For the best part of Singapore’s 50 years of history, the government has ensured that HDB flats were not just homes but also an appreciating asset. This asset enhancement policy has also naturally spilled over to the private property market and property prices have enjoyed strong appreciation over the past few decades.
The steady increase in prices helps to explain why almost every Singaporean aspires to own his own place. Our high home ownership rate is actually a rarity among developed nations. According to this wikipedia article, we are actually 3rd (behind two Eastern European countries) with more than 90% of Singaporeans living in homes either owned by them or their families.
I would actually argue that home ownership and asset enhancement were both essential policies as there was a need for Singaporeans to have a stake in the country’s future during our early years. Otherwise, the early migrants who came to Singapore would just migrate to another place when things turn sour, no?
Our economic miracle has also benefited the ordinary citizen who had bought a very affordable and simple flat as that flat probably has appreciated by a few times compared to the original price he had paid for it. And now that he is approaching retirement, he can even unlock the value of his flat through schemes like the Lease Buyback Scheme to fund his retirement.
Nonetheless, nothing is perfect and even such a policy would have its drawbacks, as shown below:
Asset Enhancement is UNSUSTAINABLE
A quick look at the HDB’s resale index indicates that in the first quarter of 1990, the index was sitting at 33.6. In the most recent quarter of 2014, the index has risen to a level of about 192.4. That’s a total increase of 472% over the past 24 years and the annual appreciation amounted to about 7.5%. A quick look at the private property price index from 1975 to 2014 shows a similar result with >7% annual appreciation in prices over the past 39 years.
Singapore’s median income was $286 in 1975 (sourced from this amazing article) and in 2010, it was $2710. That’s a growth rate of 6.6% a year and from a closer look at our economic growth (from this useful singstat page), our GDP has been growing at an average of about 7.7% per year since independence.
Therefore, it’s not surprising to see asset prices rising at more than 7% since it’s in line with growth in median wages and GDP. With leverage and historical low inflation rates, many Singaporeans’ wealth increased tremendously just by owning their home.
However, as our economy matures, median wages and GDP have both started to slow in the past 2 decades, and especially so in recent years. Coupled with tighter immigration policies, it’s unrealistic to expect asset prices to increase at rates like 7% in the foreseeable future.
Furthermore, with increasing property prices, mortgage loan tenures are getting longer. What used to take 15 years to pay off has now easily increased to 25. And unless the typical human lifespan is able to further increase, property prices generally has to be in tandem with median wage. If you have read the amazing article that I pointed out above, you will realise that in the last decade, median wage growth has slowed to 2.5% a year. Hardly encouraging. 😕
Young are essentially helping to pay for the retirement of the previous generation
And if asset enhancement is unsustainable, my generation and the future generations of Singaporeans will not be able to benefit from such a policy. This also literally means that people like me are helping to pay for the retirement of the current elderly. Yeah, it’s not just about taxes.
When that elderly couple is able to sell their 5-room flat in Tiong Bahru and receives $700,000 of proceeds, there is a young couple at the opposite end of the transaction who would have to probably take on a half million loan which they would likely need at least 25 years to pay off.
The elderly couple probably bought the flat 30 years ago for $50,000 and if they move to a 3-room flat in a non-mature estate after the sale, the hefty gains they enjoy will allow them to have a comfortable retirement.
So honestly, the government’s recent moves to curb the frothy property market is more helpful for the young than the old.
Less upward social mobility for next generation
Anyway, a part of me does feel that it isn’t really that unfair for me to foot part of the bill for my previous generation’s retirement. Afterall, their hard work in our nation’s early years did provide a happy childhood for me or anyone born after the 1980s. By then, hunger was no longer a real threat for 90% of the population as compared to 20 or 30 years earlier.
What irks me more is the fact that this policy will probably reduce upward social mobility in Singapore. What do I mean? Here’s two examples:
Tom was born into a poor family and his low-income parents who worked as cleaners rented a one-room flat from the government. He worked hard and did well in school. His starting pay was $30,000 in 2000 and when his parents passed away in 2015, he received no inheritance at age 40.
Jerry was born into a middle income family and his parents bought a 4-room flat in Serangoon. Jerry was average in school and wasn’t able to qualify for university. His starting pay was $20,000 in 2000 and when his parents passed away in 2015, he receive an inheritance of $500,000 at age 40.
In year 2030 at age 55, even if Tom enjoyed an average of 5% annual increments every year and not spent a single cent, he would accumulate slightly less than $2 million. In comparison, Jerry would only accumulate $1 million from his wages as he started off with a lower salary and only received 3% annual increments. However, if he knew how to invest the $500,000 property inheritance with 6% returns, this $500,000 would grow to >$1.1 million and his total assets would be more than $2.1 million.
If we compare their wealth, amazingly, Jerry would be slightly ahead of Tom at 55 even though he earned much less income over 30 years.
Micky was born into a middle income family and his parents bought a 4-room flat in Serangoon. He worked hard and did well in school. His starting pay was $30,000 in 2000 and when his parents passed away in 2015, he receive an inheritance of $500,000 at age 40.
Donald was born into a rich family and his high-income parents owned a luxurious condominium. Donald was average in school and wasn’t able to qualify for university. His starting pay was $20,000 in 2000 and when his parents passed away in 2015, he received an inheritance of $2 million at age 40.
In 2030 at age 55, even if Mickey enjoyed an average of 5% annual increments every year and not spent a single cent, he would accumulate slightly less than $2 million from his wages. His inheritance would be worth $1.1 million (assuming 6% returns) and his wealth totals $3.1 million. In comparison, Donald would only accumulate $1 million from his wages as he started off with a lower salary and only received 3% annual increments. However, his $2 million inheritance would have grown to >$4.5 million and his total assets would be more than $5.5 million.
On a wealth basis, amazingly, Donald would be WAY ahead of Mickey at 55 even though he earned much less income over 30 years.
The above examples illustrate the power of property inheritance after decades of the asset appreciation policy. It would become increasingly harder for those who were born into less well-off families to climb the wealth ladder. Yes, they would do better than their parents, but are they going to be ahead of their peers who were born with a silver spoon? It also doesn’t help that estate duty was abolished in 2008.
This isn’t an exactly healthy outcome for a nation that prides itself on meritocracy.