Moving to

I'm moving to Mostly.

I plan to use that site as a "self-marketing website" of sorts and to manage content in a way that I would otherwise not be able to do on blogger alone.

This blog will stay, ostensibly for more provisional ideas prior to refinement. I'll be gradually moving content (I still like) over to the other website. =)

Monday, May 2, 2011

Solving the Singapore Housing Problem: A Very Radical Idea

Affordable housing for the young in Singapore is one of the key drivers for the vital national strategic goal of population renewal. It is also a "difficult" problem to solve as one would like to reduce housing prices for new buyer while not destroying the "value" of public housing that has been previously purchased.

As a preliminary, we must note that in public policy there will be winners and losers. Singaporean singles have been losers throughout Singapore's history as a result of housing policy. It is clear that to solve the problem of rising housing costs for first-time buyers, current flat valuations cannot rise indefinitely.

Before attempting a solution, it bears considering whether there is a point to solving the problem. If not, we are done and you can stop reading. As usual, the strategic aspect is my justification for mobilizing our efforts to solve the problem.

Consider defence. High spending on national defence is not of immediate benefit to the nation or even of much benefit in the near future. But, security is a strategic imperative which is a key enabler for secure economic expansion and consolidation. So we spend money on it continuously. If being a nation of homeowners is a strategic objective, in so far as it is important, we should be willing to spend an increased amount of money on it over some non-perpetual time horizon. If easy home ownership truly drives population renewal and population renewal is a strategic objective, then we should be willing to spend.

Naturally, if we spend money, we will, by definition, improve the situation. So I lodge the caveat that there must be a price we are willing to pay, and we will refuse to pay any more than that.

While I have official numbers, I cannot use them here. And since I do not have access to them at this very moment, I will guesstimate using publicly available information.

Via Census 2010, in 2010, Singapore's resident population numbered 3.771 million people (3.231 million citizens and 0.541 million PRs). HDB reports that currently 84% live in HDB flats. Assuming 4.5 residents per flat, we'll have about 0.7M flats. Suppose the average HDB flat has market value $300k.

SingStat reports that the median monthly household income is $5000, $4000 after CPF for those under 50. Suppose $2000 is used to pay for a home each month interest free, and the goal is to own one's own home in 7 years under such terms, we should target an average price of $170k. This is in line with reversing the 11.1% year on year price increases over 2005 to 2010 (69%).

Suppose we aim to reduce the average market value to $170k over 10 years. (I'm not, at the moment, asserting that we should.) On the surface, this entails a reduction in value of $92 billion, which has already been paid out by the current residents.

On closer observation, this is not the case. We do not want this to be a capital gains exercise, so we have to peg the value returned to the purchase price of the flat. In this event, the flats bought before 2005 are, on average, cheaper than $170000. It is the post-2005 purchases that we are concerned about. If we suppose that 20000 flat purchases were made annually, this means that it would cost $7.8 billion to compensate people for the government imposed fall in flat prices. Paid out over 10 years, this would be $780 million annually.

This is a very radical plan. Let us consider who wins and who loses.

Winners: (i) New flat owners, who may then go about making babies (or so they would like us to believe), and (ii) former HDB flat owners who cashed out after 2005.

Losers: (i) HDB flat owners who bought their flats more than 5 years ago and would like to upgrade. The capital gains due to appreciation from the 2005-2010 period will be wiped out, and (ii) all HDB flat owners who took loans and paid interest on the higher principals.

This might widen the real gap between the cost of public and private housing. (It may also remain the same as there will be less upward pressure on private property prices leading to their fall.) This is just as well. It is not the government's duty to ensure that people are able to upgrade to private property, neither should it be an objective that people should be able to profit off public housing as the ones that are buying are typically younger citizens. Public housing is not meant to be a multi-level marketing scheme.

Where would we find $800 million a year for 10 years? Let's cut the Defence... Firstly, HDB has been selling more expensive flats for the past 5 years, this is to be given back. I do not buy the "cost of land" argument. Public housing is a public good that is supplied by the government under the price the market is willing to supply it. Similarly, market prices are not paid for national defence and civil defence.

There are about 6500 resale transactions a year, with this winners, who cashed out after 2005, took away $2.55 billion (or about $78k per household). Now what we really have to fund is the capital gains of the roughly 32500 who cashed out. With HDB returning its gains, $255 million a year for 10 years remains. This is no pocket change, but it is a lot more manageable now. What would make this even more manageable would be to return money, first, to CPF up to the amount paid out of CPF. This would probably lengthen the repayment horizon to 20 years.

As for really raising the money, my solution for raising the money for this and everything including education and social safety nets is to raise corporate tax (the headline rate is 17%) and upper bracket income (the headline rate is > $320k is 20%; higher brackets could be created). That's where most of the GDP growth went anyway. (My sense is that, the richer oone is, the more the state expends to protect one and one's property. This is a service that should be paid for.)

This is just an idea, and a radical one, which I arrived at after sitting down and thinking: Let me, right here, right now, come up with an plan for solving the problem of expensive housing. I'm surprised that it was not even more radical. (Costing > $10 billion) So here's a plan. I'd like to hear more.

As a postscript, I note that in the run up to polling day, Lee Kuan Yew has accused Tan Jee Say of not being qualified to draft an economic plan for Singapore. While I respect Lee Kuan Yew's achievements, I do not appreciate his personal attack, and see it as one on myself as well. It would befit a man of his standing to, rather, rationally attack the ideas rather than the person. I, myself, like talking about public policy in a rational manner.

I, pardon my pride, see myself to be just as able, in this respect, as administrative service officers, given my larger and more specialized toolkit. (In their favor, they are reasonably capable and have access to more detailed information.) This is not all hubris and I know where I stand. Just in the recent months, I've had a government scholar delightedly refer to himself and colleagues as "laymen" when I presented them with a "free gift capability". They also accepted my practical recommendations on how to plan their own organization (which were a step down from a better solution that I wanted but knew would be difficult to achieve politically). I have also had a hand in some changes in Q1 2011 that will have a positive impact on the lives of Singaporeans in some parts of the country. This may not conclusively prove that I know what I'm talking about, but it might indicate I'm no hack.

There are many such as me who do not love "policy work" but are probably better able to do it by virtue of a combination of good technical skills and wide breadth of knowledge. We have the vocabulary for the task and it would be irresponsible to write us off. By all means, attack the ideas so we can sharpen them, but to attack the person is distracting, distasteful and dishonest.

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