Public housing: Investment or consumption?

Leong Yan Hoi

As early as 2005, in the midst of America’s biggest post-war housing boom, some economists and financial analysts were already sounding warning bells that a bubble was forming, and a bust imminent.

The boom had been fueled in the wake of the 2000 dotcom crash by a combination of funds shifting from equities to the property sector and the Federal Reserve’s expansionary monetary policy, resulting in an ample supply of cheap money and easy credit.

The signs were there: between 2001 and 2003, the Federal Reserve cut interest rates 13 times; the amount of sub-prime loans increased from US$332 billion in 2003 to US$1.3 trillion in 2007, an increase of 292 percent; the total amount of derivatives held by financial institutions ballooned even as total cash reserves shrank; and by the time the market peaked in 2006, some of the subprime loans were already going into default.

When credit dried up in 2007, it caused a downward spiral into a financial crisis the likes of which had not been seen since the Great Depression of the 1930s. The boom had turned into the biggest housing crash in the history of the United States (US).

The parallels of the US property bubble with our current housing market boom are eerie: property prices here have been on an upward trend since the 2008 financial crisis, largely fueled and sustained by an economic rebound, influx of foreigners, massive inflow of liquidity, long loan tenures and low interest rates. The recent sale of a Housing Development Board (HDB) flat for $1 million has raised eyebrows and generated much angst among young aspirants to property ownership.

The HDB Resale Price Index, a key indicator of public housing price trend, is now at a historical peak, and is showing no sign of abating despite a recent slew of cooling measures adopted by the government:

(Source: HDB InfoWEB[1])

To all appearances a speculative bubble is forming; coupled with the near-certainty of a technical recession at the end of 2012 (as foreshadowed by weak export data and a contraction of the manufacturing sector in the third quarter), and the prospect of a sharp correction, if not a major crash, looms for the property market sometime next year.

What lessons can we draw from the historic housing crash in the United States?

First, housing, in particular public housing, should not be considered an investment good, an appreciable asset to be invested in to reap capital gains. Houses are, fundamentally, consumer durables. That is, they are goods that yield utility and depreciate slowly over time.

Second, the proponents of the Austrian School of economics hold that only savings-induced growth is sustainable, while a credit-induced growth will inevitably lead to a boom-and-bust cycle. That is why a housing boom contains the seeds of its own destruction: easy access to credit and speculative frenzy lead to over-pricing as buyers seek to maximise capital gains during the boom phase, and when credit freezes, a marked readjustment occurs with distressed selling amid falling equity and the accumulation of massive debt as the bubble bursts.

These observations were borne out during the 2000 NASDAQ crash and the 2007 global financial crisis.

Many Singaporeans have been conditioned since the Goh Chok Tong prime ministership to see public housing as a sure-fire investment that generates wealth in the shortest possible time. It will take a sea change in mindset before housing as consumption is accepted as common wisdom.

Effects of High Property Prices

Public housing is a consumption, and high property prices therefore extract an opportunity cost. In a country where 80 percent of the people live in public apartments, the deleterious effects of spiraling prices and increasing unaffordability of HDB flats are significant and far-reaching.

Huge mortgages discourage risk-taking and stifle entrepreneurship, which in turn stunts the small and medium enterprises (SME) sector of the economy.

The social costs are tremendous as well. Since installment payments are serviced largely with Central Provident Fund (CPF) savings, large loans whittle away a person’s retirement savings as well as erodes his ability to fund his own healthcare needs as well as provide for his children’s education. This is especially true for people in the lower-income group.

Young couples who find it increasingly difficult to purchase their first home are putting off marriage and starting a family, a major factor responsible for the plummeting birth rates in recent years and the current total fertility rate of 0.78, the lowest in the world. The dire consequences of a low birth rate in conjunction with a rapidly aging population are all too well documented.

High property prices also funnel money from productive sectors of the economy into the rent-seeking sector, creating and entrenching a rentier economy with its attendant problems – asset bubble creation, lack of regenerative dynamics, stagnant wages, structural unemployment, widening income inequality.

Because the prices of resale HDB flats are interlocked in a circular fashion with new flat prices as both determinant and dependent variables, a solution to the problem of spiraling property prices is not immediately apparent. Any attempt to dampen the prices of new flats may precipitate a crash in the value of resale flats as well as the private property market.

Cutting the Gordian Knot

The Singapore Democratic Party has drawn up a holistic plan which will be launched in a few weeks to provide affordable public housing for Singaporeans, without causing undue dislocation to the current property market.

The lynchpin of this plan is to reduce HDB prices and in so doing free up money tied up in property that will forseeably lead to greater investment in private enterprise and a burgeoning small-and-medium-enterprise  sector, which has hitherto been stymied by the heavy reliance on multi-national and government-linked corporations to prop up the economy.

Despite having one of the highest per capita Gross Domestic Product n the world, in a UBS study in 2009[2], Singapore ranked only 43rd and 49th for domestic wages and purchasing power respectively, comparable to Kuala Lumpur, Warsaw and Bogota, but lagging behind the other Asian ‘tigers’. Reducing mortgage liabilities will increase disposable incomes and improve quality of life.

Indeed, in many Western countries, a large proportion (up to 55 percent) of the population do not own their own homes, yet enjoy a quality and standard of living superior to Singaporeans’.

Making housing affordable for young people setting up home will help to reverse the trend of declining birth rates, and help parents invest more in their children’s education, which in turn brings positive social and economic returns.

The prevalent mindset that property is an inexorable route to riches via speculative capital gains will gradually be transformed into a mature one that views property as a long-term consumer durable which provides a basic need.

Over time, these changes will gradually shift our economy away from the rentier model into an economy that generates growth through increased productivity, innovation and the accrual of knowledge capital.

[1] HDB InfoWEB: Resale Price Index. Available at: [Accessed 8 October 2012]

[2] UBS. Prices and Earnings, Edition 2009. Available at: [Accessed 9 October 2012]

Dr Leong Yan Hoi is a medical doctor and is a member of SDP’s Healthcare Advisory Panel.