LEE KUAN YEW DID NOT LIE THAT VALUE OF HDB FLATS WILL NOT DROP

 

In my previous blog "HDB punditry - an outside the box view with stuff no one told you before" I referred to the 2011 speech of Lee Kuan Yew. I clarified that Lee was referring to maintaining values of HDB flats with estate rejuvenation and not prices which everyone knows is a ridiculous proposition in the case of a wasting asset such as a leasehold. I also referred to the famous quote of Oscar Wilde on prices and values. Less Singaporeans be branded as a people who knows the price of everything and the value of none, I like to expand a little bit on this rather gray subject. What then is price and what is value.

One of the first to ponder about 'value' was Socrates (460-399 BC). He taught happiness did not come from ownership, but from the use of the product or service. His is a utilitarian concept. Thus value is subjective and it follows people will pay for stuff according to how good they feel about it. This is nowhere more captured than in auctions. How much is one willing to pay for the Mona Lisa, not that the Louvre Museum is willing to sell it. The painting was insured in 1962 for US$100m, so adjusting for inflation, it should be worth more than US$800m today. A Japanese businessman bought Van Gogh's Sunflower for US$40m in 1987, an unbelieveable sum back then. These paintings mean nothing to climate activists who will splash ketchup at, or glue their hands to, these paintings if they could.

Price is the sum for which the seller is willing to have to forego the product he owns or to perform a service. The onus therefore falls on the seller or business person, to have an understanding of values to buyers in order that he can price rationally. But Socrates was wrong in that utility is not the exclusive factor on which price is based. There are various other factors in the realm of behavioral sciences that motivate individual desires to spend. Top of the crop is snob appeal. A Rolex and a Citizen watch tells the same time. A Honda civic and a Bentley gets one to the church or school.

A couple of weeks ago I was having coffee with a friend. We have not met for more than a decade, so it was a good re-union. As we shared old stories there was a moment of spontaneous chuckle when we realised we frequented the same shoe shop in our younger days, and the reason it being a local cheap brand. That was the Crane Shoe shop at the junction of Cross Street and South Bridge Road. I had a new pair of Crane shoes every Chinese New Year for a decade. I still had Crane shoes on when my pay check had reached a pretty serious level. Then there was a day I was out about town when the Crane decided to split, of all places right next to a high fashion shoe shop. I had no choice but to buy a branded pair at 10 times the cost of Cranes. Of all names, it was called Mercedes. I have never heard of the brand, but just assumed it must be 'branded'. As it turned out, it was comfortable and lasted me 3 years. So I was convinced price-value-quality-snob appeal somehow are good friends.

When price is predicated on quality, it leads to abnormal market behavior. Consumers might assume the higher-priced product is the better stuff. This is very apparent in the vanity products market, but it permeats everywhere. A 99 year condo is much better quality than a HDB flat.  An expat employee is a much better staff than a local lad. If our ministers are paid a million bucks, they are obviously the best in the world.

Thinking about prices can really drive one crazy. If one is 'brainless' one nevertheless understands the 'less' is a condemnation of a lack of the grey matter. Priceless, on the other hand, denotes the object is so valuable that one cannot put a price on it. What price honour, love, friendship, loyalty.... The economic laws of supply and demand tells us scarcity drives up prices. Yet the more HDB flats that come into the market, the higher the prices climb. There is only one YOU in the universe, and yet a CECA can easily kick your butt off the company chair you have been occupying for years.

Socrates and classical economists' idea of the theory of value that determines prices got kicked in the butt by the Water-Diamond paradox. Water is a life-giving essential, thus most valuable, yet a useless piece of diamond is worth much more in price. Karl Marx and his red gang then came along to preach cost of labour underlies all prices. Everything comes from labour. Thus to control prices is to control the country, and to this end, one must control the workers. Cry 'Revolution!' and let's organise the proletariat against the bourgeoisie and paint the town red. When the East has turned Red, and Mao Tse Tung started paying doctors and road sweepers at the same price, things didn't seem to work. Free economy thinkers came along, with people like Adam Smith and his book Wealth of Nation.  Free doesn't mean goods are given away freely. It meant let the market decides. Let the factors of production find it's own equilibrium. Given the tug of supply and demand, there will be a right price for your products. John Maynard Keynes then appeared and said bs to prices. Doesn't matter the prices. We can spend ourselves out of the miseries in times of economic depression. And so here we are, our sense of values and utility of products and services remain basically the same, but the prices of everything are sky high. All the sea shells in the world today cannot possibly pay for an apartment in Nathan Residences.

Despite the lofty positions of economists, price remains the domain of the marketers. Smart alecs that they are, technology allowed them to hijack Socrates' idea of value-in-use to price products in a new sharing-economy. You don't have to pay a high price for a car or a bicycle, for example. Internet technology now allows transactional cost to be lowered to enable the sharing economy. Pay-as-you-use scheme is in it's novelty phase. Will it become mainstream? It may if Klaus Schwab has his way of making us 'own nothing and be happy'.

Increasingly, smart marketers are applying behavioral sciences to their work. Particularly high tech data capture can now supply broncobytes (one bronco equals one quadrillion terabytes) of data which big data analytics can make sense of. Data is now of great utilitarian value in price setting. Thus the rise of big techs as data or information is king. Marketers now have more ways to set prices. Take for example the concept of multi-product pricing. Various related products can be packaged together and sold under a single price. This is called bundling and can be seen in pricing for electricity and telecommunication products and services.  The travel industry is full of these packaged products.  A primary advantage of bundling is the price of one allows the sales of lower quality, or lesser in demand products, to be passed off to consumers.  Singapore is the only country in the world to apply bundling in politics. The GRC or Group Representation Constituencies is a scheme to elect 5 candidates on a single ticket, the original objective being to ensure minority representation. This bundling scheme thus allows neophyte, lackadaisical or lesser known candidates to ride along the coattails of bigger guns in an election and get helicopter-dropped into positions of political power.

An interesting use of behavioral science in marketing is what is known as 'number anchoring'. Marketers provide 3 products priced differently with different qualities, benefits or features. The cheapest is a very basic product, say at $20. The next product at $40 has much better features. The 3rd is a premium product that is choke-full of features and benefits that most people don't really need and this is priced at $300. The choice between $20 and $40 is a bit difficult to consider, but the choice between $40 and $300 is easy. The tendency is consumers will pick the $40 product. Consumers are anchored on numbers psychology. 'Number anchoring' could probably have something to do with why leasehold private condos sell like hot cakes in Singapore. In the value theory of good-better-best, there is HDB, leasehold condos, and the extremely higher priced freeholds. The 'better' numbers outperform.

 

A similar version is to get customers anchored on 'functional fixedness'. Back in 2019 the black fashion mogul Kanye West, sold his Yeezy brand "church clothes" at the famous Coachella Valley Music & Arts Festival. He had various products, most expensive was a sweatshirt at $225. He received lots of criticism for pricing way too high. In reality, his products were competitively priced with many other branded fashion ware at the festival. The problem was his stall was at a church and he positioned Yeesy as 'church clothes'. Because people has 'functional fixedness' and the psychological make up of people in relation to 'church' is it is a social thing and should be at giveaway prices.  

The mention of church leads me to 'just pricing', which is an attempt to insert moral and ethical values into pricing. Basically, it is an attempt to discourage predatory or exploitative pricing. This has led Shariah Laws to ban Riba, or interest, and Muslim scholars to introduce and codify Islamic finance. However, it is the Western Europeans which first tackled usury hundreds of years before the Muslim world. Thomas Aquinas objected to usury, as deed Gautama Buddha who long preceded him. Usury is the lending at very high interest rates. Lending at exhorbitant rates are done by loan sharks. Most countries like Singapore have banned loan sharks, but there is no usury law. States in US have their own usury laws which impose a maximum interest rate for lending. 

The PAP has delivered on the promise of home ownership, quantitatively in early years, and qualitatively in current times. The generation that knows what it was like to live in houses with raw earth for floors, communal taps, exterior bucket toilets and kerosene pressure lamps, and then to upgrade to granite and marble floorings and other trappings of modern living, do not take things for granted and remain appreciative. Post Merderka generations have higher expectations. Singaporeans may not know about the value theory of good-better-best, but they surely want stuff good and cheap.  The Urban Land Institute home attainability report 2022 (Asia Pacific) I shared in the previous blog indicated public housing HDB prices is the most affordable amongst the 31 cities surveyed, but these are leasehold real estate. The Singapore private housing is not affordable. On top of this, the denominator of household income is not qualified. Singapore household is majority double-income earners, other countries are not. Thus housing affordability based on the metric of median multiples is skewed in favour of Singapore. The situation is likely to be more dire than the statistics show. So while HDB values may not drop, there is ground for suggesting some 'just pricing' be applied to public housing flats.

Related blog : Housing Punditry - An Outside The Box View With Stuff No One Told You Before

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