Housing Matters – What can Mr Khaw do?
One of the causes of widespread unhappiness in Singapore is the rising cost of housing, especially HDB flats. Mr Mah, the former Minister for National Development (MND) who looked after the HDB failed to placate Singaporeans with his asset-enhancing reasoning. For a couple of years, he had tried various market cooling strategies that had failed to simmer the boiling market. All eyes are now on Mr Khaw, the new Minister of MND who has a mammoth task ahead of him. While he needs to address the concerns of young home seekers, he must take care not to burst the property bubble. Most populist policies would send the prices tumbling and would have long term repercussion.
Before we even begin thinking about strategies to cool the market, we must start from the basics. We must first question the rational of having houses to begin with. I know this may sound silly but in reality, a percentage of our houses are not bought to house people but rather became an investment to make the rich even richer. In a country where food is scarce, one would question the morality of hoarding food supplies as an investment when people are starving. Therefore, in the same argument, where land is scarce and housing is considered a basic need, there should be policies to inhibit properties as a form of investment.
- Restrict the sales of property to residents only
- Tax heavily on second property
- Allow provision for home upgrading
- Remove the peg of new HDB flats to resale market
Unlike other countries where there are vast land waiting for development and foreign investments are necessary to secure capital for development, Singapore has the opposite problem. In a land scarce island, we already have difficulties supporting the basic needs of our own residents and we do not require foreign investment for development.
If we restrict the sales of properties to only residents (Citizens, Permanent Residents and EP holders), we would potentially cool the market as developers would price the private properties more sensibly as there would be lesser demand from the mega-rich from foreign lands treating our apartments or houses as investment. This would in turn affect the public housing property prices. After all, why should we let foreigners who have no interest in Singapore profit at our own residents’ expense? However, we should not go the extreme and deny foreigners and permanent residents from having a place of residence as they have legitimate reason to reside in Singapore and are actively contributing to our economy. Populist policies that are xenophobic would end up hurting the economy and Singaporeans.
Though Mr Mah had initiated some market cooling strategies, a report by OCBC suggested that almost half of Singaporeans own more than one property. Obviously decreasing the amount of loans a person can take did not stop the wealthier half of the population to buy properties as investment, hence driving up prices. Luxury tax in this case would be justifiable so that people do not use housing as a form of investment.
The current market cooling measures hurt a group of home owners who are seeking to upgrade their home as they would require more cash on hand in order to purchase a second property. We could address this issue using taxes for second property and waiver of taxes if the second property owners give up their first property within six month of their new purchase, or within six months upon receiving a TOP on property under development. This would allow HDB owners who had over the years become more affluent to move out of HDB and free up the cheaper housing for the rest.
The pegging of the new HDB flats to resale market had been a policy which had caused the prices to rocket. People are willing to pay a premium for ready-made houses instead of waiting and balloting. The premium is always a certain percentage higher than subsidised new HDB flat price. When market forces drive up the resale prices, demand for resale flats would drop and the prices would stabilise after a while. However, if we peg the new flats to a higher resale price, it would cause a shift in the demand market (due to the higher new flat pricing, the premium of resale flat is now acceptable) and equilibrium would never be achieved.
We assume that people are willing to pay a premium for resale flats due to either close proximity to their parents, no waiting time or fully renovated houses. If they are willing to pay up to 250k more on resale prices, then the market will overheat until equilibrium occurs. As housing is a basic need, people have no choices to buy houses regardless of price and the only factor is affordability. If the new HDB prices are peg to 75% of a resale unit (discount given by Government), we see the following below.
Current Price: 200k & Resale Price (extra 250k): 450k will lead to New Current Price: 337.5k & New Resale Price: 587.5k…
With this policy, equilibrium would be reached, assuming that the premium stays constant, when the HDB prices reach one million for resale and 750k. In reality, people would probably pay a percentage above the new HDB prices while keeping an absolute number (such as 250k in the example) in mind.
Without bursting the property market, the government could start pegging the price of a new HDB flat to a lower percentile of the existing resale prices. If the peg is low enough, the reverse of the above illustration will happen. The price of the resale will drop which will lead to a lower new HDB prices. An equilibrium stage will be reach when the resale market prices do not fall when the Government lower the HDB prices. This would reflect the true demand for resale marketing instead of the artificially inflated prices due to our policy. This is also the point when the Government must stop the peg to resale prices as this policy is not sustainable.
In the next 50 years, we would see a majority of the HDB flats going into the twilight years of their lease. Common sense would tell us that the prices would fall drastically as the houses would serve only short term needs (just like a long term rental) rather than a retirement home. Pegging the new HDB prices to the falling prices of older flats would make no sense by then. To prevent a drastic policy u-turn and be perceived as opportunists to make the most money out of our citizens, MND should take a long term view of its pricing policy now.
Before ending off, I would want to caution the Government that housing is a basic necessity and it should not be viewed as an investment asset. While the idea of asset-enhancement may seem like a good idea, we must be acutely aware that most of these assets would devalue sharply near the end of their 99 years lease. Looking far ahead, we could see young couples who spent their entire CPF on houses that would have minimal years left in their lease by the time they retire. That would leave them vulnerable as our life expectancy increases and our birth rates decline. Immigrants are not a solution to the problems. They may sustain our economy but they are definitely not going to look after our aged.