Extracting Land Dividend Thru' Public Housing
By the late 1980s, the 2G Government began to price the land cost component in HDB apartments at market rate to extract the rising land dividend. Prices of new HDB apartments began to creep up because of a higher land cost component. To justify the price increases, the Government expanded the objective of public housing program from just homeownership to include also asset enhancement. The price hikes translated into handsome profit for early homeowners who bought their flats at much lower prices and thus benefited from the growing land dividend. But the high price also meant that the land dividend now accrued no more to new homeowners but to the Government.
11 September 2019
Notably, during the early years of HDB history in the 1960s and even 1970s, the 1G Government chose to price new flats affordably not only because they were built on state-owned land acquired from private landowners at below market prices but also that household incomes were generally low.
Re-Positioning Public Housing as Investment Asset
This change, however, by the late 1980s when the 2G Government began to price the land cost component in HDB apartments at market rate to extract the rising land dividend. Prices of new HDB apartments began to creep up because of a higher land cost component. To justify the price increases, the Government expanded the objective of public housing program from just homeownership to include also asset enhancement.
The price hikes translated into handsome profit for early homeowners who bought their flats at much lower prices and thus benefited from the growing land dividend. But the high price also meant that the land dividend now accrued no more to new homeowners but to the Government.
Price Spiral Created by Linking Prices of New Flat to Resale Flats
The mechanism that played an instrumental role in pushing up prices of new HDB flats was the resale market created in 1971. Prices of resale HDB apartments were used as benchmarks for pricing new flats.
Prices in resale market were moderate initially. But when new flats began to be sold at higher prices after the late 1980s, the peg created a price spiral between new flats and resale flats. Price increases only began to moderate due to the Asian Financial Crisis and to an oversupply of new flats built based on HDB’s projection during the late 1990s. But by 2006, prices of both began to accelerate again.
From 2006 to 2012, for example, prices of a resale 5-room HDB flat in Ang Mo Kio increased 86% from $327,000 to $609,000. Closely tracking the rise in resale prices, flats in a nearby new town Sengkang, now launched under the new built-to-order (BTO) scheme, also saw a price increase of 85% between 2005 and 2011.
To enhance affordability, repayments of home loans for BTO flats were stretched from 20 years to 30 years. In reality, the extension of the loan term not only provided room for BTO prices to rise further but also translated into more interest payments for homeowners, adding to the total costs of the BTO flat.
Measures to Enhance Affordability
In the aftermath of the 2011 general election, when votes for the ruling party sank to historic low, several measures were implemented to address concerns over rising housing cost. Firstly, BTO prices were delinked from resale prices in 2011 to stop the price spiral. Next, the Government also announced new grants for eligible homeowners buying their first BTO flats to make the purchase more affordable. In 2013, loan term was reduced from 30 to 25 years. In 2015, more new grants were again announced before the general election to quell discontent over high BTO prices.
Given that the objective of the delinking was to slow the rise of BTO prices, the general expectation would be for BTO prices to moderate after the delinking. On the contrary, data in 2014 actually showed that despite falling resale prices, BTO prices continued its rise. Between Q2 2012 and Q3 2014, for example, BTO prices of lowest-priced 4-room flats in Sembawang rose 6.7% even though resale prices fell by 9.3% during the same period.
Flaws in Government’s Defence of its Affordability-Based BTO Pricing Model
The Government defends the high prices of public housing by claiming that
HDB flat is an investment asset and homeowners stand to enjoy capital gain
prices are fair because they are determined by market forces
despite the high prices, HDB apartments remain affordable
By definition, the value of any asset is the present worth of the stream future incomes generated by the asset. However, HDB flats are generally not for renting. Since the flats do not generate income, they are in reality not investment assets but consumption goods. Moreover, HDB flats come with a lease that expires, unlike many private properties which are freehold. Hence, the value of HDB flats will inevitably depreciates over time with the rundown of the lease until they are worth nothing when the lease expires.
The Government had been able to position a HDB flat as an investment good by leveraging on the illusion of the extraordinary profits made by early homeowners who bought in when prices were low. In reality, there is little room for profit for later homeowners because of the high prices they have paid especially after accounting for the interests homeowners pay to HDB.
History has also repeatedly shown that asset prices can never keep growing without resulting in the creation of an asset bubble. In the end, late comers in the housing market would be burdened by high housing costs with little room for profit, not to mention also the heightened financial risk associated with an oversized housing loan. The proposition of a leasehold HDB flat as an investment asset is therefore fundamentally flawed.
Next, the Government justified its high housing-price policies by claiming that prices of new BTO flats are determined by market forces through the peg with prices in the HDB resale market.
The truth, however, is that Singapore’s public housing market is hardly a free and competitive one with the Government acting not only as the sole supplier of land and developer of public housing but also as policymaker and regulator of the housing markets. Because of the extensive control it can exercise over supply and demand of the BTO and resale housing markets, the Government possesses both the motives and means to push prices up incrementally. Claims by the Government that BTO prices are determined by free market forces are therefore untenable.
Finally, Government has persistently maintained that even though the prices are high, new flats remain affordable. To begin with, the concept of “affordability” is a double-edged sword. At times when income is low, setting selling prices of public housing below costs enhances affordability but the subsidy becomes a heavy fiscal burden for the government while homeowners stand to enjoy a windfall subsequently when they sell it. That is inequitable to the State. Conversely in times of rising income, affordability means that selling prices may be set above costs to the detriment of the homeowners while rendering the government with an extraordinary profit. That is inequitable for homeowners.
Conceptually, therefore, a pricing strategy that is based on affordability is flawed and unsustainable if implemented. This is why no producer in any competitive market can price his products based on consumers’ affordability. Producers that overpriced their products based on affordability will simply be forced out of the market by their competitors. The only exception is when the producer is a monopoly and has unrivalled pricing power. Hence, Singapore’s affordability-based pricing of BTO flats stands as proof that Singapore’s public housing market is not a freely competitive market.
In the end, the high prices result in wealth transfer from the people to the State leaving homeowners with inadequate savings in the Central Provident Fund for their retirement. Even though Singapore has one of the highest per capita income and saving rates in the world, Singaporeans worried about adequacy of their savings for their retirement.
In short, Government’s justifications of its BTO pricing policy do not stand up to scrutiny. As a result, public housing pricing continues to be a contentious issue. The Government is left to defend an otherwise first-rate public housing program and a well thought-out retirement saving fund (CPF), both started by the altruistic 1G government. Pricing of new flats becomes increasingly politicized with the Government promising more and more grants before very election to pacify voters.
Meanwhile, the unresolved issue of declining resale prices with the rundown of the lease remains a ticking time-bomb for the future governments and homeowners down the road. In effect, the current government has mortgaged the future of generations of Singaporeans to come by extracting the land dividend today through public housing.
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 (Phang, 1996). 070000 SMU - The Singapore Model of Housing and the Welfare State (Phang SY)
 Phang, S.Y. (2012). “Public Housing: Appreciating Assets?”. Research Collection School Of Economics. Research Collection School Of Economics.
 See Feecha (2014). “HDB BTO Prices Increased 6.7% but Resale Price Index Fell 9.3%?”