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:
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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:
Example 1:
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.
Example 2:
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.
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Hi Mr 15HWW!
I agree with you that in Singapore, property has been an abnormality that has been appreciating very well over the years. Across the globe, there are few examples of such consistent real, inflation-adjusted gains in cities. London and New York are quite good examples I reckon. I think many other countries will find that after adjusting for inflation, cost of owning a home today is quite similar to their own historical standards.
Although I am skeptical of this consistent growth, Singapore is a land-scare area and there will one day be a physical limit on the amount of properties we can fit on this island. I think Venice is a good example of what could happen if Singapore is ever “maxed” out. No new properties, just regeneration of existing ones. So although the trend of continued future gains doesn’t seem very probable, I would still think it is possible if the government is intending on increasing the population capacity and making our lion city an attractive place in the future globally-linked world. Prices can increase faster than our wages, especially if it is not Singaporeans that are purchasing our real estate, haha. (Very possible trend. Less Singaporeans these days, more foreigners!)
With regards to inheritance, I think the 2 examples you gave illustrates quite well the benefits of an inheritance. However, maybe your view should look at multiple generations, since an inheritance is involved? It isn’t a game of individuals, it’s a game of family generations.
As a parent, you would want to leave as much as your assets to your children, for the specific reasons to give them a head-start in life over all their peers. If you as parents deferred personal consumption and saved up most of your money for your children, while your peers spent all their money and did not pass on anything to theirs, why shouldn’t your children have a head-start over theirs? As a parent, you also accumulated yours savings under the same rules of meritocracy.
You cannot choose your parents, the same way you cannot choose if you strike Toto. If you happen to be born to rich parents that will leave you a big bequest, it is essentially luck. You now have a monetary buffer to make up for your deficiencies in accumulating wealth if you are handicapped in merit abilities, through your parents’ accumulated sacrifice of their wealth. Inheritance in most cases is how capable your parents were, and how much they loved you. Meritocracy has no effect on these factors.
Using Merriam-Webster, meritocracy is a system in which the talented are chosen and moved ahead on the basis of their achievement. Like you rightly pointed out, under meritocracy, those that work harder and more will get good jobs and be rewarded more. They will also more likely move up and get promoted. What does inheritance has to do with it?
Having an inheritance tax to level the playing field would actually destroy the concept of family and savings, since nothing that belongs to the parents could be transferred to their children, or even spouse. It encourages excessive consumption while still alive (spend what you have, instead of what you need) and little savings. It also denies families an outlet to express their love in a monetary way. Although I am assuming a 100% tax, which is what is needed to ensure everyone starts the same, even a 20% or 50% tax has the same implications, but to varying degrees. Inheritance tax should be a binary decision based on principles, yes or no. Anything in between is just tax revenue for the government and a lot of PR to explain their neither-here-nor-there policy.
There are also tons of loopholes in inheritance tax. Why don’t I just give everything to my children while I am still alive and get them to pay for me? Establish a trust, insurance policies, etc. Of all the taxes people don’t like to pay (then again, people don’t like to pay any taxes), they really hate estate tax the most. It is literally, you can only take my money over my dead body, haha.
Hi GMGH,
Wrote this piece to address partially the issue of inequality which we talked about a couple of weeks ago. =p
If property prices do increase faster than the increase in median wages in the coming years, I really do fear for average Singaporeans who do not inherit significant property inheritances in the future. How are they going to afford a home? We could come to a situation like Hong Kong (where a true Laissez-faire system is being practised.)
I can understand that parents would want to leave behind a bequest for their children. But is it really good for society to have rich men’s children enjoying such a significant headstart over their peers? And since the desire to leave a bequest is especially strong in Asian cultures, I really don’t think a 20-30% wealth or inheritance tax is going to encourage excessive consumption. But this tax could help to level the playing field by a little.
Based on the definition you furnished, the problem with inheritance is that the person with better merits might not “move ahead” if we use wealth as a basis. And let’s face it, in a capitalistic society, wealth is extremely important as it gives you access to resources that a poor person can only dream of.
Fair play to the lottery winner because at the very least, he bought the ticket and understood the game. But how about that capable person with average parents? Despite earning much higher wages, he can’t “out-wealth” that average person who received a big property inheritance (without any form of taxation) from capable parents. If this persist over a few generations, inequality could be so extreme that even an extremely capable person born into poverty can’t overcome.
I am definitely not advocating a dystopia where there’s a 100% inheritance or wealth tax. But I guess things might have gone far too right and an extremely unequal society is dangerous, especially for the richer people who have everything to lose.
Hi Mr 15HWW,
I’m happy you blogged about it, you do have a much bigger outreach than me, heh 🙂
Yes, if property prices do outpace wages, it’s only a matter of time that eventually Singaporeans will no longer to be able to afford a home here. However, remember HDBs! The property market (both public and private) in Singapore is highly regulated and often has government intervention (MOP, SSD, ABSD). According to HDB, more than 80% of us live in HDBs. HDB is very pro-Singaporean. With the change to the pricing of BTO flats, they are no longer pegged to the price of resale flats. First-time buyers needn’t worry about the appreciation of the resale market or the private market since it will not affect BTO pricing. Singaporeans will always be assured of an affordable home.
However, even if we didn’t have HDBs, is home ownership a necessity for the average person? Developed countries like Germany and Switzerland are only around 50% in terms of home ownership. We have been ingrained that the baseline minimum requirement should be to own your own home. Is this truly conventional wisdom?
I think we are judging the outcome of meritocracy differently. I see personal and family wealth as something not related to meritocracy. Meritocracy to me is about giving everyone fair career opportunities and advancement based on abilities, and the corresponding greater responsibilities and rewards. Meritocracy is for rewarding people fairly based on their skills. However, it gives no starting point. It only determines the increment.
We could use wealth to measure how “far ahead” someone is, but the essence of luck dilutes this metric. A lucky person with no abilities (Toto winner!) might have far more wealth than an unlucky person with abilities. However, if they are judged only on merit and abilities, that unlucky person will always get the more capable and rewarding job. Isn’t that what meritocracy is about? Not who has more money in the bank?
Is the average Joe supposed to be able to “out-wealth” a billionaire’s heir? I think it is highly unlikely within a lifetime, but definitely a possibility over generations. Meritocracy isn’t a system that allows the average people to “out-wealth“ rich people. If a rich family is able to perpetuate their wealth over generations, does it not mean that they have strong financial capabilities and are savvy enough to grow their wealth? This is an act of their merit and abilities! If they lack such abilities, they will simply lose their wealth. Being born rich doesn’t guarantee dying rich as well.
As mentioned by JW, rich people find many ways to avoid paying estate taxes. Insurance policies, trusts, migration and even renouncing of citizenships are things that people do to protect their wealth from estate taxes. If they cannot afford to exploit the loopholes of the system (the middle class), they aren’t rich enough to be taxed, haha! I suppose the question in my mind is, do I want to live in a society where there are many rich people, or do I want to live in a society where there are many poor people? Estate taxes makes the rich poorer, but they do not make the poor richer. Inheritances allow people who might otherwise be poor due to lack of ability to enjoy an artificially higher standard of living. Or should they get what they “deserve” based on meritocracy, regardless of their parents sacrifice (accumulated wealth bequeathed to them)? No merits and no abilities, so no good job and no good life?
Hi GMGH,
Resale prices and even private property prices do generally move in line with HDB prices, at least until now. But I guess you can be right that the top 10% of properties will rise faster than median wage growth because these properties are catered to the top 10% of wealth-accumulators. And I would bet that if nothing drastic changes, their income or wealth will rise faster than median wage.
The day average Singaporeans can’t afford a flat will be the day when they won’t want to serve National Service. Why would these people want to serve? Protect foreigners’ properties and wealth?
Your theory on meritocracy is interesting and I feel it’s pretty valid too. Yes, it can and should determine the increment and not the start. And I definitely don’t expect the slightly above-average Joe to out-wealth a billionaire’s heir. But increasingly, the above-average Joe might not even out-wealth an average Joe (with inheritance). In the past (maybe 30-40 years ago), perhaps I was born into a poor family but with hard work and capabilities I could probably still climb up to the top 20-30th percentile of income/wealth. But now, if I am born to parents in the lowest 10 percentile, it could be a struggle to even reach the average. A case of diminishing upward social mobility.
I think there’s also increasing evidence to show that wealth lasts more than 3 generations these days. This gives rise to “powerful” families like the Rockefellers and Waltons. I am not denying that these people aren’t savvy but it isn’t unfair to say that John and Sam did most of the hard work for the foundation of these empires. Moreover, it does take plenty of effort to squander away wealth if there’s an underlying business earning literally earning millions of dollars every few weeks.
With regards to the live with rich people or poor people question, this reminds me of a familiar question of “Would you rather earn $100 and everybody else you know earns $50 or would you earn $200 but everyone else you know earns $400”. Most people chose the first option. And I think with good reason. There’s certain resources that are limited. Like land, space and who knows, maybe resources like food in the not so faraway future.
Many of my points stem from two fundamental views of my own. Firstly, that there’s a threshold point of inequality that the masses can take before a revolution happens. And secondly, that many resources are finite and there’s a competition. By constraining the consumption (taxing) of the very wealthy, there’s a good chance the poorer might get access to more resources.
I don’t know if I have bitten off more than I chewed when talking about such stuff on this blog but I guess in the end there’s really no “right” or “wrong” in such discussions. And anybody can disagree with the two views above and I can respect that. =)
Hi Mr 15HWW,
You know, I bet our politicians have had these sort of intellectual discussions before in some closed room! I wonder what their conclusions were.
Like you said, there is no right or wrong in such discussions. As much as I want to defend against estate taxes, I do think the issue of social mobility that you brought up is actually quite a big issue that I haven’t really thought about. I need to figure out how these 2 topics can be tackled together by a beautiful solution. However, I do not think progressive estate taxes are the way to go because it is not a self-correcting system. Someone has to constantly decide the arbitrary threshold and the tax rate, which is a moving target that depends on the degree and breadth of inequality of the majority population.
Just some food for thought: Since meritocracy rewards the talented, does it not eventually leads to inequality after just 1 generation? Secondly, the poor will always be out of the market for “positional goods”. The wealthy consume different type of goods from the poor. If the poor can compete with the rich for the same goods, are they no longer poor?
I think it was a great post to stimulate discussion. I shall return once I am more sophisticated on these topics!
Wow!
After Got Money Got Honey’s comment here, I feel really good! I’m not alone in being gabby 🙂
15 HNW.
I really like this comment:
“Using Merriam-Webster, meritocracy is a system in which the talented are chosen and moved ahead on the basis of their achievement.”
It’s not about who should earn more than who, or who has more money 😉
Meritocracy is about talent and competences; not just academic qualifications.
Thankfully, big daddy is re-calibrating.
Hi SMOL,
Yes. Talent and competence. Maybe I shouldn’t have focused on the academic part so much to bring across my point. =p
I definitely have no qualms if a person who isn’t academically inclined but competent in his area out-accumulates a professor.
“Having an inheritance tax to level the playing field would actually destroy the concept of family and savings, since nothing that belongs to the parents could be transferred to their children, or even spouse.”
Exactly. Let’s not sugar coat it as “inheritance tax” its essentially “death tax”. Inheritance tax doesn’t hurt the rich (they have corporate vehicles to get around that), it actually hurts the hard working middle class.
Regards,
JW
Hi JW,
Firstly, I don’t thing nothing should be passed down. But I also don’t think everything should be passed down.
The point is, asset enhancement policy hurts the children of those who didn’t have assets the worst.
I understand there are loopholes in a death tax (in the structure we know it today) but I guess the spirit I am advocating is to be able to have a progressive tax on assets and wealth and if these monies can be redistributed to the worst off, this can ensure that less advantaged children enjoy the same opportunities as the luckier ones.
Something for thoughts.
The property prices that have gone up has nothing to do with asset enhancement. Its linked to economic growth, population growth and higher income levels. If today the population go down from 5mio to 3mio or income level go down 1.2k for fresh graduate, do you still expect the prices to be at current level?
Your statement that the current generation is funding the retirement of previous generation and the children get better off from their parents through inheritance seems contradicting. How do current generation fund the retirement of previous generation if they buy new flats? Who can they sell to? Even if they inherit something, it will take luck, efforts and knowledge to get wealthier. I don’t think becoming a multi millionaire or billionaire is that easy, or else majority will be one. Relying on a few properties to become multi millionaire? You think its because of real estate make you wealthier or you are already rich enough to afford the few properties? Besides the more expensive it is, the smaller the pool of buyers.
You also mentioned that “This isn’t an exactly healthy outcome for a nation that prides itself on meritocracy.” In the very first place, why the parents were middle income or higher income? I believe its because of meritocracy that make the parents middle income or higher income?
Hi ariesboy,
Yes, maybe the government is trying to claim credit when it was the economy doing its job supporting the rise in property prices?
The problem with new flats is that there isn’t enough space to keep on building new flats?
Anyway, there isn’t a big contradiction here. If you are born into a big family (i.e. many siblings), you won’t get much of a property inheritance if your parents were average or below average. And buying a resale flat means you are supporting the previous generation’s retirement. However, if you were the only child of a big family, you get a big inheritance and you become better off for it.
I guess my hypothesis is that meritocracy in a capitalistic society works really well for the first few generations of relatively equal (all mostly poor?) people. After that, meritocracy’s effect gets diluted (less social mobility).
Hi,
Whatever the prices, whether its up or down, there will always be people complaining, isn’t it? It really depends whether you are the buyer or seller.
Talking about space to build new flats => Remember en bloc and SERS and building higher?
Talking about the previous generation, like you have mentioned, the income was very low then => With that income, can they really get a bigger flat at that time? => How much can they really save with that income to retire in today world? Even if they sell, they will still need to spend bulk of the monies on another smaller flat, or else where they stay.
For current generation, they have more opportunities in work and with a higher income. The current generation will find it tougher in today world because of intense competition from almost everywhere. Maybe in the past, its one 1 deg holder in 10 for their cohort. Today, it can be 6-8 out of 10 cohort since parents can send them overseas or they can study private plus there are many foreigners working in companies.
You use if for yr example. Likewise a person who come from a big family with little or no inheritance can still start a biz and become a multi millionaire. The only child with a big inheritance can also gamble n splurge away the inheritance. It really depend on that person character.
Hi 15HWW,
I apologized that I am going to be long-winded…..I totally understand how you feel on the part of inheriting flats.
I came from a family of 3 where my father is an odd-job carpenter with no CPF earning S$800 a month until he passed away in 1997. He sometimes gamble and advance pay from boss so we are left with no market / pocket money for us. But he never borrow from loan shark or had mistress, and deep inside love us – I know it after he passed away. Mum is housewife babysitting as always, borrowing money from good relatives. She had only primary 1 or 2 education. She loves and cares about us, but she does not ask me to study hard as sometimes she does not even know when I am taking my O or A Level. My father simply worries each day about money and had no time for us.
Unfortunately, I do not even have a flat to inherit as we are staying in HDB rental 1-room then 2-room flat.
What I am happy is that my family is intact, although money woes led to countless quarrels. My wife is no better with a father who gambled and borrows that led to a divorced family.
I had to work part-time, give tuition when I am 18, no support in education neither inheritance nor guidance from family. Just motherly love – that is even more important! I am lucky to have a university degree and a good sister that provides important decision in my life (when I am a teenager). My sister start working part-time when she was 13 and my brother literally signed on as an regular because of house financial problems.
I always make the same complaint that life is unfair in my 20s and early 30s. At that time, although I command a much higher income than my peers, they always had a strong backing from their parents. Worst still, I got a near death “medical condition” when I was 30 and had to pay all the medical fees myself. But I learnt more after that.
My friends get married, parents pay. They buy house parents pay. They buy cars, parents pay. Even when their parents die, they inherit. And then act as if they are very capable having nice marriage hotel, nice condo, and nice cars!
Does it bother me now?. No, I am happy they have that, because then they lack something else which is more important in life. You work hard for your own assets, which are more satisfying – They lack it!
So many times I complained. But so many times I heard older wiser (richer) big bosses / clients (who use to be very poor) tell me that I am “Lucky” to go through all the hard times.
Adversity carves a man!
My sister and my brother are staying in Landed property today with each of them having additional HDB/private property. They earn it with sweat and stress!
I believe you will do very well in future considering your lower-income family background. Just ignore the noises and continue to work hard and live a healthy and happy family life. You had a great family now and treasure them.
I am 36 this year. The thing I am most happy about is my lovely wife and children, and at least I am healthy now too!
Cheers, Rolf
Hi Rolf,
You gave a wonderful comment and thanks for sharing your story. Talking about long-windedness, I think I suffer more from that as seen from most of my posts. =p
Your story is really inspiring and if I compare myself to you, I really have alot to be grateful for as a child.
And I agree that “success” does taste sweeter when we go through adversity. And congrats to your siblings who are as successful (if not more successful) than you.
When I wrote this post, I wasn’t really thinking of myself. I think I have it really good since I could even take half a year off work recently. And to a certain extent, you can even argue that I am a hypocrite as I am taking advantage of the capitalistic system and deriving some passive income from capital assets even as I talk about this. Sometimes I do wonder if what I am enjoying now is really “fair”.
I just hope there will be as many like you in the future who achieves upward social mobility. =)
Hi 15 HWW,
I think you are already black-listed by our government already. They are encouraging work until as old as you can, and here you are taking 1/2 year off. Haha …just kidding!
Anyway upward social mobility may be skew most of the times when it is associated with wealth and income.
Just look at SMOL, this is called upward social mobility. Hor…..hahaha…
To me, personal developments and social responsibility is probably more important Versus Upward Social mobility.
Singapore as a country is vulnerable without any resources and two lurking neighbours. As a parents, I am worry about the future of my children.
Maybe I will tell them….
“FIRST developed and take good care of yourself, then your family, then your country and people (in any way you can, not necessary big contributions).
BUT while building the core fundamentals and extending outwards, your actions must always base on the good of the “Big Picture”. Always be aware that without nation, there will not be family, without family, there will not be you.
Ok, I am entertaining myself again.
Rolf
Rolf,
Confirm there’s cheenaness in you 😉
成家立业, 平天下
Compared to you, I’ve a privileged childhood. I came from 3 room HDB background 😉
I hope government don’t see this post and start increasing tax on inheritance.
I think it’s natural to pass on wealth to our successors. Isn’t it a good thing that our future generations are wealthier than ours? I want my kids to be richer than us.
But we have many examples of millionaire who had poor backgrounds and how kids of millionaires are spoiled and become bankrupt etc.
I believe in fate and karma. So life is fair for everyone. We reap what we sow.