HDB HOUSING PUNDITRY - AN OUTSIDE THE BOX VIEW WITH STUFF NO ONE TOLD YOU BEFORE

 

“We deal with all varieties of information. Somebody’s always upset no matter what we do. We have to make a decision; otherwise there’s a never-ending debate.” ~ Sergey Brin

In the 1960s Lee Kuan Yew made the decision to go big on public housing via the Housing Development Board to overcome the problem of massive homelessness. The HDB built world record numbers of public houses sold on 99 year leases. The primary reason for selling as leasehold instead of freehold was to introduce a cheaper form of real estate. There is also the simple matter of the Laws of Entrophy. One cannot expect the HDB buildings to stand forever or even 200 years. Decision made, problem solved, Singapore became one of the countries with the highest home-ownership rate, and everyone was happy as their big ticket asset appreciated in a fast rising economy. 

Decades on, when vast numbers of HDB leases have passed the half-way life, and the market appreciation curve dips into negative territory, the reality of diminishing residue value finally bites. This is exacerbated by, in my opinion of long ago when I was in my mid-twenties, a policy error of allowing the use of CPF pension savings to pay off mortgage loans. This policy leads to the inevitability of both a diminished retirement fund and lease value. Back then in the 70s, I understood there was no free lunch. If you use your pension money to pay off mortgage loans on a wasting asset, you better build a separate retirement fund. It was for this reason that I returned my first HDB flat to the government in late 80s before the 5 year minimum occupation period and bought a low end freehold property.

There is a rising tide of anger in the HDB heartland on 3 core issues:
Firstly, Singaporeans believed they were sold a lie that they owned the property whose values will never depreciate.
Secondly, public housing is now extremely costly.
Thirdly, the question of government (SLA) selling cheap land at market value to HDB thus profiting at the expense of Singaporeans.

Is it a matter of unmet expectations or grounded on real situation of vast majority of folks? Tis the season of public housing punditry. Differing opinions, thoughts, ideas and suggestions help to move our national debate. A censorious approach does nothing for all, whether from officialdom, critics or supporters of government programmes.

For a non-partisan, non-confrontational way of discussing the topic, I recommend the op-ed of Bobby Jayaraman in Sudhir Vadaketh's Jom Media which serves as a summary intro for those not familiar with local context and the latest salvos fired by both sides of the aisle

"A fool is someone who knows the price of everything and the value of nothing"... Oscar Wilde

A thousand apologies for what I'm going to say is bound to hurt the feelings of many. In fact, based on the many blogs I have written which have been critical of the government, many will say I sold out. I have consistently said I am critical on issues. I am not a blind critic. It's a good place to quote Oscar Wilde as many do understand what he meant.


HDB LEASEHOLDS DEPRECIATE TO ZERO $ AND LKY NEVER LIED

The complaints on the depreciating value of HDB leaseholds seem like a mob of disgruntled buyers trying to hold the seller to a material misrepresentation. They are holding the government to account for the perceived "big lie" of Lee Kuan Yew who said in 2011 the value of HDB flats "will never go down".

Yes, LKY did say that. You can read the transcript of his 19 Mar 2011 speech here for context. What is not shown in the transcript is the first few seconds of his intro where Lee said "... 85% are HDB heartland homes. We intend to keep the values of these homes up, it will never go down." Interestingly the government archive transcript omitted those few seconds. Imagine that, even LKY got suppressed! In my socmed discourse, the things I hate most are rude interjections by clueless commenters of "where is your proof". As bloggers, ours is not a dialectic study but mere sharing of opinions. Ours is not here to show proof of anything. Do your own research and enrich yourself. However, it would be different if one should ask "can you please show me any links to where you got the idea from?". In any case, I drop the 10 sec video clip here for proof and posterity and to preempt a POFMA.

A leasehold is a wasting asset. It would be insulting LKY's intelligence to suggest he never knew a leasehold gets written down over the years to zero. In the context of his speech, he was referring to how the government will always try to keep values up by constant rejuvenation of HDB estates. He never promised the prices will always go up.

All those writers in socmed who continue to complain they bought a home that will be returned to the state, I do pray they stop insulting their own intelligence. A leasehold is what it is. You are in effect a very long term tenant is all that is to it. You signed on the dotted line on a piece of paper called Lease Agreement. Let's stop showing the world HDB heartlanders lack the basic intelligence. More importantly, opposition politicians should stop this narrative. It is not helpful.

Now for those who try to preach some equity in lease extension or the provision of some residual value, that's an entirely different matter. It's an area open to debate and persuasion. If I were an opposition politician, I would want to own that platform. But please, I do declare I hold no political aspirations.


IS PUBLIC HOUSING VERY EXPENSIVE?

All things are relative. We can compare to other countries, or we can compare over time. For the price of a brand new 4 roomer HDB, one can buy a detached house with a swimming pool, larger built-up, freehold, in any of the cities in the National Capital Region of Philippines. My parents first 4 roomer in Henderson Crescent cost us S$16,000 back in mid 70s. But all these comparatives mean nothing because of complex economic inefficiencies that affect different time and space.

The one metric that is used for comparison is affordability. Housing affordability is a metric based on  household income in relation to housing prices.. The affordability metric for country comparative is not useful due to the problem of agglomeration diseconomies. Agglomeration means a collection of various things, and in this instance it refers to various factors such as cost of living, land use regulations, corruption, inflation, etc. Roughly speaking, it means at country level, the parameters are subject to too much economic inefficiencies to be meaningful for comparison. However, comparatives across cities of relative economic development do give a sense of the status quo. I share 2 recent reports and you can determine for yourself whether Singapore housing and HDB flats are affordable.

(1) Demographia International global survey on housing affordability 2021 Q3

Median Multiple (MM) is the median house price divided by the gross median household income (pre-tax). This report measured 92 cities across 8 major countries (US, UK, Australia, Canada, Singapore, Hongkong, Ireland and New Zealand). Singapore was placed 53rd with a MM score of 5.8 as compared to Hongkong which was most expensive ranked 92nd and a score of 23.2 MM. Pittsburg PA of US was most affordable with a score of 2.7 MM.

According to Demographia Intl. Singapore’s MM rose from 4.6 in 2019, to a severely unaffordable 5.8 in 2021, reflecting the impacts of the pandemic shock.

Read the full report here.

(2) Urban Land Institute home attainability report 2022 (Asia Pacific)

This is a good report in that HDB was a participant, thus public housing data was available. With an MM of 4.5, HDB was the most affordable across the 31 Asia Pacific cities studied. Singapore private property (both freehold and leasehold) had MM of 13.3 is on the high side ranked 13 out of 31.

Check the full report here

What a household spends monthly on housing takes up the biggest chunk of their income. However, the two parameters of household income and housing prices do not provide the qualitative aspects, for example freehold versus leasehold, unit sizes, quality etc. Nevertheless Median Multiple does provide a sense of affordability for comparison purposes.


CHEAP LAND COST & HIGH MARKET PRICES GIVE SLA HUGE PROFITS?

Let me address this point by point as raised by various folks.

1. Government forcibly takes away land from rightful owners (TRUE)

Every country in the world practices eminent domain which is state confiscation of land for national development purposes. Some does it constitutionally, some has no legislation about it. Some provide compensation, some don't. Singapore is no different. Singapore land acquisition is now governed under The Land Acquisition Act 1966.

2. Land acquisition is for national development (NOT ALWAYS TRUE)

Land acquisition is for national development which is for the bigger good. It is mainly used for public housing and infrastructure. However, under mix-use schema, some parcels of acquired land are sold for private development. This goes against equity as it is redistribution of land from rightful owners to some private wealth.

3. Government is the biggest land banker due to land acquisition (FALSE)

Yes, the government owns the most land in the country. But I like to highlight a mistake in the Jom-Media op-ed by Bobby Jayarama. He said ".. the Land Acquisition Act of 1966, which empowered the government to acquire private land compulsorily, helping it become by far the biggest landlord in the country, owning some 80 percent of land today". A substantial part of state land comes from land reclamation.

4. Government acquired land cheap (FALSE) and sell to HDB at market rates, making huge profits (TRUE)

In the distant past, owners were forced to give up their lands for peanut compensation. A little fun digression here. Long ago in the 60s, lots of corruption in the land acquisition field work. Men from helicopter come (the big guys) had blinders on. Cheng hu tuay gu (government officials) advised villagers will be compensated $500 for each fruit-bearing tree. Suddenly everybody started planting trees diligently. 2 or 3 years later when the acquisition process rolled out, villagers made handsome gains. Cheng-hu (government) had no database and land survey in those days. Then a bright civil servant realised the newly formed airforce had done area mapping of the island a few years earlier. Sorry to all those Ah Pehs, the photos showed no fruit trees earlier. Kindly return the compensation to the coffers.

In 1966 Law Minister EW Barker initiated the Land Reclamation Act. Since then, owners whose land were acquired have been compensated at market rates.

When the government sells land to HDB years after acquisition at current market rates, there is substantial profits since valuation has risen. But huge land bank comes with huge carrying cost. Just because government accounting does not input carrying cost does not mean it's free. Don't just look at historical cost and forget the cost of capital.

So folks, let's sober up. The land is cheap when you look at it today based on historical cost. But it was not cheap at the time of acquisition, it being the market cost at the time. The huge profit being the difference of today's market price less historical cost also needs to be tempered with the huge carry cost. Be fair to Caesar.

5. When the government sells land to HDB, there is no change in 'past reserves' (TECHNICALLY FALSE).

The way Desmond Lee, minister for national land development, explained is like this. Land is held in the books of Singapore Land Authority. Land appreciates while it is in the books of SLA. The land is considered 'past reserves' under the constitution. So when SLA sells the land to HDB at market rates, there is no increase in past reserves.

The minister is technically wrong because government accounting works on a cash basis. If the land was acquired in say 2015 at S$100m and in 2022 it had risen to S$150mm, it would still remain in the books of SLA at historical cost of S$100m. When SLA sells to HDB at market value of S$150mm, it made a realised capital gains of S$50mm. This gets into the accounts and 'past reserves' goes up by S$50m.

So here's something to ponder over if we want to bitch over the legalities. It was a previous administration that acquired the land. But the current administration sold the land and realised the S$50m cash gains. Is the S$50m legally 'past reserves' as defined in the constitution?

6. HDB makes huge losses due to the subsidies to buyers (TECHNICALLY FALSE)

Accounting wise, this is technically false because HDB is covered by government grants for these subsidies. The grants come from the government's fiscal spending. For year ended 31 Mar 2022, the subsidies for the year was S$849m.

HDB makes billion $ losses every year. In addition to the subsidies, there is usually another big ticket loss shown in the accounts which is also covered by grants out of the government budget. This expense line is "Provision for losses on land development". For 2022, this loss was more than S$2B. I have no idea what this is. It's not easy to interpret the HDB financial statement. I think it has something to do with the timing of release of development cost to match project completion.

7. Why not have SLA absorb the subsidies? (NO CAN DO)

Some suggested (Chris Kuan?) SLA could simply sell to HDB at market value less subsidies. That way, no losses will appear in HDB. This cannot be done for 2 reasons. (a) SLA would be fiscalising past reserves, which is against the constitution. (2) It is impossible on practical grounds because subsidies are buyer and house-type specific. This info is not available at the time of sale of land to HDB.

8. The government can increase subsidies to reduce the high cost of HDB flats (THIS IS BASTARDISING OCCAM).

The strongly held view is cost of living is very high, salaries have not grown, cheaper foreign labour have edged Singaporeans to lower paid jobs, HDB housing prices skyrocketed, land cost is a big chunk of HDB prices, government land is very cheap based on their historical cost. So why not reduce the price of HDB flats. There is no real lost to the government since SLA made massive valuation gains. It is only an opportunity cost.

It's a complex situation. But most folks' simple Occam solution is increase subsidies. Do you really think it is just an opportunity cost to the government, that land is so cheap to them, they can simply lower HDB prices and suffer no real losses? Well, there is no free lunch. Somebody is bearing the cost of these subsidies. Why should my village friends who got chased off the land subsidise your HDB apartments? It is a moral issue of equity.


THINKING OUTSIDE THE BOX

The government should tackle both the supply and the demand side of the public housing market. Here's some food for thought.

HDB is tasked to offer cheaper public housing and this was to be accomplished in 3 main ways. (1) Mass production lowers unit cost of HDB flats. (2) Central planning and admin lowers the marketing cost. (3) 99 year lease differentiation justifies lower prices than private freehold properties.

Here's a trifle that most people do not understand. Cost of construction between a private condominium and a HDB block is comparatively marginal. So why do private condos appear so glam and HDB so mediocre? It's a sociology thingy. HDB is meant for the lower end of the market, so it has to be seen to be less glam. It has to appear Lower price, Lower quality. Having said that, over the years, HDB has improved design esthetics to meet expectations.

If you like to have an idea of building cost, click here for a 2014 info. So far back. Can't help it, such info is hard to come by. Psst it's from a banned site which has been taken down. You will be looking at a web archive.

On the supply side, the government started off with the right philosophy for public housing, but executive imagination stagnated for decades with consequential tectonic shift in our economy that is never addressed. What do I mean by this? HDB pricing was supposed to follow the private housing market, but priced lower in part due to lower quality and its leasehold status. Over the years, it has been flipped around. The private housing market is influenced by HDB pricing. This circular pricing influence tends to go one way - up the rungs of Jacob's Ladder. REITS became the darling of investors and rentals grew hot, boiling the market, cooking Singapore into a renter economy. Since rent is the major cost of doing business, surpassing even energy, its pricing impacts the economy severely. Entrenched interest in the real estate sector engenders inertia to change.

HDB, being the biggest land banker, should embrace its status and be a price-maker instead of a price-follower. In other words, HDB should price itself on some model of housing affordability, independently of how the market is. Wait a minute. Am I contradicting myself here? If HDB were to price much lower, meaning higher subsidies, surely the same criticism of social equity applies. It's the villagers who subsidise HDB buyers. True. However, in this case, the objective is not about subsidies, but market-making to address the larger issue of macro-economic management. It's the more palatable "for the bigger good" rationale. Heck, HDB should do away with accounting for subsidies which is purely a political propaganda gimmick.

On the demand side, I shall restrict myself to only public housing. Take permanent residents off the HDB resale market. PRs not only increase demand substantially due to the large numbers, but many of these are from upper middle class and business owner class. They have the fire-power to push the market up. Admittedly, I have no data. But it's a no brainer taking the PRs out of HDB resale market will put a dampener on prices.

I am no Liu Wencai, the most hated evil landlord in the Mao Tse Tune era. (Actually, this evil stereotype landlord was a Communist Party propaganda creation to move their class struggle agenda. Liu was just a landlord protecting his interest). I suggest a way out for the PR debacle. HDB can set up an agency to handle a special HDB resale market segment specifically for PRs. This agency buys back HDB units from the resale market at open market rates, and maintain a small inventory for selling to PRs. A parallel HDB resale market for PRs can be allowed. To differentiate the products, the HDB may play around with the lease duration, shortening it to 5, 10, 15, 20 years etc. This may be advantageous to PRs who don't have a longer time horizon here. A further benefit is the management of the inventory allows the government a tool to control demographic patterns and avoid racial niches of PRs to develop.


CONCLUSION

The government should encourage public debate on issues such as this for its national implication. Issuing POFMA and scaring the shit out of well-meaning Singaporeans is not the way to go. There may be some smart professors in academia, or some smart alec undergrads, or just about anyone, who have some ideas but are dis-incentivised by POFMA. For example, my 2 brief suggestions here could spin off and attract more detailed examination and suggestions. Ideas and designs are incremental by nature. POFMA kills this process. The government should stop making POFMA the place where ideas go to die.  If the government disagrees with anyone, such as Yeoh Lam Keong, a former chief economist at GIC, simply say so and front-page their own views, or corrections, in the Straits Times. Afterall, for the government, it is only an opportunity cost to publish in the state media.

Related blog : Lee Kuan Yew Did Not Lie That Value Of HDB Flats Will Not Drop

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