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The Problem with HDB or Deflating the Housing Bubble-Part 2

7560796-golden-house-and-broken-nest-eggs-reflect-the-dire-situation-of-real-estate-investments-on-the-rocksIn his Parliamentary speech Mr Khaw describes how the government’s asset appreciation policy had allowed some HDB owners to build up substantial nest eggs.

However, Singaporeans have actually been short-changed by their government/landlord because they have been forced to accept housing quality and densities at a cost that in a democracy would be unacceptable.

Kirsten Han a Singaporean blogger wrote about the appalling quality of the high-rise block, higher density estate and smaller albeit new unit that her mother was relocated to under SERS.

Still housing costs might be expected to rise substantially due to economic growth and limited supply. However it is vital that we understand that high cost is to a large extent a result of deliberate government policies. What the PAP refer to as their asset appreciation policy.

First and foremost is the government’s monopoly over land and its control over the supply of housing.

Second is the government’s deliberate decision to increase the population so enormously through immigration and the foreign worker policy as well as the various measures it has taken to make HDB property look more attractive than other investments.

These have helped to push up prices but have perverted the HDB’s original aim.

Mr. Khaw mentions allowing HDB owners to own private property in 1989 as well as the decision in 2003 to allow them to sublet their flats.  However he omits to mention some of the other measures that the government has taken. These include allowing us to use CPF contributions to pay for our housing loans.  This was effectively a big subsidy to housing investment compared to other forms because payments came out of pre-tax income and had the desired effect of pushing up prices. In addition each succeeding Budget has brought more generous grants, which were originally intended for lower-income groups but were subsequently extended, to encourage ever more over-investment in housing.

Ultimately these subsidies and grants are self-defeating because they have just had the effect of increasing prices by the present value of the subsidies (see my earlier blog, “A Bulge in the Pipeline”).  As the CPF subsidy is worth more to the wealthier (though only up to the Additional Wages limit for contributions) it has the effect of diminishing housing affordability for those in most need of public housing.  Indeed HDB has come so far from its original aim that it now serves an opposite function.


Supply and demand
However the biggest contributor to higher housing prices has been the government’s policies on both the supply and demand side. Despite more than a million people being added to the population between 2001 and 2010 the stock of HDB units only rose by some 11,000 units between 2004 and 2009.

USA today also wrote about this problem that the government is creating on both the supply and demand side.
To quote, “ From the end of 2007 through last year, Singapore’s public housing resale price index soared more than 40%.The median price for a four-room apartment rose at the same rate during that time, from $215,000 to nearly $304,000. The actual rise, however, is “more dramatic,” because public housing flats are smaller today than in the past, says Kenneth Jeyaretnam, secretary-general of the Reform Party, a liberal free-market party.

Critics blame the price increases partly on the government’s inability to keep up with demand for public flats as Singapore’s foreign population surges.


The government is the largest landowner in Singapore, meaning “it determine(s) the market value of the flats depending on how much land it releases and the amount of flats it builds,” says Jeyaretnam.” From 2007 to 2009, residential housing flats increased by less than 5,000, while the overall population climbed nearly 400,000, according to government data.


The government has ramped up construction of public housing. But the “root problems” haven’t been addressed, according to Jeyaretnam, namely that the country has too many people and not enough housing.”

Too many people not enough housing. All those extra workers had to be housed somewhere. While allowing PRs to buy flats in the resale market may have marginally contributed to higher prices the biggest contribution has undoubtedly come from allowing owners to sublet their entire flat to foreigners and to hold private property at the same time as owning an HDB (once the Minimum Occupation Period has expired). The labyrinthine and often contradictory HDB regulations present ample loopholes to be exploited and they have been with alacrity by PRs and Singaporeans alike.

Economically renting and buying are more or less perfect substitutes (meaning that price changes in one market will be reflected immediately in prices in the other) and increases in rental yields will push up HDB prices.


These policies have made a mockery of the original intention of HDB . Instead they have been a big bribe to upper middle-income groups who have had the financial wherewithal to exploit these deliberate loopholes and anomalies. This has only served to widen income inequalities.


This government’s policies should have been to remove subsidies which largely benefited those who had more capital to start with and who in a free housing market would have been able to look after themselves.


An illusion of prosperity
Naturally, the asset side of the government’s balance sheet has increased in value as land prices have risen due to inelastic supply and ever-increasing population pressure.  Because of this asset price rise HDB owners have been given the illusion of increasing prosperity.

However there has been a fundamental mispricing in the HDB market in which decreasing time to expiry of the lease has not been taken into account.  HDB properties can be taken back by a future government at the expiry of the lease for no compensation. Yet properties with sixty years or less to expiry trade at very similar prices to new flats with ninety-nine year leases in the resale market. This is completely different from how leaseholds on private property are valued in Singapore. This is also completely different to how leaseholds are valued in any other country in my experience.


The buyers have been sold the fiction that an asset that has to be handed back to the government in at most ninety-nine years, and in many cases much less, will somehow ignore the laws of economics and keep on appreciating forever. Let me repeat that there has been a fundamental mispricing in the HDB market.

Singaporeans have been told by PAP ministers and in particular LKY over and over again never to sell their HDB properties, as they can only go up in value. No government that I am aware of has made such an explicit promise and it can only be characterized as highly irresponsible.  If a financial investment had been promoted in this way by a broker or corporation without any mention of the risks and investors had subsequently lost money, the buyers would be entitled to compensation.

In fact the financial crisis of 2008 and subsequent recession were precipitated by exactly this kind of move to urge mortgages onto buyers who used the assets to fund consumption. For many in the US and the UK as well as the Eurozone this resulted in negative equity and ultimately foreclosure.


The problem is that there is a fundamental conflict of interest between the government’s roles as provider of supposedly low-cost housing for the masses and as monopoly owner of at least 80% of the land in Singapore. This is why the PAP government has had a vested interest in pumping air into the housing bubble.  Until now they have been happy to maintain the fiction that the length of the leasehold does not affect HDB valuations. This is because with the deliberate creation of huge excess demand for housing the HDB finds it profitable to acquire existing HDB blocks from their owners and pay them compensation which is close to the price of new BTO flats. That is because they can vastly increase the density of housing on that area by doubling or tripling the size of blocks and building them closer together.


To gain an exact understanding we need to know how much the state’s land holdings are worth and how this impacts the government’s finances through the manipulation of land prices. This is one reason I called for the value of these assets to be listed In the Statement of Assets and Liabilities that the Finance Minister presents to Parliament every year at Budget time. How To Make A Surplus Disappear Without Anyone Noticing”.

Mr. Khaw’s Speech and Subsequent clarification by Blog


Khaw made two main points:

  • HDB prices were likely to appreciate much more slowly than in the past
  • A commitment to make new BTO flats in non-mature estates more affordable by bringing down the ratio of prices to median incomes from five and a half times to no more than four times (by his calculations)


In the article on his blog he suggested several ways this could be done without affecting the values of existing HDB owners:

  • Shorter leases for the new HDB apartments.
  • A radically different form of lease in which leaseholders would be charged lower prices based on historic land values but then would only be allowed to sell their flats back to the government at prices related to what they had paid for them


The latter proposal is similar to the Hong Kong system for public housing in which purchasers, who have to be below a certain income level, have to sell back to the government at a lower price or else pay back the subsidy they had received between the market price and what they paid. However in Hong Kong public housing accounts for a much smaller proportion of the total housing stock than in Singapore.


It is also similar to proposals from some quarters for flats to be sold at a price reflecting only the cost of construction and not the land cost.  It is hard to see how this is distinguishable from providing rented housing for lower-income groups since the flats in question can only be sold back to the HDB. Except that this ill-thought out proposal would allow those on higher incomes to benefit from the scheme and also provide a put option for existing HDB owners in the event of a crash since they could always sell their HDB flat back to the HDB for the price they paid for them and take out the difference between that price and the scheme price in cash.


Despite Mr. Khaw’s assurances that this would not affect the prices paid for existing flats it is easy to see why this is incorrect. Both measures would have serious implications for the prices of existing HDB properties.


Shorter Leases?


It is hard to see how this could be done without undermining the current fiction that

HDB properties with shorter times to run on the original lease are worth as much as newer ones.  And then what would happen when the government wishes to acquire the flats with shorter leaseholds?  In equity they would have to be paid less than those with longer leases.  Any adjustment of HDB prices to reflect the length of leasehold is likely to have unpleasant consequences for those who have overpaid for HDB properties in the resale market based on the illusion that the government has given them an implicit promise to extend their lease for free by exchanging their existing property for one with a fresh ninety-nine year lease.


Lower Priced But Restricted Housing?


Despite the minister’s argument that this would be a separate class of housing which would not be fungible with existing HDB properties, it is likely that the creation of this option would undermine the current market prices as a large proportion of existing demand was diverted into this new option. In particular it would be likely to make the current mispricing between old and new HDB properties equally untenable.


It would also, in my view, be unattractive for all the reasons mentioned above.




It appears that the government has decided that it will get more support by lowering prices for new owners even if this has the effect of lowering HDB prices generally. Or else it has not thought through the implications carefully enough. There is a more sinister interpretation. This is that with slower economic growth and thus a declining need to expand the workforce through immigration the HDB will no longer find it profitable to increase housing densities by acquiring units from existing owners and paying them compensation that does not reflect the diminution in value caused by a shorter time to expiry of the lease.  Singaporeans who have relied on HDB to be a secure investment that will never lose value may be in for some unpleasant shocks in the future.


In Part 3 I will discuss some solutions to the current dilemma that would allow Singaporeans to own their own homes rather than being leaseholders and dependent on the government.


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