Housing a more inclusive Singapore

Making public housing more affordable with 50-year leasehold flats
By Tan Meng Wah, The Straits Times, 13 Jan 2012

PUBLIC housing policy has been the bedrock of the Singapore Government's social welfare programme from the start. Today, 80 per cent of Singaporeans live in Housing Board apartments that they own while a further 2 per cent live in HDB rental flats.

The quest for bigger and better housing also fosters Singaporeans' work ethic, encouraging hard work. HDB apartments gravitate from being just a roof over the head to also being an investment asset. The social contract between the government and the people becomes progressively underpinned by the appreciation of these assets.

In short, public housing policy serves not only social welfare but also economic and political goals. The whole strategy, however, is predicated on rising incomes so that the increasingly expensive public housing remains affordable - per capita income rose from $10,685 in 1980 to $59,813 in 2010. But fundamental changes in domestic conditions and the international environment urge a re-evaluation of that assumption.

As Singapore's economy matures, incomes are unlikely to continue growing by leaps and bounds from rapid industrial upgrading. The ageing of the population will see a rise in the number of wage earners with declining incomes who may be less able to learn new skills. The problem is exacerbated by more severe and frequent externally driven financial and economic crises which will hit low-income groups the hardest.

Defining a house as an investment asset helps the government justify the pricing of HDB apartments from a cost-based to a market-based approach. But when housing prices rise faster than income growth, low-income households are financially strained. For this group, a home may be more shelter than investment asset, yet they are made to pay market prices pegged to the affordability of middle- and high-income wage earners.

The strain on the low-income group can be seen in increased demand for rental housing. While public housing remains affordable on the 'debt-to-service ratio', the number of people facing difficulty in servicing their HDB mortgage has increased. Some were forced to sell their HDB apartments and are now looking for rental housing. With the spike in demand, the HDB has increased rental flat supply to 57,000 units by 2015.

But these rental flats come with stringent restrictions: a $1,500 monthly income ceiling and a 30-month wait following their HDB apartment sale. Two families are often required to share one rental flat - an arrangement hardly ideal when vulnerable children are involved. More importantly, these low-income households need a long-term solution, not just interim rental housing. However, policymakers should not try to alleviate inequality by introducing inequity - helping the disadvantaged must not be at the expense of existing homeowners.

One solution is for HDB to provide appropriately sized public housing that comes with a shorter lease. To make industrial land more affordable, the government recently introduced smaller plots on shorter leases - 19, down from the usual 30 or 60. The same can be done for public housing.

If homeowners buy their flats in their 30s or later, a lease of 50 years will be long enough to see them through their old age. Currently, studio apartments with 30-year leases are affordably priced, but available only to those aged 55 and above. They are not suitable for families with wage-earners in their 30s or 40s, and are also too small for a family.

Lower-priced 50-year public housing provides an affordable way for families to own a home that meets their needs, at monthly mortgage rates they can afford, with enough for their living needs.

To avoid an undue fiscal burden on the state, these 50-year leasehold public housing can be priced on a full recovery of construction costs and projected maintenance costs.

To be priced affordably, however, the land costs should not reflect full market pricing which is pegged to prices of apartments sold on the open market. Some formula that takes into account potential revenue foregone from the land sales can be worked out.

The different lease periods will help to minimise any adverse impact on the value of the 99-year leasehold HDB apartments. To curtail speculation, those selling their 50-year leasehold property will have their capital gains forfeited. In other words, they trade any potential capital gains for affordability and security.

In effect, this dual-track approach to public housing pricing allows the government to be both inclusive and equitable.

In this approach, HDB apartments for the poor are priced affordably based on costs but homeowners will not be allowed to profit from the sale of that property.

However, HDB apartments with better amenities and longer lease can be priced based on market forces and become investment assets for households with higher incomes.

Years of rapid growth have produced a dual-track economy in Singapore in which some benefit handsomely while others languish.

It is only equitable to develop a more inclusive dual-track public housing policy so that those who have benefited less would not be indirectly 'taxed' and made to pay for housing at the same rates as those who have been rewarded in the rat race.

Singapore is said to have reached a 'new normal' phase. However, the key forces shaping external environments - the US economy's deleveraging and re-industrialisation, the sovereign debt crisis and European competitiveness, and the Chinese economy's restructuring and rebalancing - will take several years to stabilise. During this period, Singapore's ultra-open economy is likely to be buffeted by the ups and downs of these evolving forces.

Hence, Singapore is really only at the start of a transitional stage before new social, economic and political norms can be said to have settled. A relook at public housing policy - a key part of Singapore's socioeconomic fabric - is thus timely.

The writer, a Singaporean, recently completed his PhD in world economics at Nanjing University.