MYTH # 3: Rising prices of HDB flats will lead to wealth creation for Singaporeans.
TRUTH: It will have a negative wealth impact due to higher financial liabilities according to a NUS study done by Abeysinghe and Gu Jiaying
In a reply to question from a MP who asked if a cap should be imposed on rising HDB resale prices during a Parliamentary session in July, Senior Minister of State for National Development Grace Fu noted that HDB flats remained affordable to Singaporeans.
“‘HDB flat prices should be a reflection of Singaporean’s wealth and it is “not a bad idea” for prices to increase steadily, especially for those holding onto negative assets bought in the previous market peak in the mid 1990s.’”
The ruling party has never failed to remind Singaporeans that it has brought about high home ownership and rise in asset value under its rule.
During a speech given to Kim Keat residents in 1995, then Prime Minister Goh Chok Tong said:
“By how much have we increased the value of your assets? At the start of the upgrading, 3-room flats in the precinct commanded less than $80,000 in the open market. Today, I am told, housing agents are offering as much as $160,000. Your assets have doubled in the last three years. All of you made the right decision, by supporting the upgrading programme and voting strongly for it.”
Now, a 3 room flat in Kim Keat is fetching as much as $300,000, nearly double its value ten years ago. Has the government created wealth for Kim Keat residents? If only things are as straight-forward on paper as in real life.
Suppose a Kim Keat resident bought his original 3 room unit at only $100,000 from HDB. He had borrowed a 80% loan of $80,000 from HDB and has almost completed repaying it.
He would have made a handsome gross profit of $220,000 if he sells off his flat now. However, in today’s market, he will need to fork out at least $220,000 or more for a similiar 3 room flat which means that not only is he unable to capitalize on his gains, he will be plunged into greater debts.
Of course, this is a superficial way of looking at things. Common sense tells us that in an inflationary market like this, everything is getting more expensive which puts a limit to the amount of wealth one can generate from selling off his assets.
A study done by two NUS economists, Tilak Abeysinghe and Gu Jiaying, shows that “past episodes of house price escalations have led to a substantial erosion of housing affordability” especially in the private sector. (source: NUS SCAPE) Higher property prices does not necessarily translates into higher wealth for Singaporeans.
Abeysinghe and Choy in their book – “The Singapore Economy: An econometric perspective (2007)” have examined the wealth effect of property prices on consumption in Singapore and found that the wealth effect is very much absent.
In the absence of cheaper suburbs which offer quality living, the only way for Singaporeans to unlock property values is, apart from emigrating, to downgrade to smaller units. This does not seem to be occurring on a large scale which explains why the ‘housing wealth effect’ on consumption is insignificantly small.
Higher property prices, instead of creating a wealth effect, exert a significant and negative “price effect” on consumption expenditures leading to a fall in the average propensity to consume.
As house prices go up, the increase in the value of housing assets is accompanied by a concurrent rise in the financial liabilities of households, in the form of higher downpayments for purchase of residential properties and burgeoning housing loans.
Due to the limited avenues for liquidating property assets, households have to build up sufficient financial assets to smooth the profiles of their lifetime consumption of non-housing goods and services leading to a diminishing in domestic purchasing power.
It is a common perception that Singaporeans living in HDB flats are leaving “enhanced assets” to their children. This does not appear to hold true as HDB flats are 99 year old leasehold properties – their value will decline with time.
Regression estimates for HDB 4-room flats transacted between May and July 2008 show that a 10-year gap between two flats lead to about 12% price difference with the older one selling cheaper.
If the 99-year lease effect also comes into play, the prices may drop substantially, perhaps to the discounted present value of the remaining stream of rental incomes, and such properties may not generate much bequest value to children.
Not only will “asset inflation” not generate wealth for Singaporeans, it will lead to a vicious cycle, plunging more and more people into lifelong debts.
Mr Paul Yip, Nanyang Technological University (NTU) associate professor of economics issued a recent warning that Singapore risks ’severe asset inflation’ during the economic recovery and urged the government to act now to control the prices of HDB flats. (source:Straits Times)
Prof Yip noted that the US government has lowered interest rates and expanded its money supply in a bid to avoid a repeat of the Great Depression.
But post-recession, the government may fail to shrink the money base back to pre-downturn levels, he said. In that case, excess US dollars would flood the market.
‘For Singapore, there may be an inflow of money from the US, increasing the money base and therefore the money supply… When the recovery comes, there will be wage inflation and consumer price index inflation, and this will fuel asset inflation……’Rents will rise and then people will be able to charge even higher rents, causing a vicious circle,’ Prof Yip said.
HDB flats are meant to be cheap and affordable to ordinary Singaporeans. Whether it generates wealth for us in terms of fixed assets is of secondary importance. It is time for the government to return to the basics and ensures that Singaporeans are not over-committing themselves to their housing loans.
1. The Singapore Economy: An econometric perspective (2007) by Abeysinghe and Choy.
2. Limited income and housing affordability in Singapore (2008) by Abeysinghe and Jiaying Gu.
3. The Economic prospectus of Singapore (2007) by Winston Koh and Roberto Mariano
Note: This article was first published in the old Temasek Review in September 2009