Tan Kin Lian's Blog: Low cost of living

Thursday, February 11, 2010

Low cost of living

I watched a TV program. It featured a worker earning $2 a day in a poor country. The worker said, that the $2 was additional income to the family, who depended on farming as their primary livelihood. Although they are poor, they do not have any financial stress, as they have low cost of living.

I recall the conditions of Singapore in the 1960s and 1970s. HDB flats were sold for $15,000 to $35,000, representing about two years of average earnings. Most people could find jobs that paid sufficient wages to pay their flats, accumulate savings in the CPF and live comfortably as long as they are willing to work. They have better financial security.

The financial condition worsened after 1980 when public housing was allowed to appreciate under the "asset enhancement" policy. It is now a financial burden to buy a modest HDB flat which has to be paid with a high proportion of the earnings when jobs are no longer secure. This has caused a lot of financial stress.

I believe that it is possible to rebuild a new economic structure that gives more financial security and less financial stress.

Tan Kin Lian

20 comments:

Anonymous said...: That's why on a purchasing power parity comparison, Singapore workers are quite pathetic, especially when superimpose on the high per capita GDP.

Our income distribution is not "normal". Instead it is a black swan event -- very fat-tailed.; February 11, 2010 12:12 AM
Anonymous said...: REX comments as follows,

i think it is impossible to "build a new economic structure" given the situation the govt has led us into. At this juncture, one can't possibly overnight reduce the hdb prices 50%. Those who paid the high prices will be very unhappy, it won't be fair to them. At the most a price freeze can be imposed. But the price is still very high and the govt encourages in fact 30 year loans to give the illusion of "affordability".

In summary, i think it was a grave mistake to peg hdb prices close to private market prices and not so much related to the cost which had been incurred during construction. It betrays the mission of hdb to provide mass housing.

We have already gone over the cliff i can't see how we can turn back, even if we have a different political environment. However i wish i can be proven wrong if someone could suggest a solution...

REX; February 11, 2010 7:35 AM
Tan Kin Lian said...: Hi Rex

China has "one country, two systems". Their challenge is even bigger than ours, and they have succeeded. Be optimistic.

I know how it can be done, i.e. to build a new economic structure, but I do not wish to discuss this point. I only say that "when there is a will, there is a way".; February 11, 2010 7:50 AM
Anonymous said...: REX comments as follows,

In the case of china because of its immense size, it was quite possible to have one country two systems, e.g a rural landscape where life is cheaper, and an urban landscape in the huge mega-cities. In Singapore, everywhere you go it is hdb hdb hdb hdb hdb so how can the policy of two-systems be applied over small land and also retrospectively..

could you share a little more of your vision on how it might be possible to improve the status quo... It will be very interesting to see things in a new light..

REX; February 11, 2010 8:20 AM
Tan Kin Lian said...: Hi Rex

It is possible to offer new HDB flats based on a price that is related to average earnings. The owner will have to sell the HDB flat back based on the same formula. The price will appreciate based on increase in average earnings (but reduced by depreciation) and is not tied to speculative market forces.

People can choose to buy these controlled price flats or market price flats or private property.

HDB can also make more flats available for rental. I think that people should have the option to rent flats at reasonable price (also linked to earnings) rather than at speculative market price.

These points were discussed in my blog previously. It is good to resurface them.; February 11, 2010 8:38 AM
C H Yak said...: As I suggested earlier in a separate post, it is possible to practise segmentation into 2 markets.

I believe it is practical and is fair to both existing and new HDB purchasers.

And the majority who live and wish to live in HDB flats can opt to purchase at :-

(i)"managed" prices tagged to actual costs which is made affordable for the majority by buying and selling back to HDB only, or

(ii)the "secondary" market which is a free market operating on its own market pricing and HDB owners can opt to take their own risks in this market if they prefer.

This is much better than "forcing" all to join the speculation due to a restrictive national housing policy which is designed to support unrealistic "asset appreciation" but creating a "bubble" most of the time.

I support Mr Tan's statement "it is possible to rebuild a new economic structure that gives more financial security and less financial stress.".

I believe there is a natural resistance to accept CHANGE by any incumbent Govt. due to its reluctance to see a setback in its current policies.; February 11, 2010 10:13 AM
Anonymous said...: basic necessity like housing, food, medical care should be regulated. this ensure ppl can not denied of these basic services. There can be another range to provide more luxurious forms of such services.; February 11, 2010 10:52 AM
Anonymous said...: REX comments as follows,

in response to kinlian's suggestion:
I think that's a very good idea especially for new entrants to the market.
However, I worry about the huge number of existing owners of hdb who paid high prices to-date. For example, existing owners in say Sengkang had paid $400K (just example) for a flat under the current policy. Then the new policy as you suggested is implemented, and a new block also in Sengkang, is priced at $200K (as per based on average income). So the new entrants will no doubt be very happy. But the chap who was stuck with his 400K flat... he try to downgrade and sell the flat at even 350k .. no takers.. since it is the same location, same environment just different scheme.. he can't get a buyer. You make 10 people happy you make 50 people unhappy, just a guess. It is hard for this scheme to work in singapore bec we have no more land. Any new flat under the new proposed scheme will definitely be not too far from those under the current scheme; this makes market segmentation very tricky.

In China you can delineate a district 10km away from those under the old scheme and it is possible. Here, we are just too small physically so segmenting the market in such way will put a lot of people on the old scheme at a serious disadvantage. The proposed new scheme could work if the market is not mature yet, and the number of new entrants are much higher, or if the physical size of the country is larger...

eh sorry i still felt that the govt already pushed us over the cliff, cannot climb back or split up.. we all in hell already... for 30 years of hell ...

rex; February 11, 2010 12:02 PM
Tan Kin Lian said...: Hi Rex

I think that the two market already exist. In the past, there was a big price gap between private condo and HDB flat, even through they are in the same location and have almost the same physical attributes. The difference is in the condition on re-sale.

Now that "normal" HDB has moved towards private prices, the "controlled" HDB will have its separate market. Rather the "normal" HDB should continue to command a premium over the "controlled" HDB.; February 11, 2010 12:31 PM
Anonymous said...: Just a thought, if you think that HDB flat prices should be controlled, then, it's owners will not bother to maintain them well enough or to renovate the flats when they are old because they have to sell back to HDB at a predetermined price. We will have run down flats and maybe even ghettos because there is no incentive to maintain your house. What do you think Mr Tan; February 11, 2010 1:10 PM
Anonymous said...: There is a Chinese idiom 骑虎难下.

Meaning when you ride a tiger it is difficult to come down without the risk of being eaten.

I think high property prices is like 骑虎难下.; February 11, 2010 1:22 PM
Anonymous said...: We have already gone over the cliff i can't see how we can turn back, even if we have a different political environment. However i wish i can be proven wrong if someone could suggest a solution...

To unwind, the following needs to happen first.
1) More opposition in parliament
2) Reduce new HDB prices NOW by not pegging to so-called market rates.
2) HDB enforcement to weed out illegal sublets, longer MOPs.; February 11, 2010 1:50 PM
C H Yak said...: To Anon. 1.10PM

+++Quote+++

"Just a thought, if you think that HDB flat prices should be controlled, then, it's owners will not bother to maintain them well enough or to renovate the flats when they are old because they have to sell back to HDB at a predetermined price."
+++Unquote+++

I don't think this is an issue. Renovation and installed fixtures, e.g. air-con, depreciate over time and it will not appreciate. At most, just attach a small price tag to such fixtures.

If a 5 Rm flat cost $50K to renovate, depreciate it over 10 years or even 5 years.

In fact most houseowners would prefer their own style of renovation. If HDB flats are made affordable, I believe owners will spend reasonably on their perferred style of renovation.

In fact the HDB used to put in standard tiles, doors and fittings for purchasers, but has changed policy and is now adopting the "Opt Out" scheme for finishes in the sales of new flats.

It was actually a waste of purchasers' monies. What was newly installed by HDB was hacked out and new renovation done by purchasers. The HDB also get the BCA to conduct quality checks on such finishes & fittings, it all adds up to the high costs and pricing for purchasers...then new purchasers hacked them out.

If sellers are indeed so proud of their renovation then perhaps join the secondary "open" market as I suggested and sell it with a premium price. Do not join the HDB managed 1st market if they are confident to fetch a premium price.; February 11, 2010 4:26 PM
Anonymous said...: REX comments again,

re. TKL comment quote "In the past, there was a big price gap between private condo and HDB flat, even through they are in the same location and have almost the same physical attributes..."

that is not quite true... condo has private swimming pool, condo has security guards, condo has private parking not for general public, condo has private gardens and green spaces. So there is this product differentiaition with hdb flat resulting in price differential of two markets, within the same location. But in your suggesting you are proposing hdb price-controlled vs. hdb un-controlled as a way to segmentising.... this can't work because truly, there is no physical difference between the former and the latter. It can only work IF the "hdb controlled price flat" is in a new location far away. (thats why i said it works in china where you can implement one country two system bec it is so huge). If the proposal is forced through, honestly i believe those who had earlier purchased the hdb uncontrolled free market price in the same location as the one who has the chance to buy the cheaper model, will curse the new policy.. bec it's too late for him to take advantage of the better scheme and he's stuck with the xpensive one.
And there is the maintenance issue as mentioned by anonymous above.

Finally I don't think that if we vote in the opposition, hdb pricing policy will be solved. You cannot simply just reduce 50% overnight because it is not fair to those already bought their flats.. the number is huge... I agree with "anonymous" comment - it is a case of 骑虎难下. Damn if you don't, them if you do, we have been brought to hell by the incumbents, I still don't see how we can turn back the clock without harming others. But of course it is a good idea to keep brainstorming and believing that there is a way out.
REX; February 11, 2010 8:29 PM
Anonymous said...: Very easy lah...hdb prices are govern by gov policy, plus tiny tiny bit of so-called "free mkt force" in sg...gov can easily micro or macro tweak it (soft-landing/hard-landing) to achieve desirable price for sg. Our current problem is that the gov wanting high hdb price..It is all in their policy. As for the ways to control, need not nag further in this blog, our highiest paid ministers got all sorts of creative & out-of-the-box ideas and solutions.
Our current problem is not how to we lower/control the hdb price, but what our gov r having in their minds!!!; February 11, 2010 9:21 PM
Anonymous said...: Talking about HDB flat being pegged to market price, I'm very puzzelled how HDB determined the selling price of my CCK flat bought in 1996.

My unit:
-highest floor,
-Design & Build Plus by HDB architect,
-not-so-good location as it is serviced only by feeder bus,
-ugly ceramic tiles,
-NO fixtures like kitchen cabinet, wardrobe & etc unlike those at Sengkang & other locations
-have to wait 3 years to receive keys

-cost $425K!

At least those at Sengkang are of much better quality and come with fixtures. Sengkang has also enjoyed many good amenities in recent years.

At least those at Toa Payoh are on 'prime land'.

HDB valuers for resale flats have never valued flats in my development (17-blocks) above what we paid for to HDB until recently. Many of my ex-neighbours who were original owners gave up waiting and sold their flat at loss as high as $80K for their executive flats.

At the time when HDB decided to put the flats on offer, $425k obviously cannot be the MARKET rate as this area was still undevelop. There was (still is) no amenities around here to justify the high price.

Someone commented that the low valuation is due to the lack of a strong political rep here. Could that be a reason?; February 12, 2010 12:15 AM
Anonymous said...: Are we missing out that rental flats
are also in the vicinity of HDB?
http://www.straitstimes.com/SME+Spotlight/Latest+Stories/Story/STIStory_488416.html

Perhaps there shall be criteria to opt into the scheme and allow those in current policy a refinance option. Two pricing index, you want to ride the wave, is your choice.; February 12, 2010 1:59 AM
hph said...: Mr. Tan,
You have reminded me my most painful experience with HDB some 30 years ago. May I share my story here? I grew up in Tanjong Pagar area in 1960s and 1970s. My family was affected under the then housing resettlement programme in the early 1980s. We got S$12,000 compensation from the government - the total area of our fully owned pre-war 3-storey house was about 4,000 sq.ft. The very low compensation was due to a sort of 1973 land compensation policy.

We were soon alloted a 3-room HDB flat of 750 sq.ft in the Kampong Bahru area. In 1979/1980, average price for that flat size in the entire Singapore was between S$18,000 - S$24,000. However, in 1981 the same 3-room flat suddenly JUMPED to S$41,500 in my case - I still do not understand the reason till today! Obviously, my family was totally shocked and devastated that we were suddenly 'forced' to pay double the price in a span of one year. To rub salt into our wound, URA sold 'our house' about five years later for more than S$500K after a so-called upgrading. What can I say?????; February 12, 2010 3:32 AM
Anonymous said...: Are we digging our own grave?
The prices for HDB continue to climb. The owners are happy to see the value of their houses esclate. The banks are happy to give the loans for new buyers. The government can collect more tax (eg stamp & duty fees etc) for purchase and sale transactions. The renovation contractors have more business to do. It seems everybody is happy.

BUT our future generation suffers!; February 12, 2010 9:09 AM
Anonymous said...: I always wonder whether this is the failure of Mr.Goh's government as many policies implemented during his term have no impact in medium term but may have undesirable long term consequences.

Property speculation like the stock-market is just another Ponzi scheme, the early birds benefited at the expense of the late-comers to the party. Believe me, look at Japan, UK and US economic woes which were unleashed by housing bubbles. When the housing bubble burst finally arrived, their banks and financial institutions become Zoombies like AIG, Hokkaido Takushoku Bank, WaMu etc. The day property in Singapore corrects, the BigThree will be shaky. The early winners have pocketed their GAINS through their financial muscle and leverage. Their gain is our tax through high rentals and factored into products/services we require. Why was not capital gain tax introduced for curbing property speculation in the past? Did the politicians benefited from not having this arrangement? I notice when their sons were near National Service age, the law was amended to reduce NS to 2 years instead of 2.5 yrs. Like the US, a hidden tax known as INFLATION (inflation actually means printing more paper currency) may then be introduced to inflate away the toxic assets, if that day arrives.
The Evil Politician; February 12, 2010 11:38 PM

Thursday, February 11, 2010

Low cost of living

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