On "Economic Flexibility"

Being pinned down is no fun. It can be tremendously suffocating knowing that you are trapped and there is no way out. This is really the situation that many Singaporeans find themselves in. Young Singaporeans find themselves in low income jobs (as benchmarked to comparable work overseas). The necessity of a roof over their heads leads into expensive mortgages for houses whose title deeds their names are not on. It is a rut. A sad, sad rut.

The financial burden often deals a death blow to any enterprise that would entail risk. Aspirations are killed and with them, the possibility of a stronger, more vibrant, more productive economy. This may seem to be quite a logical leap, but it most assuredly does follow.

We are in need of new enterprises that generate real-value to rejuvenate our economy. The Singapore government knows this and is already gambling on what might generate, in public service lingo, the next S-curve. These businesses we need are certainly not the “safe” businesses that exploit the socio-politico-economic system to extract rents (or isomorphically, protection money). The desirable businesses will create goods and services that add-value to the lives of people or facilitate the conduct of people’s lives or businesses. Barring the most brilliant insights into consumer needs, almost all value-adding businesses will carry considerable financial risk as they will have to be operational before they can be revenue generating. The founders will have to raise capital by debt or (in the fortunate but rarer cases) issuing equity while running the risk of failure.

Many young people leave school with a different perspective on how things might be done. They have learnt about possibly new ways of doing things in school and after a year or two of hands-on work, they are ready to combine the updated perspective from the academy with their knowledge of current practices into a business. Unfortunately, the vicissitudes of the Singapore system catch up with them. Already a few hundred thousand in debt after paying for the lease of a HDB flat, the capacity to take on the additional risks of starting a business is lost.

What I hope for Singaporeans is Economic Flexibility. It is being released from the economic coercion of debt and financial risk and being able to pursue experiences and/or enterprises. While there is something primordially irreducible in start-up costs for businesses, we can do something about the financial burden that young Singaporeans are forced to shoulder. Possible angles of attack for this problem, which might yield huge dividends, are the cost of housing and the financial outcomes associated with the risk of medical disaster.

The SDP has published a proposal for a national healthcare insurance system and it looks good. In fact, I’m told that a number of doctors thanked the authors of the proposal for bringing up that important issue. Should that proposal or a variant of it be implemented, perhaps 90% of Singaporeans will have a substantial fraction of the financial risk associated with medical issues reduced.

From the housing angle, the first question to be asked is whether public housing has to cost so much. It turns out that construction costs are not as outrageous as HDB flat prices are. This is because flat prices consist of the construction cost, cost of overheads, and the cost of land. Based on the fact that flat prices have essentially doubled since 2005, while construction costs cannot be said to have increased by much, it then follows that land costs, which reflect market prices, must make up a large fraction of HDB flat prices. I’ve written about how we can create a public housing system that better meets the needs of Singaporeans without destabilizing the present housing market. (Tentatively, the reader may ignore the pricing recommendation. I've had a lot of push-back from people on the matter of pricing with auctions so it may detract from the point I'm trying to make here. The auction is for allocative efficiency and represents pure consumption of households. The article may be read as if a fixed price were recommended.) I’ve also written about how land pricing can be done on a rational basis which will enable shorter lease (hence, cheaper) flats to become attractive (LINK). In a nutshell, it is possible to quickly reduce the financial burden associated with housing costs without destabilizing the housing market.

Dealing with both healthcare and housing would certainly unshackle Singaporeans who will then be free to venture into business, invest, or pursue experiences. Economic flexibility is not just about money, it is about having flexibility in living life. This is a compelling vision for the future and I hope that we, as a nation, can get there.

On Housing: Asset Enhancement is an Illusion

The topic of property prices and their impact on both the young and society at large has been talked about recently ('Perils of asset enhancement for younger Singaporeans', 'Perils of asset enhancement for younger Singaporeans', ST Forum Apr 18). I'd like to weigh in on this matter.

A quick calculation in Excel based gives the estimate that a dual-income household with husband and wife beginning with somewhat above the median income ($3000, to simulate the time taken to build up 10% of the home value) would take about 10 years to fully own a $300,000 HDB flat. This is based on a 3% annual salary increment, their use of 30% of their take-home pay to service their loan, and an interest rate of 2.5% (based on POSB Home Ideal). Ten years is a long time. Furthermore, if the trend of property prices rising faster than incomes continues, repayment periods will get even longer. This points to a trend of increasing financial hardship, with families having less of their take-home pay available to them for longer periods.

Furthermore, assuming that a home is a necessity to a family, the family's assets are not really appreciating as other home prices are rising in tandem. Only when the family acquires a second home can it be truly said that their assets are appreciating in value. For those who do not yet own property, "asset enhancement" is a form of inflation -- the vaunted "taxation without legislation" which "greases the wheels of the labour market"; for those who own a single apartment/house, "asset enhancement" matters little; for those who own more than one apartment/house, "asset enhancement" is truly asset enhancement. With this laid out, "asset enhancement" is structurally similar to a regressive tax, which is contrary to the stated intention behind it.

Maintain a Surplus of HDB Flats

Some years ago, there was a surplus of HDB flats that was described in some quarters as mismanagement on the part of HDB arising from an over-projection of the demand for flats. I personally do not see having a surplus as a problem. A surplus of HDB flats enables first-timers to get flats sooner, perhaps a year or two earlier.

The government might like to think of the cost of empty flats as a subsidy in terms of time to first-timer flat applicants. Early acquisition of a home to call one’s own can make a positive difference to the willingness to have a children. As such, surplus flats are compatible with Singapore’s needs. The question then arises of how to manage the flat supply.

The quantity of the stock of flats should me managed so as to ensure a healthy but not excessive level of surplus flats. To do this, the key is to launch the next project only when the stock of remaining flats falls below some critical level. This critical level should be determined based on (i) the lead time from launch to the handover of keys, (ii) the number of flats to be built in the next project in the pipeline, and (iii) the estimated demand for flats over the next few years.

To manage the quality of the stock of flats, the key is to ensure that older flats get sold first by policy means (e.g.: not allowing a flat to be sold if a flat two years older is still on the market) or market means (e.g.: discounting older flats slightly).

Surplus flats can be a strategic tool to achieve national objectives, and should be used as such.