Yawning Bread. March 2010

Breeding a subsidy mentality in housing


    

 

 

Amid the hue and cry about rising home prices and all the speculation as to whom to blame for pushing up prices, I think Singaporeans are failing to see a monster of a problem developing before our very eyes.

We have become addicted to government subsidies. Experience from everywhere else has shown that subsidies are very hard to wean people off from. Even when they undermine the fiscal position of the state, a huge political cost is involved in trying to end them. Governments have fallen, riots broken out, blockades erected and the entire stability of the state sent reeling when attempts are made to remove subsidies.

Over the long term, subsidies are untenable. Over the short term too, they have damaging effects: they distort what should be rational economic decisions.

What is even crazier is that this has happened under the watch of the People's Action Party, whose political philosophy, we are have been told over decades, is that of self-reliance and hard work.

By now, I think, almost all Singaporeans are familiar with the various grants given out by the Housing and Development Board. This webpage from the HDB gives the details: 

The main grant is for family units whose two core persons are both Singapore citizens and who have never enjoyed a grant before. They get S$30,000 towards buying their first flat.

They get S$10,000 more if the flat is within 2 kilometres of their parents' home.

The income ceiling is the same as that for getting an HDB flat: household income of S$8,000 a month. At this level, a great majority of Singaporeans will enjoy this subsidy when they make their first HDB purchase. This is not a subsidy for the needy; it is for nearly everybody.

There is also something called an Additional Housing Grant, which is a separate grant on top of the aforementioned. Households whose monthly income is under S$5,000 are eligible, though the grant quantum is on a sliding scale up to a maximum of S$40,000 for the lowest-income (S$1,500 or less).

In late January 2010, Finance Minister Tharman Shanmugaratnam, in announcing the increase in the Additional Housing Grant from the previous S$30,000 to S$40,000, said that with the increase, some 8,000 households annually would benefit. [1] 

What does "8,000 households annually" mean? What percentage of Singaporeans would qualify for the Additional Housing Grant? Is that a large percentage or not?

In attempting to grasp the significance of this figure, I tried to compare it to the annual demand for ownership flats as reported by the HDB in their Annual Report. Over the last three years, this has averaged about 10,000 flats per year. The HDB defines "demand" as "bookings received by HDB for 2-room and bigger flats under the various allocation exercises, as well as bookings for Design, Build and Sell scheme flats." [2]

At first glance, 8,000 eligible out of an annual demand of 10,000 suggests that even the Additional Housing Grant is a scheme that throws money like confetti to all and sundry.

However, the details complicate such a simplistic conclusion. The Additional Housing Grant can be used for resale flats, but not for second-time purchases, whereas HDB's 10,000-figure for demand includes second-time purchases, but excludes resale transactions. Hence, it is not possible to compare the two figures. Nevertheless, one is left with the distinct impression that not only do all Singaporeans' first-time flat purchases get an assist from the first grant, perhaps a majority also get the Additional Housing Grant.

It is hard to avoid the conclusion that the great majority of Singaporeans depend on subsidies to get a roof over their heads. We're breeding a culture of dependency.

This cannot be tenable. I'm not against subsidies in principle, but it should only be for a small percentage of the population to mitigate extremes of poverty. Dishing out subsidies -- and the schemes are permanent -- to well over half the population cannot be fiscally responsible.

Unless.... they are not subsidies.

* * * * *

 
For the discussion below, let P be the price that Singaporean first-time buyers pay, and Q be the price others pay. Let G be the difference between P and Q. Therefore G represents the various grants.

What do I mean when I say unless G is not a subsidy?

One can see it another way -- as a dual pricing scheme, under which Singaporeans who are first-time home-buyers pay prices that are S$30,000 to $80,000 less than non-Singaporeans and Singaporean second-time buyers.

This changes one's understanding of it completely, and now it sounds defensible. Why shouldn't a state favour its own citizens? Isn't there a social good to help first-time buyers acquire a home to raise a family?

Yet, it is not just another way to look at it. There is a right way and a wrong way. Which is right depends on what the cost of building the flats is.

If the cost is P, then selling the flats to first-time buyers does not involve a subsidy. P is then a discounted price that represents a waiving of profit. The corollary is that when flats are sold to non-citizens and second-time buyers at price Q, the HDB makes a profit equivalent to G.

But the HDB has maintained for years that it does not make a profit on its prices. If we give credit to these denials, than Q -- the usual prices -- represents more or less the cost of building the flats. P is a below-cost price, in which case G is a real subsidy from the common national purse, a habit that eventually will lead to fiscal suicide.

* * * * *

 
But what else can be done? How else are first-time buyers going to be able to afford their first home?

This is where the HDB needs to reevaluate its mission. It needs to set lower cost targets for design. For example, do we really need the thick reinforced concrete "household shelters"? Do we need brick walls to separate the various rooms? Can't we use lightweight partitions like in the offices where we work? Won't putting up lightweight partitions also increase productivity, to use the latest buzzword?

We need to be able to build cheaper flats. Too much of Singaporeans' disposable income is spent on an investment that does not give productive returns.

The policy direction should be not to build costly flats with bells and whistles and then dishing out subsidies so people can buy them. Instead, it should be to build them at an affordable cost, so that no subsidies are necessary.

Yawning Bread 


 

 

Footnotes

  1. Straits Times breaking news, 23 Jan 2010, Bigger HDB grants for buyers 
    Return to where you left off

  2. Housing and Development Board, Annual Report 2008/2009.
    Return to where you left off

Addenda

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