Wednesday 5 June 2013

Rethinking Singapore’s housing policies

By Donald Low, Published TODAY, 4 Jun 2013

Public housing policies in Singapore have been highly successful in enabling home ownership for the majority of Singaporeans and in giving citizens a stake in the country. The provision of affordable public housing is perhaps the clearest manifestation of Singapore’s “growth with equity” story.

But the social contract that has enabled this is now coming under stress. In recent years, house prices have risen at a much faster rate than median or average incomes. Most agree the explanation may lie in part with wider economic and policy factors — rapid economic growth, more liberal immigration policies and low interest rates.

One response would be a combination of well-timed policy interventions. On the demand side, this involves prudential or anti-speculative measures aimed at cooling the property market. On the supply side, the Government will release more residential land and ramp up the development of public housing flats.

While these policy interventions are useful, a more fundamental rethink of public housing policies is also necessary. This is because alongside the cyclical factors, there are significant changes to many of the socioeconomic and demographic assumptions that guided the formulation of public housing policies in the first 40 years of nationhood.

For instance, while Singapore’s population was young and growing rapidly up to the 1990s, the growth of the population is likely to be more moderate (if we exclude the impact of immigration).

Singapore is also ageing rapidly. This will have far-reaching implications not only on the rate of household formation, but also on the types of public housing we provide, the community-based services that have to be developed to help older Singaporeans age in place, and the ways in which older households are helped to monetise their housing assets.


Beyond demographic changes, in the context of greater inequality, slower income growth for the lower and middle strata of society, and increased economic and employment volatility, it is by no means clear that home ownership is still the most appropriate way for the state to redistribute incomes or to provide a measure of retirement security to Singaporeans.

The primary way in which home ownership might contribute to retirement security is if house prices appreciate over time. The Government assumes that rising house prices represent an increasing store of wealth that can be unlocked by home owners to finance their retirement needs. But this assumption can be seriously questioned on at least two levels.

First, in view of how volatile house prices can be, it is by no means assured that the elderly who need to monetise their housing assets can do so at the right time in the housing cycle. As the population ages rapidly in the next two decades, a surge of elderly Singaporeans (the population above 65 is expected to more than triple in the next 20 years) seeking to monetise their housing assets might easily cause prices to fall sharply.


A second and more fundamental objection to the use of housing as a form of retirement security is that it is highly regressive and inequitable. The people who benefit the most from housing as a form of social security are those who have the means to own more than a single property.

The Government has a general aversion to inter-generational transfers through the fiscal system (of taxing the young to pay for the benefits of the old); this is why Singapore does not have the tax-financed pensions found in most developed countries.

But the current approach of relying on house price appreciation to finance the retirement of the elderly is, de facto, a form of inter-generational transfers too, since it is always the next generation that has to bear the burden of rising house prices. It is by no means obvious that the current strategy of providing retirement security via housing is more sustainable or superior.

The collapse of the housing bubble in the United States in 2007-09 also provides a cautionary tale of how an unhealthy fetish for home ownership, combined with relatively weak social safety nets and low interest rates, can be a source of economic and financial instability.

The former Chief Economist of the International Monetary Fund, Mr Raghuram Rajan, argues that the main governmental response to rising inequality in the US was to expand lending to households, especially the low-income, to support the expansion of home ownership. He suggests that promoting home ownership became a convenient substitute for the policies that really address the problem of inequality. It fuelled increasing leverage and drove financial deregulation, setting the stage for the collapse of the housing bubble and the financial crisis.


Policies to promote home ownership in Singapore are mostly still prudent and financially sustainable; Singaporean households are also not heavily leveraged in making their home purchases. Nonetheless, the US experience suggests that home ownership is not an unambiguously good thing that the Government should aim to maximise.

As the majority of Singaporeans became homeowners, policymakers may have also conflated the goal of home ownership with that of asset appreciation. This is mostly misguided.

While house price inflation provides a boost to consumption because of the wealth effect, this benefit has to be weighed against its costs. Not only do rising house prices cause anxiety for new households looking for a home, they also have socially corrosive effects.

For example, if house prices increase more rapidly than wages over a sustained period, people may begin to view financial speculation or investing in property as a more reliable way of securing income gains than through their own labour. This would erode society’s work ethic, increase status competition and envy, and divert society’s resources from productive activities to less productive and potentially destabilising ones.

The basic dilemma for our housing policymakers is that as a global city with liberal immigration policies for highly skilled individuals and open capital markets, high-end private property prices in Singapore will rise towards those in other global cities. These forces in turn exert upward pressure on mass market private home prices, and to some extent, Housing and Development Board (HDB) resale prices. The Government has to be a lot more deliberate and activist in managing both HDB and overall house price appreciation.


These structural changes suggest that a new paradigm in public housing is needed, and it should include the following features.

First and foremost, the board should once again embrace affordable housing for the majority of Singaporeans as its primary mission. While improvements in the design of HDB flats are desirable, they should not come at the expense of affordability.

The Government should strive to keep the house affordability index (which is the ratio of house price to the buyer’s annual income) well below four, preferably around three. New entry-level three-room flats in non-mature estates should be affordable for the 21st-30th percentile of households with annual incomes of around S$40,000. This suggests a new flat price of around S$120,000, which was the price of such flats about a decade ago.

Given the real possibility of slow median wage growth relative to house prices, the first order of business for the HDB should be to restore and maintain the affordability of housing for the majority of citizens. Indeed, the prices of new Build-To-Order (BTO) flats and recent announcements by the Minister for National Development strongly suggest that this is the direction the Government is already taking.

Second, the Government should discard its implicit goal of asset appreciation and end its reliance on housing as a de facto form of retirement funding. Relying on such a volatile market to deliver retirement security — where one of the key goals of public policy must be to insulate citizens from the vagaries of the market — not only creates too much risk to citizens, but is also highly regressive and inequitable.

The proper goal of housing policy should be to maintain price stability. The lesson from Japan’s lost decade in the 1990s and 2000s is not that a country is destined to stagnate because of its ageing demographics — but that a real estate boom often has long-lasting, deleterious effects on the economy.

Third, public housing policy needs to be rethought in the context of significant demographic and economic changes. When the population was young and incomes were rising across the board, public housing was an efficient and incentive-compatible way of spreading the fruits of economic growth. It was also a good way of helping Singaporeans achieve social mobility and build up their assets for retirement. But the rapid ageing of the population suggests that focus of government policy has to shift from enabling asset accumulation to helping Singaporeans unlock and monetise their housing assets.

Just as importantly, slower income growth and relative wage stagnation for a sizeable segment of our workforce highlight the need for more social transfers and direct redistribution via the conventional route of taxes and social transfers. Public housing can no longer effectively serve as the de facto instrument of income redistribution.


Fourth, the Government also needs to ensure an affordable rental market for a wider range of households (and not just lower income groups).

The undersupply of housing in recent years, combined with liberal immigration policies, has made rental housing in Singapore increasingly unaffordable. This risks making Singapore unattractive to the middle-skilled immigrants that it wants to attract. The relative dearth of affordable rental options also makes it harder for young Singaporean couples to settle down and raise families.

Given the country’s global city ambitions and its desire to encourage Singaporeans to marry and have children, the single-minded obsession with home ownership is becoming quite anachronistic. More than before, housing policies need to offer a greater variety of options to meet the increasingly diverse needs of its population.

All the changes proposed here require us to discard our old paradigms about housing, and recognise that the context Singapore faces today is quite different from the context it faced in the 1960s when the country’s policies and institutions in housing were first established.

While these worked remarkably well in the first 40 years, they are becoming increasingly ill-suited for the country in light of rapidly changing social, economic and demographic realities.

This gap between what the context requires and what policy delivers cannot be closed simply by the property cooling measures (there have been seven rounds in the last two years); nor are the laudable efforts by the Government to increase supply and maintain the prices of new BTO HDB flats likely to be sufficient.

Instead, what is required is quite a fundamental and thorough relook at the goals and principles that underpin housing policy in Singapore.

Donald Low is Senior Fellow at the Lee Kuan Yew School of Public Policy and a vice president of the Economic Society of Singapore. This commentary is abridged from a longer article first posted on IPS Commons.

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