Time for a relook at housing policies

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#1
Interesting article on housing.

The Straits Times
www.straitstimes.com
Published on Mar 02, 2013
Time for a relook at housing policies


By Tan Meng Wah For The Straits Times

SINGAPORE'S public housing achievements, on most counts, are enviable. But success can create its own problems too. Indeed, for some years now, concerns have been aired about its affordability, due to current high public housing prices.

At the core of such concerns is whether public housing is more a "public and a consumption good" or a "private and an investment good". This is not just academic.

If the role of the Housing Board is sole provider of public housing as a public good, then its monopoly allows it to more effectively acquire and allocate limited land parcels and achieve economies of scale. Home buyers get reasonably priced quality housing.

But if public housing is deemed to be a private good and prices set are based on market forces, then HDB's monopoly and the absence of competition work to the detriment of home owners. To maximise its return locked away in the form of reserves, the Government will, at least in theory, have every incentive to price land at the highest possible market price.

Such ambiguity over the HDB's role saw many early home owners - having bought their homes at low prices - benefit handsomely from rising property prices over the past decades. But later buyers have had to contend with high prices. Hence, a fundamental relook at the existing public housing policies is warranted, given that domestic and external conditions can affect future prices.

No longer a safe bet

IT SHOULD not be assumed, for example, that "investing" in an HDB apartment will continue to be a safe bet, given the already high resale prices.

In a prolonged depressed market, home owners may incur losses. Indeed, HDB resale prices were depressed for 13 years between 1996 and 2009 before prices recovered to their 1996 high.

Given current HDB home prices, high mortgage payments also raise the risk of default in, say, a recession, or when structural unemployment rises. More households are in mortgage payment arrears: from 4 per cent in 2002 to 7.9 per cent in January 2009. From 2002 to 2006, 360 households surrendered their flats after defaulting on their mortgage loan repayments.

It is also risky to assume that young Singaporeans will enjoy the current favourable economic conditions and hence high income growth in the next three decades. The risks from future adverse economic conditions are not limited to the low-income earners.

Among the unemployed, the proportion of those who are managers, professionals and technicians has been rising steadily, from 14.7 per cent in 1991 to 27.8 per cent in 2001 and 36.2 per cent in 2011. There is also a rise in the number of jobless older workers. The share of workers in their 50s and above among the unemployed tripled from 7.3 per cent in 1992 to 22.4 per cent in 2010.

These trends suggest that high mortgage commitments may drive default rates up in the future as the workforce continues to age and earning power wanes.

While policymakers should strive for public housing prices to rise in value in tandem with economic growth to reflect their true market value, asset enhancement should not remain the predominant tenet guiding policy.

Public or private good?

ONE solution is to tackle head-on the issue of whether public housing is a public or private good. New flats can first be treated as a public consumption good at the point of purchase from HDB and then as a private investment good at the point of resale.

In other words, new flats are to be sold by HDB at cost-based prices; and priced differently depending on location. The land value is announced but is omitted to keep selling price affordable.

After the minimum holding period - now five years - when a home owner decides sell the HDB flat in the resale market, HDB will have the first right to reclaim the predetermined land value from the capital gain of the flat: the resale price minus the original purchase price. But if the capital gain is less than the land value, the shortfall will be borne by HDB.

A case study in savings

TAKE, for example, a new $410,500 four-room HDB apartment in a mature estate for a prospective home owner buying his first HDB apartment at the age of 25. Under the current scheme, a $369,450 loan stretching over 30 years at HDB's subsidised loan rates would entail a monthly instalment of $1,480 and a total interest payment of $163,350.

Under the proposed new pricing model, the payment for the land price is deferred to the time of resale. Suppose, conservatively, the land value is 50 per cent of the selling price. Given the lower selling price, the flat buyer will need a loan of only $184,725 repayable over 15 years with a monthly payment of $1,241. Total interest payment will only be $38,655. He saves $124,695 in interest, compared to the current pricing scheme.

If the home owner sells his first unit and buys another four-room apartment 15 years later, the new scheme again allows him to enjoy interest savings, of $208,395.

If he chooses to retire in his second home, he can put off paying for the land value of $265,250 until after he dies and the unit is sold.

All in, his savings from the purchase of the two HDB apartments amount to $598,340 comprising $333,090 from the lower interest payment and $265,250 from the deferred payment for the land value of his second apartment.

The savings from the proposed pricing scheme may vary depending on the various assumptions made. Notwithstanding, the benefits from the lower loan amounts and shorter loan periods are obvious regardless of the figures used.

First, lower risks for the home owner. This is because of the lower monthly mortgage payments and the shorter repayment period of 30 years for two HDB loans instead of 60 years.

Even if he has to take a job that pays less in his later years, the second 15-year loan mortgage would likely have been fully repaid by the time he is 55. If not, the low mortgage sums may be easily taken care of by healthy Central Provident Fund (CPF) savings.

Next, under the proposed scheme, home owners end up with a cushy nest egg - from not having depleted their CPF retirement funds on housing - to fund their retirement without having to downgrade their flats.

This is a stark contrast to the current pricing model which sees "asset-rich and cash-poor" Singapore households having as much 75 per cent of retirement wealth locked in housing assets upon retirement, compared to the 20 per cent for average American elderly households.

Finally, and importantly, lower public housing prices will unshackle younger Singaporeans from oversized housing loans during their early and more productive years and free them to either procreate sooner - and have more children - or to embark on entrepreneurial and other pursuits.

To further boost savings for retirement, more of the monthly CPF contributions can be directed to the Retirement Account, given the lower mortgage payments.

Any capital gain from the sale of the HDB apartments bought under the proposed pricing model can also be mandated to go into the Retirement Account.

This will also remove the incentives for households to cash in their apartments during periods of high property prices.

To prevent the system from being abused, current restrictions limiting young Singaporeans to the purchase of only two apartments directly from the HDB should stay. To promote family formation, singles can be limited to only three-room apartments, while childless couples can own four-room apartments. Only families with children can upgrade to five-room or bigger apartments.

Grants for low-income households can still be disbursed to achieve redistributive or other social goals.

Decoupling new and resale flat prices

FOR the public housing market as a whole, the decoupling of selling prices between new and resale HDB apartments will likely break the mutually reinforcing price spiral between the two sectors.

Resale prices may adjust to a more realistic level. But a drastic fall is unlikely since resale prices are determined more by the state of the economy, the supply of resale flats and demand from buyers, including permanent residents excluded from buying new units directly from the HDB.

As for the Government, since proceeds from land sales go into the reserves, the deferred payments will have limited fiscal impact. More importantly, given that housing represents the largest expense for households, the low mortgage payments leave households with higher savings in their CPF accounts and empower them to take care of their own long-term needs with minimal handouts from the Government. There may be less need for extensive redistributive fiscal measures over time.

Declaring the land valuation and various costs upfront also enhances transparency.Property investment is essentially a one-way wealth transfer to an economically unproductive asset. Erecting a firewall around public housing helps to insulate the HDB home owners from the vagaries of speculative activities driven more and more by liquidity instead of real housing need.

As economies become more intertwined, Singaporeans are likely to face more economic shocks from domestic and external factors. When times are uncertain, it is the Government, not the people, who should absorb the larger share of risks. Otherwise, families will be left feeling unable to cope.

The proposed pricing model that treats public housing as private investment goods only at the point of resale helps to substantially lower both the burden and risks borne by home owners. This is done without adding to the short-term fiscal burden of the Government. It may even help to moderate the Government's long-term fiscal outlay with reduced need for redistributive transfers.

The proposed pricing model here is a win-win solution that helps to put public housing on a more sustainable and equitable trajectory for both the home owners and the Government.

stopinion@sph.com.sg

The writer is a research fellow with the Institute of Policy Studies at the Lee Kuan Yew School of Public Policy. A longer version of this article can be found at the IPSCommons blog (http://ipscommons.sg/)
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
Quote:TAKE, for example, a new $410,500 four-room HDB apartment in a mature estate for a prospective home owner buying his first HDB apartment at the age of 25. Under the current scheme, a $369,450 loan stretching over 30 years at HDB's subsidised loan rates would entail a monthly instalment of $1,480 and a total interest payment of $163,350.

Under the proposed new pricing model, the payment for the land price is deferred to the time of resale. Suppose, conservatively, the land value is 50 per cent of the selling price. Given the lower selling price, the flat buyer will need a loan of only $184,725 repayable over 15 years with a monthly payment of $1,241. Total interest payment will only be $38,655. He saves $124,695 in interest, compared to the current pricing scheme.

Land value differs around Singapore and future growth of the land value differs in every part of Singapore.
Given a choice, I will like to have a HDB unit at the centre of Orchard Rd with the land price defers to the time that I decide to sell the unit.

This scheme will give rise to unfairness among HDB applicants. Since the land value is taken out of equation, applicants of HDB unit in city area and non-mature estate will be paying the same sum of money for flats of similar size.

It is no difference from selling all HDB flats at the same price around Singapore.
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#3
(02-03-2013, 03:54 PM)yeokiwi Wrote:
Quote:TAKE, for example, a new $410,500 four-room HDB apartment in a mature estate for a prospective home owner buying his first HDB apartment at the age of 25. Under the current scheme, a $369,450 loan stretching over 30 years at HDB's subsidised loan rates would entail a monthly instalment of $1,480 and a total interest payment of $163,350.

Under the proposed new pricing model, the payment for the land price is deferred to the time of resale. Suppose, conservatively, the land value is 50 per cent of the selling price. Given the lower selling price, the flat buyer will need a loan of only $184,725 repayable over 15 years with a monthly payment of $1,241. Total interest payment will only be $38,655. He saves $124,695 in interest, compared to the current pricing scheme.

Land value differs around Singapore and future growth of the land value differs in every part of Singapore.
Given a choice, I will like to have a HDB unit at the centre of Orchard Rd with the land price defers to the time that I decide to sell the unit.

This scheme will give rise to unfairness among HDB applicants. Since the land value is taken out of equation, applicants of HDB unit in city area and non-mature estate will be paying the same sum of money for flats of similar size.

It is no difference from selling all HDB flats at the same price around Singapore.

It is indeed an interesting way to look at it. I personally think that if such policy is implemented, there will continue to be difference in housing prices.

Since housing is a public good, noone should excessive benefit from it. The trouble with asset inflation in Singapore is largely due to the ability of public housing to generate capital gains that can accrue to the owner in cash.

Allowing capitalism to help in market finding a clearance price remains important. However, restricting capital gains from freely being used as consumerism will then help correct the unnecessary ill effects of asset inflation affecting quality of life and cost-push wage inflation leading to uncompetitiveness in the economy over the longer term.

Imagine this, if you gong gong have a hdb flat many moons ago and you happen to hoot one of the biggest unit in a choice area like Queenstown - out of nothing - certainly not your hard work to reap huge capital gains from asset inflation. I mean hard work to repay mortgage and accumulate savings is a virtue but gong gong sitting on gold mine? Of course there is nothing wrong to be gong gong but if we can correct the system of a public good over time, the perception of entire society will change and perhaps with lesser financial burden, the risk taking capability may increase as well, the fertility rate.

Always 2 sides to a coin. Just my thoughts.

GG
(Who knows I oso gong kia)
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#4
Lai Liao - Singapore politicians never change - always send out previews to the market before showing the actual hand. Good for most citizens but bad for capitalist including speculators.

http://www.todayonline.com/singapore/pub...-direction

Public housing: Khaw wants to relook ‘long term’ direction

National Development Minister Khaw Boon Wan. TODAY File Photo
Minister invites Singaporeans to share concerns and get involved in designing policies
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BY
NEO CHAI CHIN
-5 HOURS 15 MIN AGO
SINGAPORE — There were fires to fight when he was appointed National Development Minister two years ago. While some hot spots still simmer on the housing front, Mr Khaw Boon Wan yesterday cast an eye on the longer term, saying he intends to get Singaporeans more involved in designing public housing policies.

This will be done through several Our Singapore Conversation sessions after the Committee of Supply debate in Parliament, and he invited Singaporeans to share their worries, hopes and dreams.

He stressed in Parliament that the Housing and Development Board’s (HDB) primary mission to offer affordable homes to the majority of Singaporeans will not change, but a “relook” is necessary in light of significant demographic and economic changes.

“For certain, the next 50 years will be different from the last 50 years,” he said. “Which elements in our current system remain relevant, which require enhancement or strengthening, and which need to be overhauled?”

He outlined four issues “worthy of deeper reflection”: What the purpose of building public flats should be, what kind of housing the Government should provide to meet future needs, addressing affordability concerns of flat buyers living in a country that is also a global city, and how public housing should respond to changing demographics such as an ageing population.

Mr Khaw noted that HDB flats are fundamentally homes, but have also become significant assets to most Singaporeans. This has been done through key policy changes since Singapore’s independence — permitting flats to be resold for profit in 1971, allowing flat owners in 1989 to retain their flats when buying private property, and allowing flat owners to sublet their flats in 2003, among others. With that, many were able to upgrade their homes and accumulate “large nest eggs to fund their retirement needs”, he said.

“Looking ahead, as we may no longer get the same kind of returns from reselling a HDB flat as in the past, how will its role as an asset be affected”, and how should adjustments be made, he asked.

Singapore has probably reached the limit possible on home ownership at over 90 per cent, and lower economic growth going forward means “huge capital gains that our parents and our generation made through reselling HDB flats will now become less likely”, he explained.

On the kind of housing the Government should provide to support future needs, Mr Khaw noted that more flat types and designs have been rolled out to meet various aspirations. This has led to calls for the HDB to “return to basics” – but he wondered if such calls meant reverting to only owner-occupation, halting the building of Executive Condominiums and disallowing Singaporeans from owning both HDB flats and private homes.

Affordability of flats has worsened since the 2009 global financial crisis that caused home-price increases to outpace income growth, said Mr Khaw. While the Government will “do more to reduce Build to Order (BTO) flat prices relative to incomes”, it has to meet newlyweds’ aspirations while ensuring they make prudent purchases.

The HDB has delinked BTO prices from resale prices, and Mr Khaw said it would “see what else we can do to bring BTO prices in non-mature estates to, say, around four years of salary as it was before the current property cycle started”. “We will do so partly through cooling measures to nudge the property market down; partly by seeing if an alternative housing option can be designed,” he added. “One thing is clear; we are committed to restoring and maintaining the affordability of new HDB flats to the vast majority of first-timer Singaporean households. Their Singapore Dream of owning their own homes, just like their parents, is safe. We will make sure of that.”

On the ageing population, Mr Khaw agreed with West Coast Member of Parliament Foo Mee Har that the Government can help more elderly to monetise their HDB flats such as through the Lease Buyback Scheme, but wondered if there were more ways to do so.

Mr Khaw acknowledged the complexity of the issues and assured that he would not forget the needs of the silent majority. “Let us work on the challenges together and shape better housing policies for our future generations,” he said.
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