Sunday, January 31, 2010

Low cost housing - a model for economic development

The Singapore experience is a useful lesson for developing countries in their economic development.

During the initial two decades, the Government built low cost housing for the people. It creates employment and gives the people a chance to work hard to own a property. The economic growth generated by the housing sector flowed to other sectors of the economy. The Government enforced a high savings rate to generate funds for this sector. It even implemented land acquisition to facilities the development. These were tough policies, but they produced a good outcome. This was leadership at its best - to set the priority for the country and to mobilize the people towards the priority goal.

The next two decades is a lesson on what to avoid. The Government decided to free up the property market under the "asset enhancement" policy, which created a bubble in housing prices. The ordinary people, who own only one property did not benefit from the appreciation, as they still need a place to live in. Only the few who emigrated or downgraded to a smaller property were able to enjoy the appreciation. Young people have to pay a higher price for a property which take away a larger share of their earnings.

The parties which benefited are the property developers and owners of land and capital. They enjoyed the  appreciation in property prices and become billionaires on the debt burden carried by the rest of the population.

Life would have been much better for Singaporeans, if the property prices had been kept stable, rather than be allowed to appreciate in the "free" market. Actually, there is no free market, as the supply of land is held by a few parties, properties are too costly to be transacted freely, and consumers have insufficient information  (leading to speculation caused by greed and fear). This is the worst case of a "free" market that is not controlled and exploited by certain parties.

Tan Kin Lian


Anonymous said...

For those who have not seen it, you might want to have a look at this scan:

It is a scan of a newpaper cutting from the 1980s, the period mentioned by Mr Tan in his second paragraph.

It very clearly and transparently shows the breakdown of the cost of HDB flats.

It is unclear why HDB was able to provide such clear and transparent breakdown in 1981 but is now no longer able to do so in 2010.

Anonymous said...

In 1981 public housing is really subsidized. Hence they are not afraid to show it.

In 2010, public housing has market subsidy. Meaning if the resale HDB flats reach $1 million per unit in the market and the govt sells new flats for $800K, the govt "market subsidise" $200K!

Like that how to show clear and transparent breakdown that it is subsidized? How to defend the undefensible?

Lye Khuen Way said...

"Asset Enhancement" was a big scam to me. Most of us will not be able to realise the "value" of our HDB flats, especially if we have more than one child.

Our National Development Ministry as the leading ministry had not been co-ordinating S'pore growth/ development of late. Beside the HDB, look at the Sports HUB & our Land Transport infrastructure. Sad.

Anonymous said...

Dear Aurvandil,
Ref. your last paragraph

" It is unclear why HDB was able to provide such clear and transparent breakdown in 1981 but is now no longer able to do so in 2010."

- Like a lot of Singaporeans, the truth is staring at you in the face

- the answer is obvious

- but like a child who first discovers that his father is not as honest and infallible as he thought, you refuse to see the truth

- subsidized public housing is another giant elephant in Singapore

- Here's my dictionary's definition of subsidy:
" If a government or authority subsidizes a public service, they make it cheaper for the public by PAYING PART OF THE COST "

- the dictionary makes no mention about benchmarking against a "market price"

- there are only two things according to the dictionary. The selling price and the cost price. i.e. the benchmark is the cost price.

- So the SELLING PRICE of new HDB flats should be less than the COST of building them

Anything else is "just another brick in the wall"
(Pink Floyd, English Rock Band, 1965-1996)

Anonymous said...

Dear Mr Tan,

Objectively, HDB prices are still AFFORDABLE (based on median income) as compared to many other countries. Remember that more than 50% of S'porean households own a house...will it be better or worse off for them if property price stays low?

Having said the above, low-income group and young family should be given more HELP to buy their house (financial education is key to prevent them becoming slaves to banks).

I seriously doubt the workability of a controlled low-cost housing model.

Overall, HDB has done a good job ih housing S'poreans but need some tweaking after years of complacency or a bit out of touch.

Anonymous said...

The policy failure of HDB is not affordability. Rather it is the destructive boom-bust cycle which which HDB has set up.

From 2003 to 2009, HDB built too few flats to meet the needs to Singapore's growing population.

This has resulted in a housing bubble which is now fully formed.

In response to the housing bubble, HDB is FORCED to build 3 to 4 times the number of flats it had previously built.

Needless to say, this WILL lead to a collapse of the property market.

I use the word "FORCED" because NOTHING can be done to stop the impending market correction. If HDB does not act NOW to close the shortage, the market will go even higher still and the damage will be even greater when the bubble bursts.

After boom-bust cycle has run its course, we will have a small group of people who would have made large windfall profits. We will however have a much large group of people who will looking at high paper losses and probably a high debt burden for the rest of the life.

This is a monumental policy failure on the part of HDB.

Policy sucess would have been building HDB flats in tandem with population growth so that there is stability in the housing market.

Anonymous said...

Here is an on-line definition of subsidize from Cambridge that you can verify for yourselves


subsidize verb
to pay part of the cost of something

- here again the word "subsidize" is linked to COST
- specifically, "to PAY part of the COST"

This reminds me of George Orwell and his two most famous novels;
1) Animal Farm
2) 1984

Mr Tan Kin Lian also mentioned these books in some of his postings.

In both these novels, George Orwell warned that the corruption and mis-use of language is part and parcel of command and control by leaders with sinister intentions.

Of course these are just books of fiction. Can never happen in real life ... right !!??

Lao Tzu said...

Why is that people can complain about high HDB prices?

1. the HDB prices are still at least 50% lower than private

2. majority (>90%?) already of Singaporeans already have their own flats and logically they should hope that prices go up?

so the ones complaining could be :
1. the remaining of 5-10% who have not owned?
2. or some government oppositions?


Unknown said...

Someone mentioned boom-bust cycle. This is caused exactly by government boards being unable to match market demand because they simply just cannot accurately determine market demand. With all things equal, as long as government is involved, there will be boom-bust. Especially when it comes to interest rates, the price of money, the effect will be felt throughout the entire economy.

I find it weird that people want subsidies. You buy now, you get subsidies. Before you buy and after you buy, you subsidise every other people that buys. What's the good in that? Money doesn't appear from thin air, it comes from you and me in taxes. Think of it this way. Instead of subsidising every other HDB buyer on Singapore, save that amount of tax that you would otherwise pay, save paying the bureaucracy for doing nothing, and pay for your house.

And please don't say that "oh, government just give discount on HDB flats only mah since it's so high priced, never cut into their cost." Remember, no contractor is obliged to build HDBs for the government. If the price is not right, they will build where the price is right in the private sector.

And then someone will mention about the million-dollar salaries. Ok, for that I'm on the same side =D I never liked government getting paid for doing nothing.

As for low-cost housing, there is the rent option if you're really broke. Speculation is driven be greed and regulated by fear, not both. Remove any form of market protection and fear do its work. Protect buyers or sellers, greed runs wild.

and Wise Lao Tzu :)

Tan Kin Lian said...

Reply to Lao Tzu

If public housing prices are expensive, relative to earnings, it does not matter than private properties are even more expensive.

The people who buy new flats may represent 5% of the population each year. In 5 years, they will amount to 25% of the population.

It will represent a lot of people who are paying a large part of their income towards their home. This is bad for the country and for the financial well being of the working people.

C H Yak said...

To Lao Tzu

(i) HDB flats used to be at least 66%~70% cheaper than private ones several years back. If it is 50% cheaper now as you claimed, it is at least 16%~20% higher in prices now.

(ii) To correct you "majority (>90%?) of Singaporeans already" are staying in their own HDB flats, not necessarily own them. They live with their parents or siblings. Even with a two-child family, one new flat would be have to be created.

Since birth rate has declined, the demographics mean more new flats should be readily available, since PRs can only buy re-sale flats. But the HDB prefers to release them as "higher quality" BTO flats to target more demanding purchasers. These new flats could never be the same or better than private ones. But prices had gone up drastically.

Anonymous said...

HDB stand for housing department board. What is its purpose? Yet the government used this department as a 'tool' to generate more money for them to gamble overseas.

Just as what lim ss has say today. Moderate intake of wine is good for health, but if too much, bad for health.

If pap can say that, why are they not doing something to prove it.

Anonymous said...

For Low Income Apartments, the United States and Canada, a commonly accepted guideline for housing affordability is a housing cost that does not exceed 30% of a household's gross income. Housing costs considered in this guideline generally include taxes and insurance for owners, and usually include utility costs. When the monthly carrying costs of a home exceed 30–35% of household income, then the housing is considered unaffordable for that household.

Anonymous said...

This is a very socialist point of view. See this list of low income housing non profits that could not exist in a purely socialist society.

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