In yesterday’s ST* it was announced that MM Lee had unveiled a five year master plan for Tanjong Pagar GRC and Radin Mas SMC. The imminent GE and the carving out of Radin Mas as a new SMC from Tanjong Pagar may possibly have had something to do with this.

But surely Singaporean voters are sophisticated enough now to realise that the money spent on upgrading their estates does not belong to the government and that such upgrading is a normal part of urban renewal that goes on in every country in the world? There is no reason to think that the Reform Party would not be able to make use of the same or different planners, architects and engineers to come up with at least as good a plan if it was in government or at least running Tanjong Pagar Town Council.

The unspoken implication may be that residents will not get the upgrading programme if they dare to exercise their democratic right to vote in an Opposition party candidate. After all it was not so long ago (in the 1990s in fact) that threats to delay or stop refurbishment of older HDB estates were used to try and stop Singaporeans voting for Opposition candidates. It is to be hoped that, if such threats are made, they will not work any longer given the increasing proportion of younger voters who have grown up with relatively unrestricted access to information about other freer and richer countries through the Internet. However there will undoubtedly be some subliminal effect on voters which might deter some of them from voting for us.

The details of the upgrading programme do not seem that impressive. Residents are entitled to ask the question why the lifts will not stop at every floor till 2014 and why handrails and ramps have not been installed earlier given the high proportion of elderly in Tanjong Pagar and Radin Mas. After all in most countries on Singapore’s level of per-capita income it is a legal requirement to provide access for disabled people to public buildings including public housing.

What is not revealed is how much of the upgrading will be paid for by a change in land density or re-zoning to allow new commercial developments in the area.  For instance, what was noticeable in the government’s recent announcement of an upgrading programme for Hougang was the fact that there was to be a new shopping centre, private residential developments and integrated transport links. The revenue from these new developments might presumably more than pay for the cost of upgrading yet this detail was not mentioned in the MSM.

In addition, if past precedent is followed, the residents themselves have to pay part of the cost of upgrading. Also the town council sinking fund pays for most of the cost of the LUP, or Lift Upgrading Programme.

So it is not clear how much of the cost will actually be footed by the government (meaning out of general taxation) and how much is financed by residents or self-financing.  Residents of older flats which are subject to the Selective Enbloc Redevelopment Scheme (SERS) may think they are getting a good deal as their old flats are replaced with new ones with approximately the same market value. However as there is normally a change in land density, involving the construction of much taller and bigger blocks packed more tightly together , the whole of the increase in the market value of the land may not be passed on to the leaseholder. In addition the new flats, though technically the same number of rooms, are much smaller than those built even fifteen or twenty years ago.

The Reform Party plans to allow HDB leaseholders to buy out their freeholds if this is technically possible so that they can sell their flats to the highest bidder and benefit from the full uplift in value just as those who own private property are allowed to do. We are confident that this will be of much greater economic benefit to homeowners than upgrading schemes that are largely self-financing. It will also be better than being effectively forced to relocate to new blocks at a location of the government’s choosing. Nothing could more clearly illustrate that HDB owners are merely long-term tenants than owners with full rights to their property.

However the truly astonishing part of the report is MM Lee’s assertion that:

“‘Eighty-five per cent are in HDB homes. We intend to keep the values of these homes up. They will never go down,’”

Does this mean that the government is guaranteeing that HDB flats will never fall in price? This seems an astonishing promise to make though it is perhaps less so in view of the fact that the state effectively owns 79% of the land and is by far the biggest homebuilder.  By squeezing the supply of new flats to a trickle over the last ten years while allowing a 25% increase in the population (all of whom have to be housed somewhere), the government have pushed up the HDB Resale Price Index by some 65% over the last ten years. These issues were discussed in my previous article, “A Bulge in the Pipeline”**.

Clearly the government intends to keep pumping more money in the form of subsidies into the housing sector, just as they have done recently by offering a Special Housing Grant to first-time buyers of up to $20,000 to those earning less than $1,500 per month.  This comes on top of up to $40,000 of subsidy which is already available. In the short term at least this will boost prices higher than they would be in the absence of the subsidy.

In addition it was already implicit in the Budget 2011 statement that the population would continue to rise. The Finance Minister spoke of economic growth of 3-5% per annum combined with productivity growth of 2-3% per annum (an ambitious target given Singapore’s poor track record).  This means that the labour force would have to grow up to 3% p.a. if participation rates remain unchanged.  This is the same rate that our population has risen over the last ten years and if correct means Singapore’s population will have to keep growing and not stop at 6.5 million which was the government’s original target.

These policies, together with the continuing monopolistic control over supply exerted by the HDB, may prevent property prices falling in the short term at least. It may even be that the government’s control over the property market has become much more effective than in the period from 1996 to 2002 when the HDB RPI fell by approximately 30%.

However it has to be questioned whether an indefinite continuation of the property price bubble will be good for Singapore and how long it can be sustained. With an increasing proportion of personal wealth tied up in housing, the bursting of the housing bubble will have severe consequences for the real economy.  The negative wealth effect and increase in the real value of debt will depress consumption and probably cause an extended period of negative or very low growth while the debt burden is reduced, just as has happened in the US and Europe.  While the low level of domestic consumption and high reliance on external demand as a source of growth may be an advantage in these circumstances, the effects of any severe fall-off in external demand could still be rapidly transmitted to housing prices particularly given the growing importance of the foreign population to sustaining these price levels. Even now the elevated level of prices for basic housing is of serious concern to those who are not fortunate enough to own a property yet.  Despite the oft-bandied statistic that 85% of Singaporeans “own” or live in an HDB flat this is probably about half the population. I would rather see some air being let out of the balloon now than it bursting with serious economic consequences at some point in the future.

MM Lee’s assertion that HDB prices will never go down would not receive serious attention if it was made about stock markets or other asset markets. Singaporeans should treat this with the same caution and not be sucked into believing that the laws of gravity can be indefinitely suspended just because the government says so. Such hubristic statements have historically been a good contrarian indicator.

*http://www.straitstimes.com/News/Home/Story/STIStory_647111.html

** http://sonofadud.com/2011/02/03/a-bulge-in-the-pipeline-or-how-to-create-a-housing-bubble/

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam