Public housing: The end of an era

Jeremy Chen

The current state of public housing is not healthy: new flats are unaffordable and applicants suffer long waits. What the system does have going for it is that Singaporeans who bought flats previously are able to realize capital gains from selling them on the open market.

The inability of Non-Open Market (NOM) flat owners to make capital gains, as proposed by the SDP’s housing plan, has been the main concern of some property analysts and commentators (see here).

However, under current economic conditions, capital gains for buyers of new HDB flats are far from certain. Such being the case, it would be irresponsible for a government to market expensive public housing to citizens on that premise.

Simple principles underlie the current “public housing asset appreciation scheme”. The previous generation buys property in what used to be the economic periphery. As development occurs, this property becomes more “economically central” and its value appreciates. A decade or so later, with steady growth in the “property buying” segment of the population (ages 30 through 50), they sell in the face of increasing demand and buy a cheaper flat in the new periphery, reaping economic gains. This idea is sound as long as a less developed economic periphery exists. But structural features of the Singapore economy point to the unsustainability of this scheme.

Firstly, there is no longer much remaining of an economic periphery to cash out and move into, unless we count Pulau Ubin where construction costs are likely to be high due to the cost of transporting equipment and preparing the land. Furthermore, building on Pulau Ubin is ecologically undesirable.

Secondly, the population segment aged 30 to 49 will shrink to 91.1 percent of its current size in ten years, and to 81.6 percent of its current size in 20 years. All long-term price increases have historically been associated with increasing numbers in this age band. This means a shrinking demand side of the resale market. The same demographics-led demand trend was linked to Japan’s property crash of the mid-2000’s which left, in its wake, a “lost generation”.

To support resale prices, we may either shrink the supply of new flats or ramp up immigration. Shrinkage in new flat supply will mean that more young people will be forced to buy expensive resale HDB flats in order to provide capital gains for the previous generation, meaning the same may have to be done to later generations. Immigration would be a problematic solution because with Singapore already bursting at the seams, further straining our infrastructure would certainly reduce the efficiency of our economy.

All this simply indicates that the public-housing-asset-appreciation scheme that the PAP touts is, for fundamental economic reasons, unlikely to lead to future capital gains from public housing. Singaporeans should really consider the economic fundamentals before taking on a huge mortgage in the hope of capital gains 5 to 15 years later.

The structural evolution of the Singapore economy is eroding the conditions that have supported asset appreciation. With growing economic uncertainty, the current public housing system is fast becoming outmoded and fundamental changes will have to be made.

Singapore has to gradually move to a more stable public property system because capital gains are no longer certain. While the NOM scheme does not allow capital gains to be made through public housing, it also removes the dangers associated with the PAP’s asset-enhancing scheme which, as mentioned, will not sustain indefinite capital gains.

In addition, the SDP plan frees up liquidity for direct savings, consumption, and investment (in entrepreneurial ventures or in financial instruments).

To summarize, it does not make much sense to buy into the current system and pay a huge premium in return for uncertain future rewards that are likely to be small. In contrast, liquidity today means the ability to consume, to invest in others, or to invest in oneself — with certainty.

All in all, the NOM scheme will provide a better standard of living to citizens in both the short run and over the long term.

Housing A Nation: Holistic Policies for Affordable Homes (pdf) is available for download here:

Jeremy Chen is pursuing his PhD in Decision Science at the NUS and is a member of the SDP’s housing policy panel.

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