We can either have asset enhancement or affordable housing, but not both

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Recently, the Prime Minster said that home ownership is a “key national policy” because it “enables every Singaporean to share in our economic growth, because as the economy grows, so will the value of your home”. The promise of asset enhancement has always been part of the government’s narrative. However, this promise clashes with yet another key government goal: affordable housing, and this poses a problem.

The idea of asset enhancement is that your home will increase in value over time as the economy grows. However, as housing prices rise, they also become less affordable for those who are looking for a home.

Now, let’s say the government responds by building more flats. As supply increases, prices fall, making housing affordable. Those seeking homes benefit. However, this also means that the aim of asset enhancement becomes compromised as those who purchased homes previously see the value of their investment fall.

As Calvin Cheng argues,

“For the first generation, you can sell cheap leasehold HDB flats to people and for all intents and purposes they are assets. And as the Singapore economy grew, the value of these assets grew. Both aims could be met.

At a certain point, and we have reached this point, these two aims will conflict.

You EITHER have to choose to provide affordable housing OR allow these residential assets to appreciate meaningfully. You can’t have both.

Personally, I think affordable housing should be the sole objective of HDB flats.”

It is very difficult to disagree with his conclusion. I would add that in the event where the twin aims of asset enhancement and affordable housing conflict, the latter should prevail for three reasons.

First there are alternative ways to grow one’s wealth aside from investing in property, whereas access to affordable housing is an essential human need. Nobody should be too poor to have a roof over their head in order to allow someone else to grow their wealth.

Second, property is a poor form of investment anyway for a variety of reasons. First, you will always need a place to live, and so selling high also means buying high. Second, property is illiquid – it is easier (and cheaper) to sell a stock or a bond than it is to sell a home. Third, there is no point sitting on an expensive home if you do not actually sell it. Hence, whether you actually make any money from your investment will depend on whether you are able to overcome any emotional attachment to your home and selling it – this may be difficult for many people to do.

Third, asset enhancement is an impossible goal in the long run in any case; so might as well abandon it in favour of affordable housing. This is because HDB flats are held on 99-year leases, meaning that their value will inevitably decline at a certain point. The only way to avoid this and fulfil the asset enhancement promise is to extend the lease or conduct a lease buyback above what the HDB owner originally paid for the flat (taking into account inflation). Both of these are untenable since the former would contradict the policy goal (reiterated by the PM during the National Day Rally) of “recycling” land for future generations, and the latter would invariably drain the government’s coffers.

One might respond that the claim that we cannot have both asset enhancement and affordable housing might be a little hasty, as that logic only applies if we look at the housing market in isolation. This is because, if real incomes (i.e. income growth minus inflation) grow faster than housing prices (and housing prices grow faster than inflation), then we can have both asset enhancement and affordable housing. In a scenario where Singapore’s economy grows and Singaporeans as a whole become higher-skilled and more productive and have higher incomes as a result, even if property prices escalate, housing will still remain affordable because, to put it simply, we would have more money anyway.

However, there are several issues with this argument. First, it is extremely difficult to raise incomes to a level higher than the current housing price growth rate, given Singapore’s advanced level of development.

Second, the government will need to ensure that incomes rise equally, or even better, in favour of lower-income individuals. This is unlikely to take place naturally and will require substantial intervention which will affect other parts of the economy. Housing will be no more affordable to those from lower income brackets if their real incomes remain stagnant while the income of the rich grows.

Third, as incomes rise, so will inflation, and if inflation overtakes the growth in housing prices, the aim of asset enhancement will be undermined.

Fourth, for this to work, Singaporeans will need to invest less in property, and instead turn their focus on other means of wealth enhancement. Otherwise, whatever growth in income will simply go back into the property market, leading to demand-pull inflation and bringing us all back to square one.

In conclusion, the government needs to make a choice – asset enhancement and affordable housing are both desirable goals, but in today’s context, it is practically impossible to achieve one without sacrificing the other.

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(Cover photo credits: ST) 

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