The Future of Housing in Singapore - Part One

Housing Board Subsidies – Regressive?

In the 1990s, Housing Development Board changed their subsidy policy of flats to in effect, be a discount on the market price. Hence, a HDB flat located in the same precinct as a private condominium would sell at a much lower price in comparison. In our government’s drive towards home ownership such that everyone has a ‘stake in the country’, 95 per cent of the 80 per cent of HDB dwellers are owner-occupiers. This is indeed a remarkable achievement for a country just over 40 years old – a true testimony to the success of the government and the HDB.

However, there has been recent public discussion as to the rising costs of HDB flats and whether housing is still affordable in Singapore. Some questioned why the subsidies from the government were not a cost-based break-even subsidy, but one that was a discount on the market price. To this, the government stand has been that such a market-based approach ‘reflects the true subsidy buyers enjoy’ and has allowed HDB to price its flats affordably despite the sharp escalation in construction costs. Indeed, this is an accurate reflection of the situation. The bottom line being, if HDB changed its policy to a cost-based break-even subsidy, the amount of subsidy it would have to foot would increase with construction costs and this might prove unsustainable over a prolonged period. Hence, basing a subsidy on the market price will mean that the state as public housing provider gains less than it would have if it was a private developer. The public then benefits from this discount. The state however, still gains an excess over costs from their public housing developments, which is used to ensure that future public housing prices can be kept affordable. All this works well. However, let us explore deeper into the contributors of these subsidies – who is subsidizing for public housing in Singapore?

Under a cost-based break-even subsidy, an increase in construction costs will mean that the government will have to utilize more of taxpayers’ funds to subsidize the increase. Tax in Singapore is a progressive tax which means that the better-off contribute a larger percentage of their wealth towards taxes. Paying for the subsidies from taxpayer funds’ will mean that the better-off will subsidize an increasing proportion of the subsidy increase. This is definitely progressive.

Under a market-price based discount subsidy, the reduced profit from current public housing developments the state receives is used to subsidize future public housing developments. The reduced profit is received from the Singaporeans living in public housing developments today. The subsidy for future public housing is for the Singaporeans living in public housing developments tomorrow. What this means then, is that the population living in public housing is, effectively subsidizing itself over time.

But then, what about the state’s subsidy - the discount on market-price it has given to these 80% of the population? Who actually is paying for that? The answer depends on what the actual market price these public housing developments would be, based on demand, and not just on supply factors (i.e. location, costs). Simply put, if there would be no demand for these developments without the discount, (because those that can afford it would have sought out private developments, and those that cannot afford it, will simply not be able to afford owning a home), then the discount would actually not exist. The market price for something with no demand would be zero, and a discount on zero would be zero.

Therefore, it does seem that having 80% of public housing dwellers subsidizing themselves over time, leaving the 20% already living in private housing completely unaffected is regressive. In our quest towards a progressive society outlined through our other policies, this housing subsidy policy seems to go against that. Crucially, this regressive policy affects 95% (of the 80% in public housing), as they are home-owners. This is a percentage much larger than the population actually paying progressive taxes.

I am however, not advocating a cost-based break-even subsidy, as it is undeniable that over an extended period of time, that may prove increasingly unsustainable as construction costs and the living standard demands of public house owners rise. Nor do I think we should relook the home ownership policy of Singapore, as the ‘everyone has a stake in this country’ argument is a good and justified one. The solution, might then, just lie in an area which Singapore was weak in and could not afford to rely on when we first started off as a young nation in 1965, but has since grown from strength to strength – the private property developers. Can they offer affordable social housing?

(The above article was published in ST Online Forum on 29 Oct 2008, titled 'Are Housing Board Subsidies Regressive?')