Public Housing Pricing

Transcription

1 ENGAGING MINDS, EXCHANGING IDEAS Public Housing Pricing Looking Beyond Just Affordability

2 Success of Public Housing Program Served Singapore extremely well in past decades. Environments have fundamentally changed. Recent measures have enhanced affordability Any alternatives?

3 Scope of Presentation 1. Shortcomings of Current Pricing Approach 2. Looking Beyond Just Affordability 3. An Alternative Pricing Approach 4. Impacts on Stakeholders 5. Fostering Inclusive Growth

4 ENGAGING MINDS, EXCHANGING IDEAS Shortcomings of Current Pricing Approach Equity and Risk

5 Current Policy Focus Enhancing affordability Delinking BTO prices from the resale prices since 2011 Providing more grants to more eligible firsttime homeowners.

6 Fixation on Affordability Good Progressive: Grants benefit the poor. one-third of 20,000 or 7,500 households each year benefit from the expanded SHG New housing grants : $150m Total grant amount : $290m $440m more affordable now for eligible low-and middle-income households and singles buying their first BTO.

7 Fixation on Affordability Not-so-good: New grants will not benefit two-thirds of 20,000 or 12,500 first-timers each year All upgraders buying second BTO will not receive grants have to pay resale levy ($15k - $50k) BTO prices are still high Grants benefit only some. Prices still high.

8 Affordability-based Pricing: Problems HDB is the sole agency in charge. Advantages: Effective resource planning and allocation Strong political and financial commitment from the govt Disadvantages: HDB has power in setting rules/prices. Homeowners are price takers. No viable alternative.

9 Affordability-based Pricing: Issues QUESTIONS: Are the prices equitable? Are households exposed to high risks?

10 Affordability-based Pricing Equitable? In times of low income (e.g. 1960s to 1980s) Housing costs might be higher than income Government priced low or below costs Subsequent extraordinary profit for homeowners Unfair to the government In times of high income (e.g. since 1990s) Prices may rise faster than costs Prices may rise without regard to the true costs Affordable but homeowners at risk of overpaying Problem exacerbated by income inequality. High housing price hits low- and middle income households more. Unfair to homeowners

11 Affordability-based Pricing Equitable? Can be inherently inequitable to both the government or the homeowners under different income conditions.

12 Affordability-based Pricing Lower Risk? Affordability-based pricing provides room for BTO prices to rise. Higher mortgage higher risk of default Rising arrears though fewer in non-recession years: 32,000 [End 2008] 16,000 [July 2013] Risky to assume high income growth will continue Earning power wanes as workers age. Macroeconomic volatility on the rise Default rates will go up during bad times

13 Affordability-based Pricing Lower Risk? Rise in number of jobless older workers (50s and above). tripled from 7.3% (1992) to 22.4% (2010). Rise in number of unemployed PMET more than doubled from 14.7% (1991) to 36.2% (2011). Increased risk of capital loss if resale market is depressed. Need to enhance households ability to withstand shocks.

14 Shortcomings of Current Approach Affordable Equitable Low risk

15 Arbitrary Grants: Market Interference Subject future govt to populist pressure for more grants pricing becomes more political Do not adjust automatically to market forces frequent meddling required Can be distortionary

16 BTO Price and Social Mobility Past paradigm: Low BTO price-low interest cost room for high capital gain use to upgrade to bigger unit Social mobility enhanced

17 BTO Price and Social Mobility Current paradigm: High BTO price-high interest cost lower capital gain difficult to upgrade to bigger unit Social mobility in the future may be constrained

18 ENGAGING MINDS, EXCHANGING IDEAS Looking Beyond Just Affordability Retirement Funding

19 Retirement Funding Conundrum Singapore is among the highest in GDP per capita and saving rates But there are concerns about whether Singaporeans have enough to fund their retirement WHY?

20 Retirement Funding Conundrum Has high housing price brought about efficient allocation of national resources but inefficient allocation of household resources? How to reconcile the needs for Housing and Retirement funding?

21 ENGAGING MINDS, EXCHANGING IDEAS An Alternative Market-based Pricing Approach Revisiting the Land-Cost Sacred Cow

22 What Homeowners Pay Total repayment by homeowners is more than just the BTO price. Components of BTO price: Development Land Component overlooked by homeowners Interest

23 What Homeowners Pay Breakdown of BTO Price Breakdown of Total Cost Paid Interest 25% Development 38% Land cost 38%

24 What Homeowners Pay Development cost: Not controversial. Land cost: More contentious. High land cost High BTO price Higher loan + longer tenure High interest cost Higher total cost Lower capital gain at resale

25 What Homeowners Pay CHALLENGE: Reduce interest cost while paying the full BTO price (development cost + land cost)

26 How to Reduce Interest Cost? Housing is both a consumption and an investment good. But homeowner should have a choice whether they want it to be a consumption or an investment good. Add a temporal perspective: consumption good : point of BTO investment good : point of resale

27 How to Reduce Interest Cost? Proposal: Pay only development cost component at BTO. Defer payment of land cost component to the point of resale. Same BTO price but Defer land cost payment lower HDB loan shorter tenure lower interest lower total cost More room for capital gain

28 Deferring Land Cost Payment At BTO, pay only for consumption. At resale, share the realized capital gain. If capital gain < land cost, the state bears the shortfall

29 Deferring Land Cost Payment Homeowners avoid excessive risks in default and capital loss avoid paying interests for a contingent gain still stand to make capital gain at resale. The approach is more market-based than grants. The development costs payable is totally determined by verifiable costs driven by market.

30 Why Work to Reduce Interest Cost? By charging the prevailing market value for land at BTO: Govt enjoys capital gain immediately at BTO earns interests on unrealized capital gain bears no risk of future price movement Homeowners enjoy capital gain realizable only at resale pay interests on unrealized capital gain bear all risks if resale market is depressed

31 Why Work to Reduce Interest Cost? Land cost can be likened to a capital gain tax but payable at the time of projection, not realization Illogical that homeowner has to take a loan to pay the tax upfront and incur substantial interest payments Singaporeans are co-owners of the land. Contribute as productive citizens to help raise the value of land deserve a small share of the return from the land.

32 State Shoulders More Risk Is it fair for State to bear the risk of shortfall at point of resale? Equally unfair for homeowners to bear the loss. In times of rising uncertainty, the State should bear more risk. To mitigate the risk for the state, land cost can follow the property, not the homeowner, until it is fully recovered.

33 Comparison of the Two Approaches Assumptions: Households will buy two apartments First apartment : 3-room Second apartment : 5-room Land cost is 50% of BTO price First apartment purchased at age 25

34 Interest Savings: First Apartment Current 1 Current 2 (With grants) (W/o grants) Loan Period Proposed Scheme (w/o grant) Int. Savings (Compared to Current 1) Int. Savings (Compared to Current 2) HDB BTO Price $200k $200k $200k Deferred Land Cost $0 $0 $100k Less Grants $60k $0 $0 Payable at BTO $140k $200k $100k Down payment $14k $20k $10k HDB Loan $126k $180k $90k Mthly Repayment $572 $817 $604 Total Repayment $171k $245k $109k Total Interests $45k $65k $19k $27k $46k

35 Interest Savings: Second Apartment Current 1 Current 2 (With grants) (W/o grants) Loan Period Proposed Scheme (w/o grant) Int. Savings (Compared to Current 1t) Int. Savings (Compared to Current 2) HDB BTO Price $550k $550k $490k Deferred Land Cost $0 $0 $245k Less Grants $0 $0 $0 Payable at BTO $550k $550k $245k Down payment $55k $55k $25k HDB Loan $495k $495k $221k Mthly Repayment $2,246 $2,246 $1,481 Total Repayment $674k $674k $267k Total Interests $179k $179k $46k $133k $133k

36 Monthly Payment : Both Apartments Land costs: 50% of BTO Current (With grants) Current (W/o grants) Proposed (w/o grant) Loan Period Mthly Repayment 1 st Apt $572 $817 $604 Mthly Repayment 2 nd Apt $2,246 $2,246 $1,481 Age 1 st Apt fully Repaid Age 2 nd Apt fully Repaid Lower risk.

37 CPF Savings: Both Apartments Land costs: 50% of BTO Savings (Compared to Current with Grant) Savings (Compared to Current w/o Grant) Total Interest Savings $159k $179k Deferred Land Cost from 2 nd Unit $245k $245k Increase in CPF Savings $404k $424k More CPF savings for retirement.

38 Other Financial Benefits Other financial benefits for homeowners: Capital gain from sale of first unit Interest earned from higher CPF savings Possible rental revenue in later years

39 Estimates are Fairly Conservative Estimates are based on fairly conservative assumptions: BTO price rises by $30k every 5 years. Land cost only 50% of the BTO price.

40 Rising Land Cost Land costs are likely to rise faster than development costs. Average land cost more than doubled in the last five years at an average rate of 18.2% per yr. Faster than rise in property prices: 9.1% for HDB resale and 5.2% for private property. Faster than rise in income of 5.3% for average households and 6.2% for top 10% earners.

41 Rising Land Cost Competition for land is likely to intensify. Land now makes up about three-fifths (60%) of development cost. Land costs will constitute a greater portion of BTO prices over time. Homeowners will pay increasingly more not only for land but also for interests.

42 Land Costs vs. Monthly Repayments Loan Period 1 st Apt (3-Room) 2 nd Apt (5-Room) Land costs Current (With grants) Current (W/o grants) Proposed (w/o grant) % $604 60% $572 $817 $483 70% $363 50% $1,481 60% $2,246 $2,246 $1,185 70% $888

43 Land Costs vs. CPF Savings Increase in CPF Savings Land costs Savings (Compared to Current with Grant) Savings (Compared to Current w/o Grant) 50% $404k $424k 60% $466k $486k 70% $528k $548k

44 Reducing Wealth Transfer What Singaporeans need are lower inequality in distribution of income less wealth transfer to protect CPF savings A housing transaction may result in wealth creation for individuals. At the macro level, the transaction basically involves zero-sum wealth transfer from the buyer to the seller.

45 Reducing Wealth Transfer Little new wealth is created for the country unless the buyer is an immigrant transferring wealth into Singapore. Rapidly rising asset prices point to substantial wealth transfers to the detriment of low- and middle-income households already hit by stagnating wages and rising living costs.

46 Reducing Wealth Transfer Assuming land costs to be 50%. Amount % BTO price of 2nd unit $550,000 Development costs of 2nd unit $275,000 38% Land cost of 2nd unit $275,000 38% Interests paid for 2nd unit $178,699 25% Actual cost to homeowner $728, %

47 Reducing Wealth Transfer Breakdown of Actual Payment Governmen t (Land & Interest), 63% Developer, 38%

48 Returning to Basics Proposed solution is a return to basics not only for public housing but also CPF. Public housing a consumption good at the point of BTO an investment good if and when it is sold CPF savings are for retirement funding, first and foremost, not primarily for property investment

49 ENGAGING MINDS, EXCHANGING IDEAS Impacts on Stakeholders

50 Number of BTO Impacts on Homeowners Age Group Date of 2 nd BTO Impacts 0 20s - Benefit the most s & 40s 40s & 50s 60s and above - Benefit substantially from second BTO Recent Will not benefit. Paid high BTO price, may lose if resale prices fall. Much earlier Benefitted from low purchase prices & high resale prices

51 Impacts on New Homeowners Benefits the most : Housing loan: smaller Interests: lower Loan tenure: shorter Monthly mortgage payment: smaller Default risks: lower More CPF savings for retirement Retire in the second apartment without downgrading.

52 Impacts on Recent Upgraders Already higher risks to begin with: Higher BTO price because bigger apartment, no more grants Higher monthly repayment and a longer tenure Bigger family size heavier financial burden Older Risks of health calamities & structural unemployment rise Lower capital gain from resale of first unit high BTO prices resale levy high interest cost

53 Impacts on Recent Upgraders Stand to lose if new pricing approach results in drastic fall in resale prices. Fear understandable. May not materialize. Correlation, not necessary causation. No change in BTO selling price. CPF savings for new homeowners come not from lower BTO prices but from lower interest payments deferred payment of land cost (second BTO)

54 Impacts on Recent Upgraders Resale prices depend more on supply and demand which the State may have control and influence. Resale prices rose 80% due to influx of PRs, short supply, low interests and easy credits. High resale prices in turn may have resulted in high BTO prices reverse causality Resale prices continued to rise even after BTO prices were delinked from resale prices.

55 Impacts on Recent Upgraders Planned increase in population demand remains buoyant resale prices likely to hold

56 Impacts on the State Overall impact hinges on how land cost for public housing is being accounted for. Key statistics for HDB (2012/2013) Amount paid for land - $5b Home ownership deficit : $719m Overall deficit: $797m (bef. govt grant & taxation) Grants received from govt: $1.04b Net surplus after grants & tax: $246m Bonds issued : $6b Unfair for HDB.

57 Impacts on the State Overall budgetary impact: No additional fiscal outlay except possibly more grants to HDB. The approach is merely about letting homeowners keep more of what they earn by reducing interest cost. Less immediate fiscal burden since less grants need to be given out. Less pressure for other transfers reduced fiscal burden in the long run No adverse impact on fiscal revenue since land revenue goes into reserves.

58 Impacts on the State Increased in homeowners CPF savings do not come at the expense of the State State still receives the land cost as reserves though later small opportunity costs Mitigated by higher market returns from investing funds made idled by lower HDB housing loans Help the State regain goodwill and trust

59 Impacts on the State With households protected, State can optimize the value of the land by allowing prices to rise at a healthy pace in the resale and private housing markets. To mitigate any risk in shortfall of land cost recovered for the State, land cost can follow the property, not the homeowner, until it is fully recovered. Need to change the way of accounting.

60 ENGAGING MINDS, EXCHANGING IDEAS Fostering Inclusive Growth

61 Redistributing New Wealth WHAT? More equitable income distribution based on productivity may not materialize. Redistribution of income may be distortionary. Value of labour falls over time because Supply is flexible with use of foreign labour Value-add falls with age and skill obsolescence

62 Redistributing New Wealth WHAT? Value of land rises over time because Supply is limited and inflexible Value-add rises as Singapore globalizes and economy restructures Land becomes an increasingly valuable Scarce local supply vs. Unlimited global demand National income may languish but national wealth, underpinned by rising land value, is set to rise.

63 Redistributing New Wealth WHAT? High land values Benefit govt, developers, banks, and the wealthy Hurt low- and middle-income wage earners While income gap fails to narrow, wealth gap may further widen. Instead of redistributing income, redistribute new wealth from rising land value. Less distortionary than redistributing income through higher taxation.

64 Redistributing New Wealth HOW? Deferring land cost is a non-distortionary way of sharing the new wealth without imposing a high fiscal burden on the State. A step further: Discount to land cost can be given to low income households, when they downgrade, based on contribution to nation building. Criteria: Number of years worked (full-time / part-time) Number of children raised Number of years served in national service

65 ENGAGING MINDS, EXCHANGING IDEAS Summary

66 Summary Not just about affordability. May lead to inequitable pricing and higher risk. Also about strengthening retirement funding. Returning to basics not only for HDB but also CPF enhance self-reliant Public housing homeowners enjoy best of both worlds Lower risk & lower financial burden (consumption) High potential capital return (investment)

67 Summary Rising uncertainty. Government, not the people, must assume more risk. Less wealth transfer more self-reliance greater resilience Difficult to equitably distribute and redistribute income redistribute new wealth based on contribution to nation building. raising all boats with a rising tide

68 Summary Preparing young Singaporeans for a more uncertain future: Unshackle them from an oversized housing loans free them to either procreate sooner and more to embark on entrepreneurial and other worthy pursuits.

69 Criteria of Good Pricing Policy High homeownership Pricing is sustainable, equitable, free from political meddling and will response to market forces. High CPF savings for retirement without need to downgrade Low risk Low default rate even during recession Equitable distribution of public housing not based solely on income but more on needs (e.g. number of children) End-state redistribution of wealth to ensure those who do not benefit from distribution of income are compensated by having a share of Singapore s future new wealth from rising land value.

70 THANK YOU