Who really benefits from rising HDB housing prices?

This post was originally supposed to be titled “Do HDB home owners benefit in any way from property price hikes?” and was in response to a conversation I had with a friend on whether Singaporean home-owners can be said to benefit from rising property prices.  Since then, however, I have decided to expand upon it to include other considerations.

Qn: Does anyone benefit from relentlessly rising HDB flat prices?

In light of recent news that HDB resale prices have increased again this quarter, such a development should certainly give Singaporeans pause for concern, if only because rising prices sometimes do portend a growing housing bubble. However the subject of this post would not be whether the current housing price increases is indicative of a speculative bubble, as I’m not in the business nor possess the expertise to discern one in advance.  Home seekers for sure are disadvantaged by rising prices. But really, can fast growing home prices be beneficial to anyone?

The simplest answer, and the most obvious one would be HDB home owners, as my friend has said.  These folks whom are either fully-paid owners or in the process of paying off their mortgages have “locked-in” a fixed price for their houses, and any price appreciation would only mean that their total wealth is increasing. But this answer ignores a few important points. How exactly can a home owner tap increasing housing equity?

Can’t tap rising housing equity

Firstly, as all Singaporean home owners well know, HDB home owners do not actually own their homes but rather own the 99-year lease which HDB has sold to them.  What happens after 99 years? The property simply reverts to the HDB, irrespective of whom owns it at the time. Because of this simple fact, it is more accurate to say that HDB flats are fixed assets subject to a 99 year depreciation rate. Thus any appreciation on flat value is only due to current market conditions of increasing demand and limited flat supply. One certainly cannot count on its value to increase simply because we all know it must decrease as time passes.

Secondly, even if we grant that the HDB flat values can increase, given that HDB flats are illiquid and not easily tradeable, how can anyone monetise it? For most households, selling the flat only raises the question of where the flat owner will end up living.  If housing prices increase at their current rate, it is highly likely that the flat owner would have to fork out more money to buy a flat of similar characteristics by the time the sale and purchases of the old and new flats have been finalised, leading to a loss. Compounding this problem is the government’s recent talk of diverting profits from HDB sales into CPF accounts rather than cash, which worsens the problem of flat liquidity.

What investment options?

What about selling the flat and downgrading to a smaller and cheaper studio apartment whilst re-investing the remainder of the cash profits to cash out the wealth? HDB has also put forward this suggestion in response to a similar query:

However, this too itself has its problems. What exactly should the person invest in to obtain a return similar to the rate of housing price increases? There appears to be no good investments. The stock market might appear attractive, but the Straits Times Index has actually declined 3.75% over the same period (year-to-date) HDB housing prices have increased 6.7% in Singapore, which rules this option out. In fact using the STI as a gauge of stock returns is flawed, since it doesn’t take into account the fact that most retail investors routinely under-perform stock indices and even if one invests in an ETF which tracks the index, fees and charges would reduce any returns.

Now some might object that I’m only comparing a specific time period where housing prices have appreciated strongly against other more traditional investments. Fair enough, but further research on this has not been kind to that hypothesis.  Consider this paper which argues that real estate in Singapore has historically provided a better hedge against inflation than stocks:

Executive Summary. This study empirically tests the inflation hedging characteristics of real estate and financial assets in Singapore. The results show that real estate provides a better hedge against inflation than does stock and securitized real estate. Industrial property is the most effective hedge against both expected and unexpected inflation, whereas shop offers only significant hedge against the expected inflation. The returns of the two assets establish more than one-to-one correspondence relationships with inflation. When the inflation hedging characteristics of assets are tested in different inflation environments, residential property hedges effectively against unexpected inflation in the low inflation regime, whereas the hedging performance of industrial property against both types of inflation is better in the high inflation regime.

Even when considering a longer investment period of 5 years, from 3rd quarter of 2005 to this date, the STI has gained only 27.9% compared to housing price appreciation of nearly 60%! I kid you not, here are the graphs just to prove I’m not making up numbers (data on HDB resale prices here):

So what investment options are home owners whom sell their houses left with? As demonstrated, it is often the HDB flat which wins out. If the owner has just sold it, he can only pray that a housing crash would make his sale worthwhile. One final point to note about the sell-flat-then-invest theory is that it’s inherently speculative. To pull this off successfully, the owner must accurately predict when the housing market would tank, hardly a wise investment strategy and certainly not one most people can pull off successfully.

EDIT 15th July: Selling the flat to buy a smaller flat (ie. downgrading) has another disadvantage I just learned of. Under existing HDB policies, one has to pay a resale levy depending on the first subsidised flat type as follows.  In HDB’s own words, this is meant to reduce the second subsidy to help first time home buyers. Unfortunately, this also argues against the idea of flat downgrading just to invest the cash profits:

The amount of resale levy is graded according to the flat type of the flat owners’ first subsidised flat. Under the revised policy, flat owners whose first subsidised flat is a 2-room flat will pay a resale levy of $15,000. Those whose first subsidised flat is a 3-room, 4-room, 5-room and Executive flat will pay a resale levy of $30,000, $40,000, $45,000 and $50,000 respectively when they purchase a second subsidised flat.

If one can’t count on selling the flat and buying a smaller one to monetise its value, is there any other way a fully paid owner can tap its equity? What about a mortgage equity withdrawal, where home owners are allowed to use their houses to back a loan? Unfortunately, for HDB flats the answer is no. Unlike in other Western countries, HDB explicitly forbids home owners (even fully paid ones) from taking out a loan using their flat as collateral:

HDB’s refusal to allow home owners to put up their flats as collateral implies that borrowers can’t make use of their prized asset to secure their loan. This may lead to higher interest rates, since borrowers may have to settle for more expensive unsecured loans which increases the chance of default. Furthermore, if the risk of (American style sub-prime) foreclosure as HDB says is the reason why borrowers can’t use their flats as leverage, why not make such loans legal only to borrowers with good credit ratings? To add to that, because of this restriction, HDB owners cannot enjoy lower tax rates due to interest paid on an existing mortgage.

What other options do HDB owners have then for tapping their house equity? How about a reverse mortgage for retired home owners? Unfortunately, Singapore does not have a market for reverse mortgages for HDB flats. The closest thing to a reverse mortgage would be HDB’s Lease Buyback Scheme (LBS), where HDB would buy back the remaining lease period. But a look at the stringent eligibility requirements for the LBS clearly shows that it’s catered towards the elderly (rather than all fully paid) home owners whom have no access to retirement cash flow:

S/N	Condition
1	At least one flat owner must be citizens of Singapore and should currently be living in 3-room or smaller HDB flats
2	All flat owners must be at the CPF Draw-down-age (currently 62-years old) or older
3	Flat owners and their spouses must not have enjoyed more than one housing subsidy in the past
4	The gross monthly household income must not exceed $3,000
5	All household members must have lived in their flat for at least 5 years
6	*Members of the household must not have previously owned a: 4-room or larger HDB flat; OR Private residential property
7	*The household must not have any outstanding loan on their flat that exceeds $5,000

With effect from 1 April 2010, LBS will be extended to the following groups: a) Those who previously owned 4-room or bigger flats; and b) Those with an outstanding loan of more than $5,000, but will have proceeds of at least $60,000 for the purchase of an Immediate Annuity under CPF LIFE if they take up LBS. *

From 1 April 2010, conditions 6 and 7 will be revised as follows: Condition 6 Members of the household must not have owned or currently owned a private residential property. Condition 7 The household must not have any outstanding loan on their flat that exceeds $5,000 unless they have minimum proceeds of $60,000 for the purchase of an Immediate Annuity under CPF LIFE.

What do we see from the above? In particular, condition number 3 works against the argument that one should downgrade his flat and invest the cash difference to tap housing equity if one wants to purchase his second flat under a subsidy. Doing so would mean the person would be ineligible for the Lease Buyback Scheme. And for all the trouble of qualifying for the LBS, how much could one get? HDB’s own example quotes a sum of $520-$550 monthly for a 62 year old single male.

Is this amount adequate for retirement? If one has no other source of income, it does not appear so, especially given that as of 2008, a slight majority of 51.2% of the average Singaporean household total assets are illiquid residential properties and likely the roof above their heads ( as compared to France (47%), Japan (40%), US (28%) and UK (34%) ) :

Given the widely recommended replacement ratio (defined as the ratio of income one receives after retirement to that before retirement) of 70% and using a benchmark of $2400 monthly median income as recently quoted by Finance Minister Tharman, $550 monthly only gives a replacement ratio of 22.9%, a far cry from even 50%, let alone 70%.

How about the recently introduced CPF Life scheme?  Would adding a monthly payout under CPF Life to this amount give an adequate replacement ratio? Allow me to digress a little to answer this question. The answer is apparently no. According to this example provided by CPF itself of a 62-year old male (in 2010) with $67,000 left in his Retirement Account, the maximum one could get is $440:

From this, we have $550 + $440 = $990. This monthly payout sum (41.25%) falls far short of the recommended 70% replacement rate for retirement. With such a glaring shortfall, it is therefore not surprising that the government has chosen to push the burden of retirement and pension funding onto the shoulders of younger and working Singaporeans, as I previously wrote here.

So from the above discussion it should be evident that housing equity due to rising  HDB prices can’t be tapped under existing HDB and government policies and there is considerable doubt that elderly Singaporeans would be able to support themselves by sole virtue of their household assets.

To wrap this section up, I’ll add that evidence of the “wealth effect” (that rising home prices mean greater wealth for home owners) of rising home prices have been conclusively debunked by academic researchers. TR reported on this study by NUS researchers:

Higher property prices, instead of creating a wealth effect, exert a significant and negative “price effect” on consumption expenditures leading to a fall in the average propensity to consume.

As house prices go up, the increase in the value of housing assets is accompanied by a concurrent rise in the financial liabilities of households, in the form of higher downpayments for purchase of residential properties and burgeoning housing loans.

Due to the limited avenues for liquidating property assets, households have to build up sufficient financial assets to smooth the profiles of their lifetime consumption of non-housing goods and services leading to a diminishing in domestic purchasing power.

In concurrence with this, a similar study from SMU has concluded likewise:

Using data from Singapore, we find no evidence that house price increases have produced either wealth or collateral enhancement effects on aggregate consumption. We confirm the presence of liquidity constraints from the asymmetric reaction of consumption to income increases vis-a-vis income declines. When we allow for asymmetric response, anticipated house price increases do not have a positive effect on aggregate consumption: we find that they are considerably more likely to have a modest dampening effect, although this negative result is not statistically significant from zero. Declines in expected house price growth have a larger and marginally significant negative effect on consumption. We conclude that the results of recent studies of OECD countries, which find changes in housing wealth to be positively associated with changes in aggregate consumption, cannot be generalized to the Singapore case.

Before concluding, I should add that in fact there’s at least one way where fully paid HDB flat owners would be disadvantaged by rising HDB prices. Property taxes (and by extension government revenues) usually rise when they do, as they did last year:

HOMEOWNERS: be prepared to pay higher property taxes next year.

In line with the rally in home prices, the taxman is revising upwards the value of Housing Board (HDB) homes.

The Inland Revenue Authority of Singapore (Iras) announced on Wednesday that the annual values (AV) of all types of HDB flats will be raised with effect from Jan 1.

So to sum up, not only do fully paid HDB home owners not benefit from rising prices at all, they are screwed by the fact they would have to pay higher property taxes.

So who really benefits from rising prices?

The answer is unsurprisingly, rich people, or folks rich enough to own more than a single public/private housing unit. Take for example Sinha Shekhar, a rich new citizen from India whom is also a YPAP leader. Mr Shekhar owns both a private condominium unit and a HDB resale flat which he currently sublets out and was recently caught complaining about supposedly high property taxes on his property asset. The outcry was apparently large enough to warrant some mainstream media coverage, and it raised heckles so much that some netizens were outraged that HDB rules and regulations allowed such subletting for public and government subsidised housing. HDB’s reply that subletting allows home-owners to unlock housing equity fails to address the central concern that private property owners shouldn’t be allowed to own HDB flats in addition, especially in the face of limited flat supply and increasing demand.

Some might wonder, what exactly is the big fuss over this? Can’t Singaporeans do the same? Buy both private and public property and rent out one of them? Unfortunately, a 2006 study on private housing affordability in Singapore found that only 23.61% of all HDB home owners could afford even a moderately low priced private apartment and even fewer (15.74%) could afford a median priced one:

For completeness sake, accessibility and affordability is defined by the paper as follows:

On a theoretical level, the implication derived from the findings albeit a limited sample is that an integrated model of both aspects of housing purchase finance: the ability to provide first-time down payment and closing costs (accessibility), and the ability to pay monthly mortgage payments (affordability) is needed to explain housing affordability and upgrading behaviour.

EDIT 15th July: There’s one more group of people I forgot to include earlier whom also benefit from rising HDB prices. The permanent residents, or foreign citizens whom are not (psychologically or culturally) rooted to Singapore. These people may or may not own more than one public/private property, but because they retain their old citizenships, these people are always able to cash out their HDB flats for a profit if prices keep rising and depart for their homelands when they’re done with Singapore. With the cash proceeds and the benefits of the MAS strong Singapore dollar policy, it’s not inconceivable that they could buy up enough land to become wealthy landlords back home for a comfortable retirement at an early age. Singaporeans can’t do the same; where would they live if they sold their flats?

So what could we deduce from the above? To sum up, in general home seekers aren’t the only ones disadvantaged by rising HDB prices, there isn’t any way existing and fully paid HDB home owners can exploit housing equity which increases along with the price of their flats. These people are screwed by higher property taxes when their houses appreciate in value. At the worst, it gives them a false sense of social security (and illusory wealth) and certainly less reason for the government to do something about the problem of retirement funding. And certainly, let us not forget whom the true beneficiaries of rising HDB prices are, the privileged and wealthy few whom can afford multiple (public) properties for subletting unless this glaring loophole in HDB regulations is finally closed.

Other references:

HDB flats – Wealth that cannot be unlocked?

HDB’s Flawed Policy Direction

The TRUTH about Housing affordability in Singapore…..

MPs fear Singaporeans priced out by foreigners, private property owners