Beyond the income ceiling: Extending the public housing franchise

December 18, 2012
Singapore Democrats

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Jeremy Chen

The SDP housing plan,
Housing A Nation: Holistic Policy for Affordable Homes, did not touch on private property. It is, nevertheless, important to consider the needs of the “sandwiched class”.

This post completes the argument begun in Annex B of the SDP public housing plan that describes the large incentive barriers to productivity embodied in the current system of public housing grants.

To recapitulate the argument in Annex B of the SDP’s public housing plan and apply it to this setting, there is a sharp loss for welfare associated with crossing the income ceiling. This would not be commensurate with the benefit provided by the pay increment (of perhaps an additional $500 per month) that pushed one’s household income over the threshold.

Furthermore, due to discounting of future income (net present value of the value of this increment and future increments) the loss might not be made up for until decades later. So there is an incentive barrier for increasing productivity among upper middle class households, a heavy “threshold-type” barrier.

So we have multiple large “threshold” barriers to productivity among lower income households and also a huge one for the upper middle class. It is arguable that these are temporary, but having these disincentives operating at a national scale is not good for the economy.

One solution is to extend the public housing franchise. But there has to be a bit of a quid pro quo. This is because allowing those above the current income ceiling to buy new HDB flats reduces the welfare of those with lower incomes, so they impose a negative externality on the lower income groups, and this externality should be priced in a principled way. (“Principled” as opposed to rigorous as it is nearly impossible to measure the negative externality.)

Those above the income ceiling should have to pay more, and the additional revenue generated should be used to cross-subsidize everyone else. Given that the SDP Plan is based on the principle of cost recovery, prices will go down for everyone else in a manner commensurate with the number of households in the “sandwiched class” choose public housing.

This principled approach is precisely the planning norm of our plan: Non-onerous payments over a reasonable horizon, which means 20 percent gross household income over 9 to 15 years. The guide price for a given household above the income ceiling will be the price that enables 20 percent gross household income over 9 years and 13 years respectively for 4 room flats and 5 room flats. (The numbers 9 and 13 are based on the number of years that a household with $10,000 would take to pay for 4 room and 5 room flats under the SDP Public Housing Plan.)

These prices mean affordability for the “sandwiched class” and also benefit for everyone else. The resulting substitution effect will also make private housing prices more reasonable, bringing them more within reach. With this, we would have extended the public housing franchise, while protecting the interests of those under the income ceiling.

Such a scheme should be introduced in phases, increasing the “hard income ceiling” gradually (with $10,000 being the “soft income ceiling”) and in conjunction with the build-up of the proposed buffer stock of the SDP housing plan.

(Please do take a moment to consider the proposals SDP Public Housing Plan. If you feel that
Housing A Nation: Holistic Policies For Affordable Homes is right for Singapore, please spread the word. Tweet “SDP Housing Plan: Affordable Non-Open Market Flats; Availability via a Buffer Stock; Conversion to manage the transition#SGPublicHousingā€¯ and visit 
yoursdp.org for more information.)


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