Where the Public Housing System Should Be (With Diagrams!)

I'd like to make a quick comment on where I think the public housing system to be. The following diagram depicts the public housing market without specification of the number of flats supplied. (The market here consists of all Singaporean households with household incomes lower than the income ceiling.)

The reserve price would be the price below which HDB would not be willing to sell, reflecting cost or cost-plus. Now, I would like to consider the simple situation where all sale transactions involve purchases from HDB. With that, let me compare "low supply" with "high supply". Suppose that allocation is done according to the "most reliable market signal" of willingness to pay. Now let us consider "low supply".

With a low flat supply, only those who are willing to pay are able to get flats. Prices are high and much of the viable demand is not served due to scarcity effects. (... where viable demand denotes the number of flats that could be sold given market demand.) The above diagram reflects the perfect price discrimination scenario, which leaves no consumer surplus. (Somehow the shape of the postulated demand curve leaves little room for any consumer surplus even in the event of all falts transacting at the "equilibrium supply-mets-demand price.)

Of course, all flats are sold. Now consider "high supply".

Now, many more people can get a flat. Note that the surplus flat buffer allows for all flats to be sold at the reserve price. All viable demand is satisfied. One can see that some people without the means to pay still cannot get flats. Additional government measures may help more people to get flats, up to the flat supply. This has already been done through the creation of another housing market with a lower income ceiling. As for the rest who still fall through the cracks, I don't know. My sense is that a Singapore version of the New Deal could work.

I think the last diagram illustrates where I would like the public housing system to be. It better illustrates fulfilment of the first line of the HDB mission statement ("We provide affordable homes of quality and value"). In so far as this is a main objective of public housing, this is where we should be. HDB is doing well by ramping up supply.