Accessibility to Affordability

Cheryl Tay

Recently, Minister for National Development Khaw Boon Wan admitted in Parliament that there is much more to be done in the HDB market. He spoke of the “positive signs”, such as a lower rejection rate of HDB applications between January 2010 and September 2012 (2%). He also called the success rate of appeals for HDB loans (36%) “quite good”.

Most notable, however, was the HDB Resale Price Index (RPI), a topic broached when Nee Soon GRC MP Lee Bee Wah raised a question about soaring resale flat prices. According to Khaw, RPI growth had eased to 3.9 percent in the first nine months of 2012, compared to 14.1 and 10.7 percent in 2010 and 2011 respectively.

Stairway to heavy debt

Considering that prices are still rising, albeit more slowly, Khaw is right: there is indeed much more to be done. There are issues which extend beyond resale flat prices: increasingly, young couples looking to start families find high HDB prices a major obstacle. Many senior citizens have had their CPF savings depleted by the mortgages on their flats. Divorcees, who are often already saddled with alimony payments, are further disadvantaged by regulations which allow only one party to buy a flat directly from the HDB within five years of the date of divorce. At the same time, the highly contentious issue of PRs being allowed to buy resale flats, which has seen prices shoot up in tandem with the number of foreigners and PRs settling in Singapore, compound the situation.

Furthermore, a recent MOM-commissioned NUS study by Associate Professors Chia Ngee Choon and Albert Tsui projected that in order for a young person entering the workforce today to afford a three-room HDB flat in 2017, he / she must have a monthly household income of at least S$5,100. This stands in stark contrast to the 1990s, when the same income could afford one a condominium or even a terrace house. Inflation and the rising cost of increasingly scarce land aside, this projection would undoubtedly have middle- to low-income Singaporeans concerned, especially if they intend to start families and may very well need bigger flats to provide adequate living space for their children. It also does not account for divorcees, widowed individuals and senior citizens.

Change: The overdue baby

Three years after the government first implemented property cooling measures, home prices have not decreased significantly. A possible explanation is that, instead of dealing with the root problem —the prices themselves — the measures focus on other aspects, such as limiting loans (a lower borrowing ceiling of 60 percent of a property’s value for the first mortgage if buyers exceed the 30-year loan or 65-year-old age limit, and 40 percent for their second and subsequent mortgages) or simply making homes pricier for certain groups of buyers with the Additional Buyer’s Stamp Duty (ABSD), Sellers Stamp Duty (SSD) and tax for those buying their second and subsequent homes.

While such measures directly affect investors and upper-middle to high-income buyers, they do little to make homes more affordable for middle- to low-income buyers. To tackle the issue, the Singapore Democratic Party (SDP) has crafted a policy paper entitled
Housing a Nation: Holistic Policies for Affordable Homes, which was officially launched on 4 November this year. Notably, the SDP is the only political party in Singapore to have released a comprehensive paper on housing, though Workers’ Party Non-Constituency MP Gerald Giam and former National Solidarity Party candidate Goh Meng Seng had previously made suggestions regarding public housing affordability. But just how feasible are the SDP’s proposals?

A brief assessment

The chief components of the paper are the Non-Open Market (NOM) and Open-Market (OM) schemes. The former seeks to lower HDB flat prices mainly by removing land cost from home prices, based on the rationale that land in Singapore already belongs to its people and as such, they should have to pay only construction and administration costs for HDB flats.

The latter, as its name suggests, will allow homeowners to sell their flats on the open market at market value, subject to cash-over-valuation (COV), location and other factors. An OM flat can either be sold so its owner can buy a NOM flat, or it can be converted to a NOM flat.

Under the NOM scheme, average guide prices for 99-year leasehold flats range from S$70,000 for a two-room unit to S$240,000 for a five-room unit, depending on location and other flat characteristics. An improved CPF Housing Grant scheme will apply to first-timer low-income households (with an average gross monthly income of under S$4,000) for two- and three-room flats.

The scheme has two key features: firstly, a NOM flat cannot be sold on the open market but can be sold back to the HDB at purchase price, minus the consumed lease. Secondly, OM flat owners can choose to convert to the NOM scheme, where the government will return to them an amount based on the flat’s original HDB purchase price and the price of an identical or similar NOM flat, which will go to their CPF. At the same time, a buffer stock of flats will ensure Singaporeans can obtain their flats within minimal waiting time.

While this sounds promising, one might question just how realistic it is for the government to return money to those who convert their flats, in light of factors such as inflation and market forces at the time of purchase and the time of NOM conversion.

Dr Leong Yan Hoi, a member of the SDP housing policy panel that crafted the paper, explained: “When homeowners bought their flats at high prices, the land cost component was paid into the Singapore reserves.  If they convert their flats to NOM status, they’ll essentially be reimbursed a portion of this land cost, which is already in the reserves.”

Yay or Nay?

Of course, the scheme has its critics. On his blog, Singapore Alternatives, Goh said in an 8 November entry entitled HDB Housing Policy Revisit that the NOM scheme “may look good at first” but is “not a good policy”, as NOM flat owners “cannot upgrade themselves” if their flats cannot be rented out and can only be sold back to the HDB at a loss. He also argued that monthly mortgage payments make the NOM scheme inferior to simply renting from the HDB, a cheaper option.

PropNex Realty CEO Mohamed Ismail also criticised the scheme: “It has failed to factor in the costs of building a township, such as infrastructure, facilities and amenities.” In response, Jeremy Chen, another member of the SDP housing policy panel, said, “Many township features are self-financing, such as shop rentals and the sales of flats above shophouses.”

Ismail added that though similarly sized NOM flats are cheaper than new BTO flats, “the latter does not have resale value! The current BTO flats are priced very competitively and are heavily subsidised. The SDP’s proposal will deprive lower-income Singaporeans of a property asset to keep pace with inflation and enjoy its capital appreciation.”

Like Goh, he believes the scheme is tantamount to flat rental He also feels that NOM flat owners “will not take the effort to renovate their homes or enhance the value of their assets”, calling such homes “an empty shell in fulfilling the basic need for shelter, not a typical Singaporean’s aspiration of having a dream home”.

Chen countered this assumption: “A S$6,000 monthly salary would pay S$1,200 monthly (in mortgages) for just under 14.5 years. In principle, one could rent a four-room flat for S$143.10 per month if the rental rate increases with the inflation rate, making the present value of the rental stream over 99 years S$170,000. However, for the government to recover its costs, every new flat will have to be rented out for its full 99 years. This is hardly possible and highly impractical.”

Still, in The Sunday Times on 18 November, Opinion Editor Chua Mui Hoong’s article How to cool the HDB resale market lauded the SDP for its “serious engagement” on the topic but called its proposal “drastic”, saying, “I…don’t think it’s a good idea to deny lower-income households the opportunity to benefit from increases in the value of their homes”.

She then went on to suggest ways in which the bottom 40 percent of households can own homes — “build smaller flats, give more generous grants, offer interest-free loans”, in addition to a levy on rental income from HDB flats.

A critical pattern

It is worth noting that the aforementioned criticisms of the SDP’s proposal use capital appreciation of HDB flats as their common argument — since NOM flats cannot be sold on the open market, their owners are robbed of the chance to make a profit from their houses.

But while what a “typical Singaporean” wants is debatable, one wonders if upgrading is even a priority for lower-income households, who, in the current HDB market, would likely be glad to simply own a home without being stifled by lifelong mortgage payments. For many, if not most, a home fulfills exactly what Ismail had mentioned: a basic need for shelter. Putting a roof over one’s head has to come first; renovations and other forms of “asset enhancement” can follow when one has settled in & is more financially comfortable.

For that to happen, however, lower-income households not only need sufficient grants but also less exorbitant home prices. One might even say that were public housing truly affordable, five-figure grants (upwards of S$30,00) would not be entirely necessary.

After all, regarding Chua’s suggested solutions, how much more “generous” can grants get and how much more can flats shrink before it becomes impractical for the government to provide sky-high grants just so people can live in tiny spaces? As for interest-free loans, flats which are expensive in the first place would still throw up heavy mortgage payments, with or without interest.

Have cake, cannot eat cake

Those who can well afford to treat their homes as investment tools do not need financial aid. Indeed, the ABSD, SSD and tax on second and subsequent homes rightly act as deterrents for investors who, without such measures, would put genuine homeowners at a greater disadvantage and cause prices to rise even further and faster.

It stands to reason that the mindset that our HDB flats are goldmines, which has been perpetuated widely in Singapore, needs to change in order for everyone to own their own homes. A market less saturated with investors and therefore one with more affordable homes would give Singaporeans better home ownership opportunities.

Do they really lose out if they cannot sell their homes on the open market and hence cannot profit should they decide to move? Realistically speaking, in today’s HDB market, using one’s flat as a means for profit does not benefit the flat owner as much as we have been led to believe.

Michael, 60, the owner of a 30-year-old five-room Tampines flat which he bought for under S$90,000, was recently told by a property agent that he could sell his flat for S$660,000. With a 10 percent COV of S$66,000, he would have made S$726,000. But in order to truly enjoy his profits, he would have to make a significant downgrade in terms of his next residence — a S$302,000 four-room BTO flat in Choa Chu Kang, perhaps? Or a much smaller but similarly priced flat in Tampines? The monetary gain may seem impressive but if one has to lower his standard of living or move to a far-flung location in order to retain his profits, he has not actually benefited from the increase in the value of his home.

So while a NOM flat owner cannot sell his home for a profit, he gets to own a home in the first place, at a reasonable price and with a mortgage which can be paid off in under 20 years. Obviously, the scheme is meant to provide a home for everyone, not to entertain speculative investment activity.

Fill in the Blanks

The SDP’s proposal is highly comprehensive and covers all income groups, even suggesting the Young Families Priority Scheme (YFPS) to ensure that expectant couples and couples with children can obtain a flat in as short a time as possible, as well as the option for senior citizens to convert their flats to NOM flats for an inflation-adjusted annuity which will allow them a dignified retirement.

However, it does not address the topic of resale flats, for which factors such as COV and PR ownership have contributed to ever-increasing prices, disadvantaging those who do not have priority when it comes to cheaper BTO flats.

Dr Leong cites a “complex interplay of factors”, including economic recovery, the global movement of funds from equities to property, the unbridled influx of foreigners, easy credit and cheap money on the demand side, the drastic reduction in the release of new flats since 2006 and speculative activity which has pushed resale prices up, saying, ”Putting a cap on COVs and tinkering with income ceilings are at best only stop-gap, piecemeal measures which do not address the fundamental causes behind spiralling HDB prices and would, in the long run, be ultimately ineffectual.”

“The problem of the increasing unaffordability of public housing must be tackled at its root, by a) offering a viable alternative option of affordable flats sold at cost and b) in so doing, effect a gradual change in mindset, from one that views property as a speculative investment asset to one that sees housing as a long-term consumer durable that serves a basic human need.”

Worth a shot?

The SDP’s housing policy paper, like any proper effort to make available affordable public housing, is certainly worth a second look. A detailed analysis of proposed home prices is included, with in-depth calculations that show how its housing policy panel arrived at said prices. At the same time, the panel has made sure to account for different groups of buyers and their current circumstances, offering options which make it considerably easier for them to own HDB flats and maintain a decent standard of living.

As with any other proposal, there is no pleasing everyone. Government policies which attempt to keep investors at bay and so safeguard genuine homeowners and buyers have been met with derision, as have the SDP’s proposed policies.

But if such policies, when implemented, achieve their goal of making homes affordable to the general Singaporean public, they would certainly lead to one very important step in the right direction for our society.

Cheryl Tay is a journalist and a member of The Young Democrats.

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