Friday, April 1, 2011

Who is Really Raiding the Reserves?

truth wrote:

"LOWERING land cost as a way to reduce new Housing Board flat prices is
tantamount to raiding Singapore's reserves This is because all land is sold
at prices set by the Chief Valuer, and the land sale proceeds go into the
reserves." - Mah Bow Tan

Well a few day ago, he was saying that healthcare, defense and education
expediture will have to be cut for the govt to sell flats cheaper. Now we
get to the heart of the issue:

1. Most of cost of HDB flats comes from the land cost component.
2. Land cost is determined by a Chief Value in the govt.
3. When this land is sold, the money goes to the reserves (GIC).

The bottom line is when Singaporeans take up 25 year mortgages to buy homes,
they borrow money from the bank to pay HDB and most of the money ends up in
the GIC. Minister Mah uses the phrase 'raiding the reserve' to describe the
suggestion by Worker's PAP to sell land at a more reasonable price. It is
not true that the reserves are 'raided' because not a single cent needs to
come out from the reserves to get this done - money will still flow from our
pockets to grow the reserves albeit at a slower rate.

In the next few questions we asked to explore have to ask are:

1. How can land be valued fairly?
2. How do reserves benefit ordinary Singaporeans in their lifetime once they
grow beyond what is needed for cushioning economic crisis? Who really
reserves really benefit?
3. How do we maximise the benefits of public housing for Singaporeans in the
long term?

HDB's mandate is to build affordable homes. Unfortunately, nobody bother
with the definition of the word "affordable" which has become one of the
must abused words in Singapore. Does affordable means median annual income
times 5 or 10? Does affordable simply means being able to service your
housing loan which have tenures of 10, 20 or 35 years? Because
affordability was not defined, we have politicians arguing that it is still
affordable after a 50% surge in prices.

"First the cost of new houses for 1st time buyers is about 23%...the cost of
servicing the flat. That hasn't changed very much over time and is
significantly lower than Hong Kong and most other cities. It is
significantly lower than the developed countries at large. It is cheaper to
own and service a mortgage on a house in Singapore than it is in any other
developed countries..." - Minister Tharman in CNA Forum, on Singapore's
future, April 2011

There are numerous flaws in Minister Tharman assertion in the recent forum
but I put it up to show how determined PAP is to deny that serious problems
faced by Singaporeans exist. To watch Minister Tharman say that Singaporeans
have it good, homes are easily affordable....better than all other developed
countries just add to the frustration of Singaporeans coping with the high
cost of housing. I'm sure regular readers of this blog can pick out the
flaws in Tharman's argument easily but for those are having trouble figuring
it out here is the explanation. When Tharman talks about the relatively
constant average quantum (23%) that 1st time buyers use to service loans, it
counts only people who can afford a home - many can't afford homes give up
looking for one. Also, they keep the quantum constant by buying homes
smaller than what they want or need at less desirable locations and the
tenure for loans has increased - in the past people finish paying their
loans in 10 years or less now the tenture can be as long as 3
decades....there is a big difference between paying 23% of your income for
10 years vs 30 years.

He then goes on to say we are better off than Hong Kong which is no
consolation given the housing misery there (unhappy Hong Kongers come out in
force to protest every weekend for a good reason). He then goes on to make a
very strange and really hard to believe assertion that the housing situation
in Singapore is better than all other developed countries. Singapore has the
2nd highest population densities[Link] in the world and many cities in
develop countries have suburban areas where housing is very cheap. Singapore
is the 11th most expensive city in the world but is 43th and 49th in
domestic wages and purchasing power respectively, along the likes of
developing countries like Turkey, Slovakia and Qatar and far below the
capitals of other Asian Tigers � Seoul, Taipei and Hong Kong[UBS Report,
Temasek Review on the report]. Singapore has the highest income in equality
among developed countries which means that the lower rungs of our society
are more adversely affected by high housing costs than else where in the
world. Tharman's denial that there is a problem with high housing costs
shows that there is no interest in govt to solve what many Singaporeans
think is serious problem.

The undisputable truth is housing is far less affordable that it was 20
years ago. The median income rose 111% (not inflation adjusted) while the
price of housing as measured by the RPI rose 342%. That is the source of
unhappiness among Singaporeans and it is a very real problem:

The huge surge in housing prices came after the PAP govt liberalised CPF for
the purchase of homes. That single move resulted in billions in CPF accounts
mobilised for the purchase of private homes and HDB flats. Most of the money
ultimately ended up our reserves. Prior to that move, Singaporeans had
enough in CPF for retirement and HDB provided what most people would
consider affordable housing. Once CPF was used for housing, our homes
became inextricably linked to Singaporeans' retirement. In addition to this
move, our CPF is also locked to low fixed returns - the GIC borrows our CPF
at low interest rate to invest for higher returns...yes another reserve
building scheme at the expense of' retirement, Singaporeans. After adjusting
for inflation, our CPF returns is way below other funds such Malaysia's EPF.
The situation is so problematic even pro-PAP writer Chua Mui Hoong called
for CPF returns to be improved[Link]. The PAP solution now to all these
problems is to ask Singaporeans to retire later....and later..and perhaps

Now back to the issue of land valuation. Land in Singapore is a scarce and
precious resource most of which was originally owned or acquired by the govt
using the Land Acquisition Act. We can reclaim some land from the sea
provided our neighbors don't complain but the total land area in Singapore
won't increase much over time. Given this situation, the decision to make
public housing the main form of housing under the control of the govt is a
correct one. We have seen what happened in many developing countries where
free market for land allowed the rich buy up most of the land and the poor
people become landless, sometimes homeless and trapped in a vicious cycle
of poverty - the only solution left in places like Philipines was to carry
land reform in which govt forcibly take back land and redistribute it to the
lower classes. That is the bleak situation that public housing programs try
to avoid - the dynamics of the free market for land which causes income gap
to expand depressing your middle class and sending the lower class down to
poverty. The purpose of public housing is defeated if we directly link the
price of land for public housing to free market auctions to developers.
The success of public housing is measured by affordability and progress
is made when people take up less debt, have more disposable income,
have a better
quality of life and the effects of the income gap is mitigated through the
public housing program. Under Minister Mah, the HDB failed to do all that
and when confronted with WP's manifesto to improve the situation, Minister
Mah is worried that our wages will flow at a slower rate into GIC's
astronomical coffers - is he for more affordable housing or reserve
building? Lets not forget the high resale prices is caused by govt move to
open the flood gates to the foreign influx and the BTO which limits supply.

The situation might be slightly better if the govt articulates a clear plan
on how the Singaporeans will benefit from the reserves in their lifetime.
Will part of it flow back to improve the quality of retirement for
Singaporeans? The GIC today provide high paying jobs for a small number
elites who manage the reserves. For a long time, Singaporeans have been
asking for greater transparency and accountability in the management of the
reserves...these are after all build from the sweat of Singaporean workers
who have to get into heavy debt and delay their retirement to pay for
expensive public housing.

Posting Time 7:33 AM
Posted by Lucky Tan 17 comments
Friday, April 15, 2011
Minister Mah attacks WP's affordable housing plan....
Last year Hazel Poa of NSP caught Minister Mah fudging the numbers to show
that housing was still "affordable". I thought Minister Mah would have
learnt not to do something so deceptive again. Unfortunatlely, we will have
to catch Minister Mah again....this time for fudging logic...

"Minister Mah Bow Tan warned against the Workers' Party (WP) call for
cheaper HDB flats on Thursday, saying it would mean larger subsidies for
housing at the expense of other needs, such as healthcare, education or

Calling the opposition party's manifesto 'irresponsible', he noted that the
WP had not said where the extra money would come from, and pressed them to
reveal the implications of their proposals." - Straits Times (see article
Minister Mah calls WP irresponsible for its plan to provide more affordable
flats. He says that cheaper flats means more housing subsidies and less
money for education and healthcare. Let me ask you a simple question. In the
past few years when the price of HDB flats surge by more than 50% , by
Minister Mah's logic, the govt should be awashed with more money from
selling HDB flats for healthcare and education - if that is so, why did the
govt implement means testing to cut subsidies for healthcare and why did
they have to raise school fees for universities and cuts subsidies for
education of children with special needs etc? The fact is budget has little
to do with HDB selling price. If anything, when the HDB prices go up, the
HDB actually shows more losses due to "market subsidies" which increase
proportionately with price. Why is this so?

1. Land sales are not included in the govt revenue in the budget. This has
been a long standing issue because it distorts the fiscal picture and Sylvia
Lim of WP has called for the situation to be fixed[Link] so that
Singaporeans can get a more accurate picture of govt expediture vs revenue.

2. A large component of HDB flat sale price is due to cost of land priced at
the market.

3. HDB buys land from SLA at market price. The revenue of land sales is not
included in the budget's revenue figures.

4. The HDB then includes the land cost plus other cost to price new HDB
flats. It then sells it at a "market subsidised" prices to flat buyers.
When the price of flats surge up by 50%, no significant amounts of money
went to subsidise healthcare and education. Similarly, if the price rise of
flats is kept close to changes in median incomes as suggested by the WP amd
by pricing the land sales to HDB accordingly, govt healthcare and education
expediture will not be affected.

Linking public housing to median income changes is sensible because if
housing price move significantly vs income, it means that Singaporeans have
to take up more debt to financed their home purchases. Every where else in
the world, public housing is priced for affordability and not directly
linked to market prices. The high debt taken up by ordinary Singaporeans pay
for expensive new HDB flats...most of the money eventually goes into our
reserves i.e. GIC. The issue of risk free gains when 1st time buyers sell in
the resale market can be addressed by lengthening the lockup periods for
selling the flat and limiting the number of timeas a person can buy directly
from the HDB. In the long run a healthy steady state should be housing
market where prices are closely correlated with inome gains. When you have
prices moving up 50% without the corresponding gains in income, debt piles
up and a bubble forms.
Apr 14, 2011
Mah Bow Tan: WP manifesto 'irresponsible'
By Teo Wan Gek
National Development Minister Mah Bow Tan warned against the Workers' Party
(WP) call for cheaper HDB flats.
NATIONAL Development Minister Mah Bow Tan warned against the Workers' Party
(WP) call for cheaper HDB flats on Thursday, saying it would mean larger
subsidies for housing at the expense of other needs, such as healthcare,
education or defence.

Calling the opposition party's manifesto 'irresponsible', he noted that the
WP had not said where the extra money would come from, and pressed them to
reveal the implications of their proposals.

'You can't get something for nothing,' he said on the sidelines of the Urban
Redevelopment Authority's Corporate Seminar.

The WP had unveiled its 63-page manifesto on Saturday. Called Towards A
First World Parliament, it contains proposals on 15 broad areas of public
policy, with a number focusing on hot-button issues like public housing and

One of the key points under public housing was to allow for cheaper HDB
flats by pegging the price of the flats to the median incomes of households
that qualify to buy them, instead of pegging them to resale market prices.
Another was for flats to be affordable enough that mortgages can be paid off
in 20 years instead of 30.
Read the full report in Friday's edition of The Straits Times.
Posting Time 9:45 AM
Posted by Lucky Tan

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