Saturday, November 05, 2005

HDB flats - Wealth that cannot be unlocked?

This report is closer to the real situation faced by Singaporeans when forced to cash out on our HDB flats than the rosy picture that PM Lee has painted.

Nov 5, 2005
Pot of gold for the poor?

Even the bottom 20 per cent of households here have over $138,000 of assets in their Housing Board flats, thanks to the home-ownership policy. But are those HDB flats really pots of gold for the cash-strapped? How useful is that valuable HDB flat, if such wealth cannot be unlocked? Lydia Lim and Aaron Low report.

ON PAPER, it looks like mother-of-four S. Kannaki is sitting on some $170,000 in wealth.

It is locked up in her four-room Housing Board flat in Sembawang, which could sell for up to $230,000 on the resale market.

She still owes the HDB $60,000 in mortgage payments.

But Mrs Kannaki, 32, who earns $900 a month as a daily-rated worker fogging mosquito-breeding areas, does not exactly feel rich.

With her husband in jail, she is cash-strapped and wants to sell her flat. She cannot as she has not lived in it for the minimum of five years required under HDB rules. Her husband also does not want it sold.

'I have to wait and I don't know how long more I can tahan, ' she tells Insight, using a Malay word which means 'bear with it'. 'Once I sell the flat, I can get some money. I don't think I want to buy a flat again. I hope I can rent a one- or two-room flat if everything works out, so I can support my family,' she says.

Some 87 per cent of low-income families here own the HDB flats they live in. This is an unusually high percentage, relative to other countries. It is largely due to various government policies to encourage and enable as many Singaporeans as possible to buy their own homes.

In a recent paper based on data from the 2003 Household Expenditure Survey, the Department of Statistics (DOS) implied that this home ownership policy had also helped the low-income become 'well-off'.

It highlighted the finding that households in the bottom 20 per cent by income have accumulated on average home equity of $138,000 each.

Home equity is the sum of money an owner gets after he sells his flat and repays his mortgage. It is calculated by taking the estimated valuation of the flat and deducting the outstanding loan from the HDB.

The conclusion of the DOS? Home-owning Singaporeans, including those in the bottom 20 per cent, are in general 'well-off in terms of the asset values of their HDB flats'.

But does owning an HDB flat really make even low-income households 'well-off'?

Besides giving them a roof over their heads, how does it help these families when they face hard times?

How easy is it for them to cash out when they need to, so they can use the capital gains from their flats for other needs and expenses?

The answer to these questions could well decide whether home equity should be a factor in deciding how 'well-off' these families are.

The difference is a huge one, especially for households in the bottom 20 per cent.

By the DOS' own calculations, the amount of home equity these families have accumulated - an average of $138,000 each - is close to 10 times their annual household income.

This figure was also cited by Prime Minister Lee Hsien Loong in his National Day Rally speech this year, when he spoke about the Government keeping a close eye on how families in the bottom fifth of the population were faring.

Mr Lee said it was 'not bad' for families in this group to have equity of $138,000 in their HDB homes.

'It will see him into his old age and his family if he is prudent,' he said.

But while the Government's underlying assumption seems to be that the value of these flats should count towards people's wealth, some economists disagree.

Among them is National University of Singapore (NUS) economist Tilak Abeysinghe, who says: 'The question is whether your house is a usable asset. If it is not, then it cannot be considered part of your wealth.'

By 'usable asset', he means something that can be sold to help the owner pay off debts or for other expenses.

Not easy to cash out

THE irony in Singapore is that while most people own their homes, they cannot do what they will with them.

The vast majority who live in public housing are technically not owners but tenants, who lease their flats from the HDB.

It is the HDB, as landlord, that decides what they can do with their homes. This state of affairs seriously limits the ways in which Singaporeans can convert their home equity into cash for spending.

In contrast, in countries like the United States and Australia, people who want to get money out of their homes can either downgrade to a cheaper place or borrow money using their homes as collateral.

But the HDB does not allow the second option here.

In 2002 during the pro-entrepreneurship drive, entrepreneurs tried but failed to get the go-ahead for home-equity loans, as a way to get capital for their start-ups.

These loans allow an owner, who has paid up part of his mortgage, to take a second loan on the repaid portion.

The HDB said no because subsidised housing is for Singaporeans to live in, not use as a source of credit.

Reverse mortgages are also not allowed. The HDB worries that borrowers may outlive the term of the mortgages, be forced to sell off their flats to repay the loan and end up homeless.

West Coast GRC MP S. Iswaran says more needs to be done to help Singaporeans to monetise the wealth tied up in their homes in an orderly manner.

He describes this as the 'essential final aspect' of policies to help people own their homes and save for retirement.

The current situation is 'asymmetric', he says. 'The average Singaporean spends 20 to 30 years building up the equity in his HDB flat through monthly mortgage payments.

'Yet when it is time to unlock some of this value, say for retirement expenses, the main option is to sell the property. This is not optimal - the monetisation is lumpy and the individual still needs a place to live,' he tells Insight.

He means that after the sale, the flat owner gets the money in one lump sum instead of a steady stream of payments spread out over a period of say, 10 to 20 years.

One change that has helped HDB owners monetise their assets is the relaxation of subletting rules in March this year.

Now, those who have paid off their mortgages can sublet their entire flats after living there for five years, and those with outstanding loans after 10 years.

But this only helps families who have alternative accommodation. Those who do not have but one choice - downgrade.

Even then, they may trip up on HDB rules, such as one requiring them to have lived in the flat for at least five years before selling.

Southwest district mayor Amy Khor says the resale levy is yet another impediment. HDB owners who downgrade have to pay levies of up to 25 per cent of the sale price of their flat if they want to buy another subsidised flat.

She says the policy should be reviewed to help those who genuinely need to downgrade and would suffer a loss if they had to pay the HDB such a huge chunk of their sales proceeds.

No wealth effect

WITH these HDB restrictions in place, it is hardly surprising that Singaporean homeowners do not seem to feel richer when the value of their homes go up.

This is quite unlike home owners in other developed countries.

In a 2004 paper on housing prices and their impact on Singaporeans' spending behaviour, Singapore Management University economist Phang Sock Yong analysed quarterly economic data from 1981 to 2000.

She concluded that the dramatic increases in housing prices during that period 'had no significant positive effect on aggregate consumption in Singapore'.

In contrast, data for the other 30 OECD (Organisation for Economic Cooperation and Development) countries showed an 'unambiguous' link between changes in housing wealth and consumption.

She suggested two factors to explain this.

First, it is not as easy for households here to withdraw housing equity to finance consumption.

Second, Singaporeans have a stronger desire to bequeath their homes to their children.

In a separate paper, Associate Professor Abeysinghe and fellow NUS economist Choy Keen Meng found a strong link between increases in home loans and CPF withdrawals, and the steady decline in Singapore's average propensity to consume (APC).

The APC measures the share of a country's total output or GDP that is due to private consumption, that is, spending by households.

In the 40 years from 1960 to 2000, Singapore's APC declined from 0.8 to 0.41.

Singapore's APC is now the ' the free world', they said. By comparison, the US has an APC of 0.68 and Hong Kong an APC of 0.64.

The decline is of concern, they wrote, as private spending is the most stable source of total demand - and therefore growth - for any economy. This means that the higher the APC, the more likely it is that a country's growth will be stable.

They concluded that Singapore's declining APC results in more volatile GDP growth.

This is because when APC or spending by households is low, growth is largely driven by exports and foreign investments, which tend to fluctuate more and are more vulnerable to external events.

The two economists found that a fall in housing prices was accompanied by a rise in APC with a lag of four to five years. They also found that the APC lost much ground when housing prices shot up during the property bubbles of the early 1980s and 1990s.

They urged the Government to prevent further declines in the APC by ensuring homes remained affordable.

When asked to respond to the findings, the DOS said it had no comments except to note that Singapore 'has a unique and exceptionally open economy with significant periods of economic growth driven by external demand'.

Taken together, the two academic papers raise the question of whether Singapore's home-ownership policy - which has benefited the vast majority, including the low income, by providing good affordable housing - may have exacted costs on the economy and individuals.

And though most Singaporeans have significant equity in their HDB flats, there remain doubts about the usefulness of such wealth to home owners.

These are due largely to the difficulties many HDB households face in converting their home equity into cash they can use.

Unless and until ways are found to help them monetise their prized assets, it is debatable to what extent HDB-owning families, especially those in the bottom 20 per cent, are truly 'well-off' if that assessment is based on paper gains they cannot encash.


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