By Donald Low

In his second public lecture on Singapore's future two days ago, businessman Ho Kwon Ping suggested that the Housing Development Board (HDB) exit its role as a housing developer, to one of a regulator of housing prices and a master land development for new towns.

In response to Ho's lecture, public intellectual Donald Low shared his views about having a new paradigm for housing policy on his Facebook page. 

Source

Rethinking Public Housing 

Public housing policies in Singapore have been highly successful in enabling home ownership for the majority of Singaporeans, and in giving citizens a stake in the country.

The proportion of the resident population living in public housing is about 85%, with the large majority (around 95%) owning the flats they occupy. Equally notable is the fact that the opportunity to own homes has not been limited to those in the higher or middle income groups; lower income Singaporeans too have benefited from policies to encourage home ownership.

Singapore’s unusual success in providing affordable housing for the vast majority of a highly urbanised population is the result of innovative, activist government policies rather than of relying only on market forces. Along with education and healthcare, public housing was seen as a merit good deserving of government provision and subsidisation. Various other factors also contributed to the successful provision of affordable public housing.

Housing for All

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S'pore's housing success over the past fifty years was due to i) its comprehensiveness (effectively integrated with broader socioeconomic objectives) and ii) inclusiveness  (affordable for their intended target groups). Rise of household incomes also facilitated a high degree of housing mobility.

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First, strong economic growth enabled rising incomes across the board, and generated social improvements for all segments of the population. The PAP came into power in 1959 on a manifesto of providing employment and housing for all. Unlike most other developing country governments that saw housing as a social problem to be addressed only after economic growth has been achieved, the PAP government considered both objectives (of growth and housing) of “equal and symbiotic importance.” The provision of affordable public housing is perhaps the clearest manifestation of Singapore’s “growth with equity” story.

Over the years, the rise of household incomes facilitated a high degree of housing mobility. For instance between 1995 and 2005, 81% of the households living in HDB one- and two-room flats upgraded to HDB three-room flat or better. Among HDB three-room households in 1995, 79% had upgraded to four-room flats or better by 2005. For these reasons, political analysts have drawn the link between the PAP government’s public housing record and its legitimacy.

The government also pursued housing policies that were comprehensive and effectively integrated with broader socioeconomic objectives. The HDB saw itself not just as a developer of rental housing for the poor who could not afford privately developed housing; instead, the HDB sought to “encourage a property-owning democracy in Singapore and to enable Singapore citizens in the lower and middle income group to own their own homes.” (HDB Annual Report 1964) The government’s comprehensive approach to public housing is also reflected in the policy to allow CPF savings to be used for financing house purchases. This allows many first-time home buyers to pay their monthly housing loan mainly, if not entirely, from their CPF savings. The integration of the CPF system and the housing system not only promotes high levels of home ownership in Singapore, but is also an important source of financial security for Singaporeans. Indeed for lower and middle income Singaporeans, the homes bought with their CPF monies are the most visible expression of social security, Singapore-style.

Yet another contributing factor to Singapore’s housing success in the past fifty years is that public housing policies were inclusive and catered to almost all segments of society. All Singapore citizens who do not already own homes and whose monthly household income falls below specified income ceilings are eligible to rent/buy HDB flats. These thresholds are set at levels that cover at least 80% of households in Singapore.

Inclusiveness was also achieved by ensuring that HDB flats were affordable for their intended target groups. As explained by the then-Minister for National Development, “When we price our flats, we don’t just price them based on our costs. We price them with an eye on the affordability for those who are purchasing them, and we try to keep that level of affordability the same over the years.” (The Straits Times, 12 July 1996). The government committed to set the price of new four-room flats at a level that was affordable for 70% of Singaporean households while the price of three-room flats would remain affordable to 90% of households. To illustrate, the selling prices of flats (before the recent increases in house prices) were equivalent to about two years’ income of the purchasers, with smaller flats subsidised more heavily than larger flats.

Rethinking Housing Policy in the Context of New Socioeconomic Realities

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Policymakers must consider i) whether home ownership is still the best way of providing social security;  ii) the relationship between home ownership and asset appreciation; and iii) our ageing population.

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The social compact that has enabled home ownership for the vast majority of Singaporeans is now coming under stress. In recent years, house prices have risen at a much faster rate than median incomes. The reasons for this phenomenon are complex and contested. Some blame broader economic factors in recent years – rapid growth, more liberal immigration policies, and low interest rates resulting from loose monetary policies elsewhere – for causing the rapid increase in housing prices in recent years. The solution, it is then argued, lies in a combination of well-timed policy interventions. On the demand side, this involves prudential or anti-speculative measures aimed at cooling the property market; on the supply side, the government should release more residential land to meet rising housing demand.

While we do not disagree with these policy interventions, we also suggest a more fundamental rethink of public housing policies in Singapore. Many of the assumptions that guided the formulation of our public housing policies in the first forty years of nationhood have changed, or are changing, quite dramatically. For instance, while Singapore’s population was young and growing rapidly up to the 1990s, growth of the population is likely to be more moderate (if we exclude the impact of immigration).

Singapore is also ageing rapidly. This will have far-reaching implications not only on the rate of household formation, but also on the types of public housing we provide, the community-based services that have to be developed to help older Singaporeans age in place, and the ways in which older households are helped to monetise their housing assets. These structural changes suggest that housing policies should not be overly driven by cyclical or short-term considerations, but should be informed by longer-term trends – demographic or otherwise. For example, as the population ages, the current policies to encourage home ownership have to be adjusted to enable Singaporeans to “de-cumulate”. At a minimum, the government has to develop more options for the majority of older Singaporeans who own public housing to monetise their assets.

Besides demographic changes, policymakers must also consider whether home ownership is still the best way of providing social security, and of building a stake-owning society. In the context of greater income inequality, slower income growth for the lower and middle strata of society, and greater economic and employment volatility, it is by no means clear that home ownership is still the most appropriate way for the state to redistribute incomes or to provide social protection.

The collapse of the housing bubble in the US in 2007-2009 provides a cautionary tale of how an unhealthy fetish for home ownership, combined with relatively weak social safety nets and low interest rates, can be a source of economic and financial instability. Rajan (2010) argues that the main governmental response to rising inequality in the US was to expand lending to households, especially low-income households, to support the expansion of home ownership. He suggests that promoting home ownership became a convenient substitute for the policies that really address the problem of inequality – improving access to quality education and strengthening social safety nets. Although politically expedient, the government’s home ownership objective fuelled increasing leverage and drove financial deregulation, setting the stage for the collapse of the housing bubble and the financial crisis.

Policies to promote home ownership in Singapore are still prudent and financially sustainable; Singaporean households are also not heavily leveraged in making their home purchases. Neither do we have policies, such as the tax deductions for mortgage payments in the US, which artificially boost demand for housing. Nonetheless, the US’ experience suggests that the home ownership is not an unambiguously good thing that the government should maximise. While we acknowledge that home ownership is generally desirable given its benefits in terms of socio-political stability and giving citizens a stake in the country, we should also be cognisant of its limits. In particular, we do not think it is appropriate as a substitute for social insurance against the risks of unemployment, ill health or disability. We should also be careful about encouraging home ownership for all segments of the population. Among lower-income households in particular, home ownership may neither be financially prudent nor the best way of providing them a degree of social protection.

Yet another structural issue that policymakers need to consider is the relationship between home ownership and asset appreciation. As the majority of Singaporeans became home owners, policymakers may have conflated the goal of home ownership with that of asset appreciation. This is mostly misguided. While house price inflation provides a boost to consumption because of the wealth effect, this benefit has to be weighed against its costs. Not only do rising house prices cause anxiety for new households looking for a home, but they also have socially corrosive effects. For example, if house prices increase more rapidly than wages over a sustained period, people may begin to view financial speculation or investing in property as a more reliable way of securing income gains than through their own labour. The increase in speculative activity and the shift in social attitudes with respect to how money can be made (rental income and capital gains instead of wages) erode society’s work ethic, increase status competition and envy, and divert society’s resources from productive activities to less productive and potentially destabilising ones.

The basic dilemma for our housing policymakers is that as global city with liberal immigration policies for highly skilled individuals and open capital markets, high-end private property prices in Singapore will rise towards those in other global cities. These forces in turn exert upward pressure on mass market private home prices, and to some extent, HDB resale prices. In the context of Singapore’s new status as a global city, the government has to be a lot more deliberate and activist in managing both HDB and overall house price appreciation. Sky high private property prices exacerbate the sense of inequality, reduce social mobility, and increase the risks of destabilising housing booms and busts.

A New Paradigm for Housing Policy

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Policymakers should i) still embrace affordable housing for the majority of Singaporeans as its primary mission; ii) manage property prices by setting a general house price inflation target; and iii) consider S'pore demographic and economic changes.

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These structural changes suggest that a new paradigm in public housing is needed. The new paradigm for public housing should include the following features. First and foremost, the HDB should once again embrace affordable housing for the majority of Singaporeans as its primary mission. While improvements in the design of HDB flats are desirable, they should not come at the expense of affordability.

To ensure affordability, the government should strive to keep the house affordability index (which is the ratio of house price to the buyer’s annual income) well below four, preferably around three. A new four-room HDB flat in Pasir Ris is priced at about $300,000. This is five times the median household’s annual income of $60,000, well above what financial advisers consider prudent. Such flats should be priced closer to $200,000. In a similar vein, entry-level three-room flats should be affordable for the 21st-30th percentile of households with annual incomes of around $40,000. This suggests a new flat price of around $120,000, which was the price of such flats about a decade ago. Given the real possibility of slow median wage growth relative to house prices, the first order of business for HDB should be to restore and sustain the affordability of housing for the majority of citizens.

Second, to manage property prices more generally, the government should consider setting itself a general house price inflation target. This target should comprise of inflation targets for public housing and inflation targets for private housing. The HDB flat inflation target could, for instance, be set at levels consistent with (expected) median wage growth. Above this inflation target, the government should have to explain why it exceeded the target. Compared to other markets, the housing market is particularly prone to speculative booms and bust. This makes it even more critical for the government to take proactive steps to prevent house prices from rising excessively, and to pre-empt housing bubbles from developing.

With general inflation, it may not be realistic for the Singapore government to adopt inflation targets as we import almost all our goods (and many of our services) and therefore have little control over externally-induced price increases, other than through appreciation of the exchange rate. With home prices however, it is quite reasonable for the Singapore government to consider adopting inflation targets. Not only is the government the biggest landlord by far, it also has a number of microeconomic and regulatory tools at its disposal to affect the rate at which home prices are increasing.

Third, public housing policy needs to be rethought in the context of demographic and economic changes. When the population was young and incomes were rising across the board, public housing was an efficient and incentive-compatible way of spreading the fruits of economic growth. It was also a good way of helping Singaporeans achieve social mobility and build up their assets for retirement. The rapid ageing of the population also suggests that focus of government policy has to shift from enabling asset accumulation to helping Singaporeans unlock and monetise their housing assets. At the same time, slower income growth and relative wage stagnation for a sizeable segment of our workforce highlight the need for more social transfers. No longer can public housing serve as the de facto instrument of income redistribution.

To deal with these demographic changes, the government needs to ensure an affordable rental market for low-income households and provide well-designed reverse mortgage and lease buyback schemes. This is critical in ensuring that the old and the poor are not marginalised and excluded socially. Finally, fostering a strong sense of community in our HDB estates would also help to ameliorate the sense of inequity and exclusion often seen in unequal societies.

Donald Low is Associate Dean (Research and Executive Education) at the Lee Kuan Yew School of Public Policy. A revised version of this essay appears in Donald Low's recent book, "Hard Choices: Challenging the Singapore Consensus". The essay was reproduced with Low's permission. 

Photos by Medha Lim.

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