"It's in the interest of buyers to have low COVs, but it's in the interest of sellers who own the flats to have high COVs. So, between these two groups, we must let them fight it out. The Government is not able to settle or fix COVs to say that it should be this or this figure. The Government prefers not to interfere. But we can interfere in the supply. This is something we can control.”
In short, the Government will not set or fix prices directly -- but it will indirectly influence prices by manipulating the factors that affect prices. In particular, the Government will influence supply, and then leave it to the magic of “the market” to set prices. These latest statements are consistent with what Mr Mah told Parliament back in April, that the Government intended to leave the purchase of resale flats by first-time flat buyers "to the market".
"Leave it to the market" is a rationale that is often trotted out, to justify why the Government should not intervene in something or other, be it rising housing prices or rising COE prices. But government policy can have a huge impact on prices (and sentiment, which can drive prices in markets like property), as implicitly acknowledged by Mr Mah when he talked about ramping up supply as a way to moderate price increases.
In this case, what’s ironic is that the Government is now scrambling to fix a problem that is largely of its own creation. Why are housing prices rising so quickly? Here are some likely reasons, all linked to Government policy from the last few years:
- Recent HDB changes making it easier for HDB owners to rent out the entire flats. After living in the HDB flat for a few years (I think 5 years in most cases), HDB owners can now rent out their entire flats even after upgrading to private property. Previously, they would have had to sell their HDB flats if they want to move into private property. Well, not any more. This has been portrayed as a liberalization, and hence presumably A Good Thing. But the reality is that it keeps potential supply off the resale market -- I suspect that many HDB-owners who upgrade to private property actually keep their HDB flats as an investment property to rent out. In fact, HDB flats strongly outperform private apartments in terms of rental yield.
- The influx of foreigners. I work with a lot of foreigners, and I think in many cases they do bring net benefits to Singapore. In light of our immigrant roots and as a matter of necessity, I do think we have to be open to foreigners. But I also believe that we are close to the creaking limits of our country’s present infrastructure; that the rate of increase in recent years has been too fast; and that this influx has limited the opportunities available to locals. In other words, the Government did not think through the costs of such a rapid increase in the foreign population in Singapore (costs which are of course not captured in the GDP figure), and continues to disregard these costs. The Government’s approach of “sharpening the differences” between citizens and foreigners misses the point, because it focuses on increasing prices for foreigners, which only makes life harder for them without making life better for citizens.
- The ease with which foreigners could become permanent residents (PR), thereby qualifying to purchase HDB flats. I know of at least one foreigner whose PR application was approved in 3 weeks or so. This has massively increased demand for public housing, hence driving up prices. The absolute number of PRs purchasing HDB flats may constitute a fraction of the overall HDB-purchasing population, but you actually only need a small number of purchasers bidding up prices at the margins, for overall property prices to increase.
- The rise of en-bloc sales over the past decade. I’m told that a popular retirement strategy for older folks who cashed out from en-bloc sales, is to buy a HDB flat in cash and then live off the massive cash balance left over for the rest of their retirement. The lax rules for en-bloc sales therefore channels cash-flush buyers into the HDB resale market, hence the advent of near-million-dollar HDB flats.
- HDB’s dogmatic adherence to its Build-To-Order (BTO) model. Burnt from the huge supply overhang of public flats when it massively over-built in the face of the HDB bull market that ended in 1996, HDB now only builds flats when it is confident of selling most of the flats built. This means that HDB will launch a project (i.e. start taking orders from interested buyers), but only start construction when most of the flats (I think at least 70%) have been booked. This avoids a supply overhang, which means that the cost of public funds being tied up in unsold public housing (which is saved by the Government) is transferred to citizens, who end up bearing the cost of a longer waiting period for new flats. In addition, the delay in getting a flat drives potential buyers to the resale market. This in turn pushes up resale prices, which actually then increases BTO prices down the road since BTO flats are priced at a discount to the then-prevailing market price. So this policy is a vicious cycle that delivers a double whammy (if not more) to prospective buyers.
But most fundamentally, increasing HDB prices marks the coming to roost of the Government’s deliberate (and much ballyhooed) policy of making one’s flat a financial asset for retirement purposes. This works only if flat prices increase over time – otherwise, they would make really bad investments that are unsuitable for retirement. By mixing up the public policy goals of providing affordable accommodation and helping citizens plan for their retirement, the Government has ended up achieving neither, with public housing becoming increasing unaffordable and many retirees being asset-rich and cash-poor.
The point that I ultimately want to make, is that the “leave it to the market” message is deceptive when the bearer of the message is able to manipulate the market. Markets do not exist in vacuums, but are instead influenced by government regulations and policies. So when the Government declines to intervene or to change the underlying rules, it is really a conscious political decision to maintain the status quo.
In such cases, the “market” becomes a convenient scapegoat for a mess that’s really of one’s own creation. A deus ex machine, if you will, that conveniently resolves an inconvenient political truth.
So the next time a government official or politician talks about “leaving it to the market”, or blames the market for something or other, be a little bit more questioning. Drill deeper and find out if that person is really helpless to influence the market. I would bet that’s not the case in most cases.
