Asset appreciation policy is incompatible with housing affordability

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Written by Ng E-Jay
22 March 2013

The government has lost control of the housing market because it allowed foreign demand to push prices up to unacceptably high levels, and because it failed to anticipate and build HDB flats ahead of demand. As the price of private property sky-rocketed, it pulled up the price of HDB resale property as well. As a result, singles, single parents, divorcees, and other marginalized groups who are not allowed to buy flats from HDB are left in a financial precarious and potentially devastating situation.

Fundamentally, the doctrine of asset appreciation is incompatible with the provision of affordable HDB housing. This is because government housing is an essential need that provides shelter and security. It is meant to provide one of the most basic needs of a human being. It is not a luxury product or an investment vehicle. It is most certainly not designed to be a financial asset which can be valued on cash-flow returns.

Listed equities appreciate over time if the companies they represent make consistent profits and deliver shareholder value. To declare that government housing should behave in the same fashion is ridiculous because a home is not a business. People need homes to provide one of the most basic needs of human survival, not because it is meant to be like a stock that can be sold for a profit.

The price of property will necessarily appreciate in a situation of land scarcity and rising purchasing power of the general population. Hence in most countries, property prices are closely linked to GDP and income growth, population growth, availability of land, availability of infrastructure, and the degree of inter-connectedness of residential areas to metropolitan or business centres (where people travel to daily to make a living).

When the government builds property ahead of demand and protects the market from adverse influences like an overwhelming influx of foreign demand, property prices tend to appreciate gradually in tandem with the above-mentioned factors. They do not go very far beyond fair value, provided the government enacts prudent fiscal, monetary, and social policies.

In Singapore, we have a curious and ultimately unsustainable situation where the government has closely (and at times, tightly) restricted the supply of government housing in order to force prices to appreciate in tandem with GDP growth, even exceeding the rate of GDP growth at times.

This actually amounts to market manipulation.

When the government also does not enact sufficient controls on foreign demand, it is also creating a second avenue where property prices can be pushed up far beyond the fair value that would be dictated by the domestic economic climate. In other words, if foreign demand is not curbed but allowed free access to the local property market, foreign demand can push prices far beyond the rate of domestic GDP and income growth.

The double whammy of supply restriction coupled with lack of control over foreign demand has led to the situation we see today, where property prices have escalated far beyond the growth in domestic income levels and the purchasing power of the local population.

The website by HDB, Resale Flat Prices, provides statistics on the latest HDB resale flat prices. It was reported last September that a Queenstown resale flat sold for close to a million dollars. A check with this HDB website indeed confirms that 5-room HDB resale flats are mostly selling at a price ranging from $500,000 to over $900,000, depending on location. 4-room resale flats sell anywhere from $400,000 to $600,000. 3-room resale flats sell for $300,000 to $400,000.

Hence, we can see that the average selling price of HDB resale flats is now anywhere between 50% to 100% more expensive than HDB BTO flats. This is unacceptable. The government has reneged on its promise to provide affordable housing to all Singaporeans. It has betrayed the trust of Singaporeans.