buyers of DBSS and EC who have a monthly income of up to $10,000PM. In the longer term as well as reviewing some of the subsidies to housing we should seek to reform CPF and give people more choice over their savings.

It is difficult to believe that the government’s policy architects could demonstrate such basic economic illiteracy by trying to control demand for an asset while at the same time subsidising its purchase. Allowing 100% of CPF to be used for housing is effectively a subsidy since CPF savings are not taxed. This is undoubtedly a contributing factor to the rise in prices

On the other hand as said previously, the government as the major land owner has a vested interest in seeing house prices rise. I would liken the government’s cooling measures to pressing on a hosepipe to flatten a bulge only to see it pop up somewhere else in the pipeline. In fact it’s worse than that, since at the same time the government is constantly pumping more water into the hosepipe thereby increasing the pressure by giving first-time buyers more money to buy HDB flats and by allowing in so many foreign workers.

Any projected benefit from these subsidies for these first-time buyers is illusory since prices of new and resale flats have risen much faster than the subsidy. While it must be questioned why the government allowed owners of what is supposed to be subsidised public housing to own private properties in the first place, as an economist I do not see how stopping this will affect the real as opposed to speculative demand for housing. It is the former that is driving housing price increases. This stems from the increase in the population and will be true whether people buy or rent. If they cannot buy they will be forced into the rental market which will push up rental yields and this will push up prices. There’s that hosepipe again! It is economically nonsensical to argue that the demand for HDB housing can be controlled by measures restricting HDB ownership while the ability to rent flats to foreigners has not been curtailed. We have seen our population rise by over 25% in the past ten years. While the supply tap was reduced to a trickle, the vast surge in the number of foreign workers undoubtedly pushed up prices since they have to live somewhere and thus pushed up rents. HDB owners would be able to arbitrage between high rental yields and low loan rates. The government’s measures do nothing to address this.

However some of the measures will make the situation worse for a whole section of the population. Reducing the LTV ratio will merely create pent-up demand and mean that young people have to wait longer to get a foothold on the housing ladder. I probably shouldn’t mention possible solutions to the problems that young people have as that has created a whole generation of politically aware youth who in previous elections were apathetic. We already have a birth rate that is so far below replacement levels that our population would halve within a lifetime if we did not have immigration.

The solutions to the housing issue are complex in isolation but more so being intertwined with other issues. You cannot look at HDB in isolation from the issue of immigration and manpower policies and CPF.  We have had over a million new people come to live in Singapore in the last ten years with very little increase in the stock of public housing so it is inevitable that prices have risen sharply. I have said that we need to slow the intake of foreign workers and concentrate on raising the productivity and incomes of Singaporean workers instead. At the same time we should increase the supply of housing by releasing more land and allowing more private sector competition with HDB.  And we need to question why foreign workers and foreign students are being housed in HDB stock.

The whole question of subsidies is moot anyway because we have no market in land.  With government owning such a big percentage of the Nation’s land and being by far the biggest housebuilder there is no such thing as a free market. As a liberal free market economist, I believe that greater competition leads to more consumer choice, better quality and lower prices.*** In the longer term we want to create a genuine free market in land by giving HDB owners the right to buy out the freeholds of their properties.

Because it is a monopolist the HDB has failed dismally to keep up with the increase in population and the inevitable trend towards smaller families in the same way that they have failed to meet the needs of young couples.  For a long time HDB insisted on phasing out the construction of three-room units and concentrating on four- and five-room units where the profit margins are higher. Clearly we need to return to building 3 room units in greater numbers. If these can be built at lower cost (through private sector competition and the release of more land), then they would enable first-time buyers to own their own flat at a younger age and hopefully have a positive impact on our falling birth rate. At the same time we need to increase the percentage available for renting while restricting the rental of smaller HDB flats to foreign workers. By increasing the rental supply and allowing existing owners to buy out their freeholds (whereupon they would be free to rent their flats to foreigners) we could over time peg the HDB back to being a provider of rental and low-cost housing to those on low incomes. We could lower the age at which single people can own HDB’s and we must push young couples with babies to the top of the queue.  We could also experiment with part-ownership part-rental schemes like those in other countries. Measures such as these will have an effect on young people giving them the stability and financial security they need which will have an impact on fertility rates.

So the gap between supply and demand looks more like an ever expanding unbridgeable gulf. The government measures come down to giving with one hand and taking away with the other. It is also no good pretending that what happens in one market (rentals) will not affect another (house prices).  An economist would say that buying and renting are almost perfect substitutes. Over a longer time period Singapore needs to return the role of public housing to providing housing for the population at the lower income levels.  There is no reason why at our relatively mature stage of development 85% of the population have to live in government-supplied housing. This is completely out of line with other advanced countries where the ratios are generally between 20-40%.

Will the affordability of HDB be a big enough issue to swing the electorate this election? We’ll just have to wait and see.

*This theme of how the rapid increase of the population driven by immigration and the foreign labour policy (combined with not enough babies) has not been in the interests of Singaporeans is one I will keep returning  to in future blogs.


***In later blogs I will return to competition in the political arena where it is as important as it is in the business one. And I will demonstrate why Freedoms  are also a vital part of the equation in creating prosperity.

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