I'm surprised that Minister Mah who for the most of 1 year kept repeating the phrase "HDB flats are affordable" has recently said that he was caught "off guard". I'll show why it is so ridiculous for him to say that because as a minister in charge of housing he is suppose to track the demand and supply situation. He also said recently the way for HDB to sell cheaply is to have the buyers sell it back to HDB later on.....he has no other ideas?
"The whole question is, do we peg HDB flats to the market, or whether we follow another system. And that other system is what some countries use. In other words, I sell you a flat at fixed price, when you sell the flat, you have to sell it back to me also at a fixed price. In other words, you are not allowed to profit from the flat. There you can keep flat prices fixed."
- Minister Mah Bow Tan [Link]
Singaporeans have the highest savings rate in the world thanks to the CPF scheme. We set aside 34.% of our income for CPF until age 50 beyond which the rate drops. In the past the CPF rate was 50% and CPF cannot be used servicing HDB loans. Even with low returns, 50% is more than enough to retire comfortably. Because HDB's mandate is to provide affordable homes and Singaporeans pay for HDB flats from their disposable income after CPF deductions, it meant that HDB cannot increase its prices too quickly. Singaporeans had enough to retire and homes were affordable under the old scheme.
After the CPF was liberalised for private housing in 1988 (to fund 100% of a private house) and for public housing in 1991, prices of homes saw a large increase:
"Regression models are used to show that interest rates, income growth rates and the supply of housing have not played a statistically significant role in the determination of private housing prices in Singapore between 1975 and 1994. Instead, private housing prices in Singapore were highly correlated with the prices for public-sector-built housing. Moreover, the timing of government policies relating to the use of compulsory savings for private housing finance purposes, the liberalisation of rules on public housing ownership criterion as well as for housing finance had a significant impact on private housing prices. "
- Research Paper, Government Policies and Private Housing Prices in Singapore
The authors of the above paper believed the large surge in property prices that peaked in 1996 was caused by CPF liberalisation. Before liberalisation, the price movements were quite tame:
The increase following CPF liberalisation for housing was huge - outstripping income rise.
You may or may not agree with the authors' conclusion that the price increase is due to CPF liberalisation (some may argue it was due to optimism) but the end result is the same. CPF savings meant for retirement became tied up in housing i.e. the money moved from CPF to HDB and from the HDB to GIC to build up those massive reserves. Yes, and from the GIC, part of it went to those famous western banks, Stuyvesant town[Link] etc. and all other wonderful investments we get to hear about from time to time.
After they hit a peak in 1996, govt's antispeculative measures and the historic Asian Crisis caused the prices soften and stabilise at a generally high level around which they fluctuated until 2007 to 2009. The high price of housing meant that Singaporeans have to retire with less money and work longer. It also has other side effects - Singaporeans have less disposal income as servicing property debt over a long period of 25-30 years meant that the quality of life is not what it should be in a 1st world country. Servicing such huge debts for housing over long periods also make Singaporeans financially vulnerable - job loss or pay cuts can lead to defaults on housing loans. One in 12 HDB loans are in default....that is roughly one or two on every floor for every block of flat.
"Nobody, no matter how prescient, no matter how clever, would have been able to predict that this is what is going to happen this year. All of us were caught off-guard" - Minister Mah Bow Tan, Dec 2009
The above statement is hard to swallow because a simple look at demand and supply tells you a big shortfall was building up.
Figures from Tan Kin Lian's blog which was taken from 2009 Yearbook of Statistics[Link].
The table shows that the total population has increase by 17.6% (8.6% for residents) over the past 5 years but the number of new homes increased only by 1.2%. As minister who is responsible for the supply of public housing, how can Mr. Mah say he is caught by surprise? How can he plan the supply without looking at the demand situation?...Isn't this something fundamental to what he has to do? ...yes and we are told they have to be paid millions for 'super' competence...I really wonder.
It is very clear what the main cause of 2009's HDB price surge is. HDB wasted so much time trying to get us to believe that HDB flats are affordable as prices rose to new record levels instead of fixing the demand-supply problem. Singaporeans who needed homes paid for someone else's poor planning and policies.
Now that we have gotten to the point where Mr. Mah admitted that he was 'caught off-guard', they will at least try to fix the immediate situation so that prices will cool off (before the coming elections). We will however be left with the long term problem of high housing costs taking away a large part of retirement savings, taking away our quality of life and causing Singaporeans to have large household debts and hence less financial security. What can be done?
One feasible suggestion I've seen on the Internet is to reduce the loan tenure gradually to 15-20 years. Shortening this, helps Singaporeans to be free of their housing debt earlier and enables them to start accumulating savings for retirement. The main problem is many Singaporeans have already purchased homes at high prices so pushing prices down will have a negative wealth effect. Therefore, shortening of loan tenure has to be done gradually and only during periods when housing prices are on the rise to curb the rate of increase rather than cause a fall. Over time, prices should rise in pace with increase in median income and a far healthier situation can emerge. The other approach is to limit the amount of CPF money that can be used...but that has to be seen in a larger context as my main concern with CPF is the low fixed returns relative to inflation so proper management of CPF has to come first.