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Why More Housing Grants is NOT a Solution 

In reality, the list prices of new Built-to-Order (BTO) flats do not reflect the full cost of homeownership. For example, the official price tags omit interest payments which work out to be a substantial amount because of the combination of high loan amount and the long loan term. Take for example a homeowner who bought a four-room BTO flat costing $562,000 in May 2019 in a matured estate. After adding in interest payable to HDB amounting to $181,950, the final total price of owning the flat is $743,950. If he decides to sell the flat, he pays another $40,000 to HDB as resale levy. His total cost at the point of resale is therefore $783 950 for a house priced at $562,000 at the point of BTO. That is about 40% more added to the official BTO price. Perplexingly, many homeowners do not factor in interest payments as part of the total costs of owning a home because it is hidden in the seemingly affordable monthly mortgage payments spread over a long loan period of 25 years.

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18 September 2019

With the election nearing, the Government again announced higher housing grants for first-time homebuyers to make the pain of high housing costs more bearable. But grant merely addresses the symptoms without tackling the root cause which is the high land cost. It is like doctors prescribing paracetamol (panadol) to suppress recurring fever caused by an infection without tackling the infection itself.

The root of the problem of high housing cost is the Government’s switch of its pricing approach since the late 1980s to one that is based on affordability. As income rose over the past three decades, the approach allowed the Government to push up housing prices to the upper limit of households’ affordability to reflect the rising land value. Today, with wages stagnating and job opportunities dwindling especially for young Singaporeans starting out, public housing is viewed increasingly as unaffordable.

 

BTO Prices Do Not Reflect the Full Cost of Homeownership

 

Moreover, the list prices of new Built-to-Order (BTO) flats do not reflect the full cost of homeownership in reality. In particular, the official price tags omit interest payments which work out to be a substantial amount because of the combination of high loan amount and the long loan term. In addition, there is also a resale levy that homeowners pay when he sells the flat. Though strictly not a cost of owning a flat, resale levy still adds on to the total cost which will impact on whether the flat generates a capital gain when sold.

 

Take for example a homeowner who bought a four-room BTO flat costing $562,000 in May 2019 in a matured estate. After adding in interest payable to HDB amounting to $181,950, the final total price of owning the flat is $743,950. If he decides to sell the flat, he pays another $40,000 to HDB as resale levy. His total cost at the point of resale is therefore $783 950 for a house priced at $562,000 at the point of BTO. That is about 40% more added to the official BTO price.

 

Perplexingly, many homeowners do not factor in interest payments as part of the total costs of owning a home because it is hidden in the seemingly affordable monthly mortgage payments spread over a long loan period of 25 years. The omissions of interests and resale levy mean that any capital gain from the resale of a HDB apartment is overstated while the costs and financial risk of homeownership are substantially understated.

 

The high interest payment is also another reason why the current pricing approach is inequitable to homeowners. Even if the rise in land value should go fully to the State and kept as reserves, for the homeowners to borrow money from the State to pay that high land costs to the State and in the process further incur substantial interest payments again to the State exacerbates the inequity.

 

More about Equity, Retirement Funding and Financial Resilience than just Affordability

 

In effect, the high land costs and interests result in inequitable transfer of wealth, in the form of CPF savings, from the households to the State.

 

Using again the example of a homeowner who bought the four-room flat with a BTO price tag of $562,000 in May 2019 but in the end paid a total of $783,950, 64% of that amount is pure profit to the State hidden as land costs, interests and resale levy to homeowners. Construction costs incurred by the Government, on the other hand, account for only 36% of the homeowners’ total payments. And if land cost turns out to be even more than the 50% assumed, as it is commonly speculated, then profit to the State will be even higher than 64%.

 

As a result of the wealth transfer, CPF savings meant for retirement have been seriously drained. Singapore has one of the highest per capita incomes and saving rates in the world. Yet, paradoxically, many are increasingly concerned over not having enough CPF savings to fund their retirement. One contributing factor, no doubt, is the unequal income distribution which leaves the wage earners at the lower rungs with little to save for retirement. Their plight, however, is compounded by the housing ‘investment’ which constitutes the biggest drain on their CPF savings.

 

American researchers, for example, had shown through simulations in as early as 2002 that the average worker in Singapore was likely to be `asset-rich and cash-poor’ upon retirement with 75% of his retirement wealth in housing asset while the similar figure for an elderly household in the US would amount to only 20%.[1] Given that housing prices have since risen substantially, housing asset in Singapore is likely to constitute an even higher percentage of retirement wealth today.

 

Any talk of returning public housing to “basic” must therefore involve looking at not just affordability but also its impacts on retirement funding.

 

Policymakers have chosen to tackle the retirement funding issue by extending retirement age but that policy approach is shortsighted. In the coming decades, many jobs will disappear because of the 4th Industrial Revolution. With dwindling job opportunities, older Singaporeans may need to retire earlier, not later, to make way for younger Singaporeans.

 

Options are also available for senior homeowners to monetize their housing asset by downgrading or lease buyback. However, those options create new problems while solving one. Lease buyback, for example, will leave the State with an excess supply of old flats. It also does not address the issue of inequitable wealth transfer from the households to the State through the Government’s misrepresentation of public housing as an investment asset.

 

Retirement funding is not the only issue. The high housing loan taken by homeowners also renders them financially less resilient in the long term because they are increasingly likely to be hit by declining earning power or even structural unemployment due to not only their age but also technological changes.

 

Already, the number of households in arrears of their mortgage payments has risen over the years. In 2002, for example, 21,800 out of 540 000 households or 4.0% of the households had problem paying. The rates of default and repossession rose even when the economy was booming. From 2002 to 2006, for example, 360 households surrendered their flats after defaulting on their mortgage loan repayments. In 2008, when the recession began to hit, 32,000 or 7.7% of all flat owners servicing their HDB home loans were in default. By January 2009, at the height of the Global Financial Crisis, that number grew to 33,000 out of 420,000 households or 7.9% of the households. As a result of rising default rate, HDB homeownership rate among resident households declined steadily from the high of 91.9% in the 2002/2003 period to 89.9% in 2012/2013.[2]

 

Going forward, given that many homeowners bought their flats at even higher prices in recent years and with wages stagnating in the lower rungs and living costs still on the rise, HDB mortgage default rate will likely to be higher in future economic crises.

 

More Housing Grants Not a Long-Term Solution

 

High housing cost issue is therefore not just about affordability for homeowners. The long term risks of inadequate retirement funding and rising financial vulnerability cannot be mitigated by dispensing more grants to enhance affordability in the short term. Housing grant is therefore not a long term solution to the high housing cost problem. It is more a short term feel-good pre-election jab to win vote. The timing of its announcement stands testimonial to that.

 

Moreover, despite the attention-grabbing headlines, few first-time homeowners will get the maximum amount of grant announced. The actual amount received will depend on “buyers’ income, choice of flat type/estate, and eligibility”. In the end, the grant each homeowner receive may only be a small fraction of the high land cost embedded in the price of new BTO flat. Furthermore, the grant will eventually be returned to the Government as resale levy when the homeowner sells the flat. Some homeowners may get only a grant of $5,000 but returns $40,000 in resale levy. They fare better not to have the grant and doing away the resale levy.

 

In addition, all homeowners are not entitled to any grant for the purchase of second BTO flat. As long as a homeowner buys a second new and more expensive BTO flat, whatever remaining gains from the earlier grants after paying the resale levy is returned to the Government through the high BTO price he pays for the second flat.

 

This is very much like a casino giving out a $10 coupon to induce gamblers to play the jackpot machine. As long as they continue playing, even if they win initially, they will most probably still lose everything in the end, including possibly some of their money.

 

A Ticking Time-bomb for Future Governments

 

Going forward, unless the pricing model is fundamentally changed, the issue of public housing will become a ticking time-bomb for the future governments because many homeowners will

  • see their wealth dissipate as the resale value of their flat heads drastically south with the run-down of 99-year leases

  • face difficulty servicing their housing loan and risk losing their flat as they age because of rising risk of structural unemployment

  • have problem financing their retirement in their senior years because their CPF savings have been substantially pared down by the high housing costs.

While we work to contain the damages of the Government’s rent-seeking housing policies by introducing options for senior homeowners to exit and monetize their housing asset, efforts must be made to switch over to a fairer, non-rent-seeking and hence sustainable pricing model that makes public housing genuinely affordable, even without grants, particularly for young Singaporeans starting out so that decades from now, they can escape the ‘money pit’ that their parents are trapped in today.

 

So, what can Singapore do?

 

A cardinal rule of policymaking is that every policy should be devised to serve only one policy goal. The current mess began because both housing and CPF policies are made to achieve more than one goal. Instead of giving people high-quality and affordable housing, HDB now builds investment assets. Instead of helping people to save for retirement, CPF savings are used to not only finance but fuel spiraling housing prices.

 

A more fundamental solution is therefore for both the HDB and the CPF to go back to serving their original objectives of providing high quality affordable housing and of saving for retirement respectively.

 

NEXTStopping the Wealth Transfer by Deferring Land Cost Payment

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REFERENCES

[1] See McCarthy et.al. (2002). McCarthy, D., Mitchell, O.S., and Piggott, J. (2012). “Asset Rich and Cash Poor: Retirement Provision and Housing Policy in Singapore.” Journal Of Pensions Economics & Finance . Volume 1, Issue 03, November 2002.

[2] Romesh Navaratnarajah. (2014). “Homeownership in Singapore down slightly in past 10 years.” 22 September, 2014. Property Guru. http://www.propertyguru.com.sg/property-management-news/2014/9/64644/homeownership-in-singapore-down-slightly-in-past-1