I bumped into a good friend not too long ago while I was on my way to a seminar. The conversation shifted again to one of the topics that we like to complain incessantly about, which is housing in Singapore is expensive.
I made a resolution this year not to get into too many debates that lead nowhere but I do have a takeaway that some frightful things such as the fear of not being able to afford a decent shelter still sticks with us, even if the situation may not be as such.
My past research have lead me to believe that:
#1 The basic home in Singapore is affordable but not cheap. I am tempted to use a median income of $3949/mth (MOM) each, but I do have to take care of those in the less than privileged position in society.
The above table shows the recently concluded BTO balloting for non matured estate. Suppose we have a couple who goes for the 3 room option, and each of them have a gross monthly income of $2500/mth. Their combine annual salary is $60,000.
The average 3 room BTO price is $160,000 without grant. The price to annual income for this couple is 2.67 times, which is much lower than the 5 times I feel is the cross over from fair to expensive.
If the couple take a 90% HDB Loan of $144,000 their combined monthly payment would be $651/mth. Their combined CPF OA cash inflow is $570/mth which covers 87% of their mortgage. They won’t have money to build up for their retirement, but it does leave ample liquid cash flow for daily survival.
$651/mth is 13% of their monthly gross income, which is less than the 30-35% prudent limit that we try to keep below.
#2 Majority of the people have a mind share that basic subsidized housing (HDB) is an investment. This clouds their judgement of a lot of related argument. They will start interjecting about what is fair and not fair. The problem is that nobody knows for sure what the government is thinking when they see “HDB” in this present day.
Are we still addressing urban non village housing for people
Do they still think everyone should have a roof over their heads?
Do they still think our wealth should be put inside the home that we live in (recent budget and national day rally indicates this is still so)
Are they acting as a price floor for private housing or is that the other way round
I will go into this a little more later.
#3 If you want a basic home, don’t expect the location to be fantastic. If you want a fantastic location, you have to pay for it. You are investing in better amenities and accessibility. If you cannot afford it, you are left living at the outskirts.
#4 The 25 year old mortgage cost is so much lower than the prevailing rent for flats that under most circumstance, it makes no sense to rent (except perhaps transitions) for the ones that are eligible for it. Due to this, the rental market is meant more for the expats, permanent residents who were unable to apply their HDB flats and transitional families
#5 There are those that was able to profit from leverage, uneven growth in asset prices, and buying when they are young while they do not have income, with a good view that their income after they come out to work will exceed the ceiling. If there is a limited supply to match to those who really need it, these folks might not fit the criteria.
The possible solution is to remove the uneven asset price growth and arbitrage across various geographical location and home size.
Old Housing Plans and New Reality
The housing system is not too broken. If it is, we would have the problems of what we see across in Hong Kong where a very capitalist private housing sector, land scarcity, limited public housing have created much social problems.
However, the way we live is also changing.
If employment landscape in the future is more volatile, then it does not make sense for us to service a large mortgage loan.
If we work longer working hours, there are other things we crave for, such as shorter commutes. In a 2004 psychological study on women, it is shown that commuting is the lease satisfying of their activities and it also causes stress on the physical body. We are already stressed at work, and on our way home, we suffered more. This is why one of the main reasons for upgrade of our homes is to improve the accessibility to work place.
If what we believe is true, the plan is for further decentralization of working districts. To have shorter commutes, it might make sense for us to shift our home to somewhere closer, if we change our workplace, with less anxiety over whether this will have a long term financial impact to our net worth.
In summary, the kind of life citizens and expats live is less structured then it was before and does the existing
A shorter leasehold HDB flat
One of my friend suggested that a shorter leasehold HDB flat might be a solution. Indeed we do have a few case study.
When it became evident that industrial space is getting more expensive and not conducive for industrialist, the government announced that in the future industrial leasehold release will be 30 years instead of 60 years.
A shorter land lease, means cheaper cost to acquire. If we observe the real estate investment trust (REIT) space, these new properties becomes less appealing to the trust as a rental asset. The managers would need to actively manage it better.
If the purpose is to make it conducive for industrialist, then this can be seen as a good move.
Another example is in the residential space, where HDB introduced the 2 Room Flexi Scheme. When the government want to provide a low cost alternative for the people retiring, that have a smaller family nucleus, they provided 2 room flats with variable land lease.
The land lease you can take up ranges from 15 to 45 years, in 5 year increments that cover you to at least 95 years old.
From an illustration, retiree can purchase these flats at a 43% to 66% discount to a 99 year lease.
This presents a good way for the retiree to liquidate existing home, have a place to live and channel their money into CPF Life or other wealth distribution instrument.
How long should the land lease be?
How long the concession will be needs to be evaluated as well.
There will be a subset of people who have no idea of what is at stake. If you get a 50 year land lease property, live with it for 30 years and handed over to your children, they may run a risk of outliving this short land lease.
I would think 50 to 60 years is reasonable. This allows someone that got their flat in 25 to 30 years old to live in the flat till age 85 or 90 years old.
Helping those who fail to realize the problem with short land lease
For those that fail to realize that they run the risk of not having a place to live, the government can make sure in their continuous education that citizens realize that they need to set aside money to purchase another HDB flat.
With flexible land lease, the impact of not knowing is less.
This would also reduce the number of people that fell into this category, and basic housing rental that match government subsidies might be able to implemented.
How cheaper can the flats get?
This kind of valuation is a mystery.
However, the SLA does publish the approximate relationship between freehold assets and leasehold, if you have an industrial property, and would like to increase its land lease, or convert between freehold and leasehold.
This relationship works itself into a formula.
The able above shows how much value a leasehold have left as a percentage of a freehold. For a 99 year old leasehold, it is approximately 96% of the freehold value.
So for a 60 year old leasehold, the discount from a 99 year is about 16%. A 50 year old one is not much different.
The change in value is more pronounced after 50 years, where you see the decay shooting up. If the land lease is squeezed from 99 to 60 years you should see this graph squeeze. I would expect a 60 year leasehold to start rapid decay at point where the property have 35 to 40 years left.
From this, my conclusion is, if we want to balance having enough lease for living, and affordability, cutting down from 99 years to 50 to 60 years probably don’t help much to alleviate cost.
The existing grants, flats of different sizes have created a tiered system that lets people with various bond like or equity like career to choose from.
Lowering the starting land lease reduces the appeal of owning the subsidized flats
However, what a reduction in starting land lease would do is to make certain flaws of the subsidized flats more glaring.
If the land lease is 50 to 60 years, owners may start seeing the home less of something they could collect rent in the long run, pass to their children.
To pass inheritance to children, they would be forced to think of other ways to build wealth. Money could be channel to private properties, portfolio of stocks and bonds. This may highlight the importance to mature other wealth building industry because to build wealth you cannot rely on HDB anymore.
It should be said that these forms of wealth building can still be considered a rentier society in that the wealth is not put into productive use such as the implementation of new business ideas and capital goods.
To subtly divert people to put their money in certain productive things is a very difficult endeavor. My gut feel is, it has to be attempted but it would be better for the government to seed or push.
Better Price Appreciation Control, Shorter Land Leases and Flexibility Rules
I can see the appeal initially of flats with shorter land leases, but unfortunately, it does not end up cheaper.
However, if we are clear that the reason subsidized flats exist is to provide affordable living instead of it being an investment asset, then some other measures might prove useful.
Right now, the prices of HDB flats can be pulled along by economic cycles, which would go through good times and bad times. They will go through a period of excessive price appreciation and price depreciation.
Should this be the case if the purpose is to provide affordable housing yet not be money losing.
The value of these properties, can be better smoothed out, by decoupling from capital markets, taking into consideration the cost of replacements, inflation and other social metrics.
Majority of the people in Germany rent, because of the laws created in place that gives adequate power to the renters.
If more rules are put in place, it might make the HDB live up to its role as subsidized housing better.
More rules means:
Subsidizing housing have limited appeal
Private home ownership will have more appeal
If you are able to do well and better living is appealing, you can always go for private home ownership.
The government could also implement ways that families can easily relocate to an estate where both parents are closer to their workplace, or nature of work.
The Downsides of such an Implementation
Unfortunately, to implement this, will not be simple.
We won’t know what doing this will affect the value of the current flats and the private property market. This will certainly make them more appealing.
I would think it will affect many people’s net worth and people will be up in arms over this.
The HDB system is too deeply rooted, and no one will tackle this monster.
They may have no reasons to because this change might not create a great benefit but will become a big potential political suicide.
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