The PAP Government Planned to Ask Singaporeans to Use 80% of CPF for Housing
We know that the PAP government knew how they were manipulating the CPF contribution rates because in 1982, the then-Minister for Labour and Communications had said that “the CPF contribution rate is likely to increase to 50% in the future. Of this 50%, 40% will be for housing and other uses, 6% for Medisave and the remainder for old age and contingencies.” So, evidently, of the 50% that was paid into the CPF, a whooping 40% was intended by the PAP government to go into housing financing!
However, “The international experience suggests that a contribution rate of 10 to 15 percent should be sufficient for providing a replacement rate of between 35 and 40 percent plus survivors insurance benefits.” If so, why did the PAP government make Singaporeans pay an excessive 50% of our wages then and 37% of our wages today into the CPF?
The PAP Government Monopolised the Housing Market by Using Our CPF
So after 1986, the PAP government did not withdraw from the over-use of the CPF for HDB but instead continued with their addiction to finesse their wealth accumulation.
Essentially, “the CPF has (become) a substitute for the mortgage market.”
Indeed, it is “Through a carefully controlled circular flow of funds (that) CPF savings have been used to enable individuals to fund the construction and ownership of government flats” which “In effect (means) the CPF scheme substitutes for the absence of a housing mortgage market.” In other words, the PAP government was able to “‘create’… (their intention of) homeownership was by directing savings in the Central Provident Fund (CPF) towards housing.”
“By the HDB’s 25th anniversary in 1985 (a year after the PAP’s 25th anniversary), of the 84 per cent of the population housed in HDB dwellings, 76 per cent were living in flats they owned. The 1995 figures are 86 per cent and 90 per cent, respectively. Home ownership among resident households stood at 92.8 per cent in 2003.”
In this way, “The government (became) not only the largest housing developer, but also the largest mortgage provider through the Housing & Development Board (HDB). The massive scale of government mortgage loans totalled 60.1 billion Singapore dollars (SGD) in the year 2000, which was much higher than the total housing loans of the private sector (SGD 38.6 billion).” Phang Sock-Yong detailed that”In 1970, shortly after the implementation of the CPF Approved Housing Scheme, outstanding housing loans were a mere S$215 million. This constituted only four percent of GNP, a figure within the range presently prevailing in Central Europe and Russia. Even at that early stage, HDB loans had already exceeded banks and finance houses loans, comprising 58 percent of the total. With increases in homeownership rates and housing prices, housing loans grew rapidly from S$215 million in 1970 to S$113,081 million by 2003. The 2003 ratio of outstanding housing loans to GDP at 71 percent is certainly the highest in Asia (compare Hong Kong at 39 percent, Japan 35 percent, Taiwan 26 percent, Malaysia 22 percent, Thailand 16 percent, Korea 14 percent, Philippines 12 percent and China eight percent).”
Effectively, “The CPF system has dominated residential mortgage financing in Singapore. As at March 31 2012, 1.38 million members had withdrawn net amount of $ 101.9 billion for public housing scheme.”
In sum, the PAP government, via “the Housing and Development Board (HDB)“, was able to become “a monopoly supplier of public housing and its mortgage provider, administered through the CPF“. Most importantly, “the absence of common or constitutional right to land ownership” allowed the PAP government to do so.
The PAP Government Acquired Land to Allow Them to Build Cheaper Flats
Indeed, the Land Acquisition Act 1966 was called “the most powerful piece of government legislation“. “The result of this was that the proportion of land under state ownership increased from 44% in 1960 to 76% by 1985.”
In fact, the Minister for Labour and Communications had said in 1982:
HDB has been able to keep such costs low mainly because it borrows from the Government millions of dollars each year at only 6% per annum. Government, on the other hand, obtains its low cost funds through the issue of Government bonds; and the CPF has been a major purchaser of these bonds. As at September 1982, CPF had $14.22 billion invested in Government bonds and deposited as advance deposits with the Monetary Authority of Singapore. Of this amount, $6.81 billion had been invested in the bonds over the 5-year period up to April 1982. On the other hand, total Government loan to HDB amounted to $6.73 billion during the same period.
Construction costs were thus initially kept low as “The HDB was able to price its units below market prices mainly because HDB flats are built on state owned land, much of which had been compulsorily acquired from private landowners at below market prices. This was made possible by the Land Acquisition Act, enacted in 1966,” “which empowered the government to acquire land cheaply whatever land it might need for housing development“. “The rate of compensation was set by statute and independent of both market value and the landowner’s purchase price. This exercise wiped out land rent gains for affected landowners, some of whom suffered actual losses having purchased their land at prices above the statutory determined value. Some landowners even had to continue with mortgage repayments for land which had already been acquired by the government.”
Goodman, Kwon and White said that, “If there had been a strong landlord class with a vested interest in land, the housing policy could never have been carried through as easily as it was.” However, as it turns out, the government had almost wiped out the landlord class in Singapore then, but has instead installed themselves as one of the major real estate owners, via HDB and real estate companies owned by Temasek Holdings, which begs the question – are we none the better off today, since now, with the government’s “vested interest in land”, has this disadvantageous to Singaporeans?
But the PAP Government Got Hooked on Using the CPF to Drive Up Housing Prices
In fact, “The government is not an entirely innocent party“. First, “higher artificial demand is generated in pursuance of the(ir) 100 per cent homeownership policy” and because of “The relaxation of housing rules by both the HDB and CPF (which) made public and private housing more substitutable, An unintended, but unholy alliance conspired as the whole residential market becomes a de facto cartel with HDB and a handful of private developers on the supply side.”
On top of that, “The situation is aggravated by the state as the largest land owner and exercises land sales from its land bank on a tender system, inflating costs in its own way. The consequence is both public and private sector housing prices feed on each other. Each time price increases from either housing sector, a corresponding effect is inevitable on the other. The two-way causality is blurred as the distinction between public and private housing diminishes.”
Flat prices therefore went into a dangerous upward spiral as “Higher income and affordability, higher HDB prices and eligibility, and one residential market instead of separate public housing and private housing markets, interact in an inflationary vicious circle.” Also, “Low interest rates have further encouraged mortgages and financing as have CPF liberalization. The stock and property markets tied up as one speculative market fuel each other too.”
Indeed, because the PAP government allowed the CPF for use for housing, this meant “purchasing properties that are bigger than the case where there were no CPF (occurred) and the purchases were financed by the residents’ own savings. That is, the extra savings due to the CPF system had induced a demand for bigger flats in Singapore. This in turn supported a higher level of property price over the years.”
“The irony is 100 per cent home ownership limits the rental market to foreigners. If business costs including rentals are uncompetitive, there will be no investment, no demand for rentals” and “with 100 per cent home ownership and no rental support for most properties, price may spiral downward“.
Because of this, Singaporeans are today trapped in a CPF-HDB loop where there needs to be “implicit price support from the government to preserve asset value” and “It is crucial that Singaporeans do not migrate en masse or the support is broken, to trigger downward spirals as more would sell their properties to rent at cheaper rates.”
Ironically, “It seems almost common sense that postwar baby boomers who are renters rather than home owners have a greater financial security than home owners which are typically “asset rich, cash poor”.
In fact, where Minister for National Development Khaw Boon Wah had recently admitted that, “we control the (public housing) construction programme; secondly, we set the price (for the HDB flats),” it might perhaps be highly problematic that if the PAP government has such overarching control that they still allowed housing prices to spiral out of control.
The PAP Government Created Further Policies to Drive Up Housing Prices
More importantly, now we know:
- In 1986, the PAP government was warned not to continue using the CPF to (over-)drive up housing demand and prices but the PAP government ignored these warnings.
- Also, now that we know that the PAP government sets housing prices, why did they continue their fanatic pursuit to drive prices upwards?
Indeed, the upward spiral of HDB prices was caused by the direct effects of the PAP government’s policies.
- 1971: “Prior to 1971, there was no resale market for owner-occupied HDB dwellings. HDB required owners who wished to sell their flats to return them to the HDB at the original purchase price plus the depreciated cost of improvements.” However, “In 1971, a resale market was created when the HDB allowed owners who had resided in their flats for a minimum of three years to sell their flats at market prices to buyers of their choice who satisfied the HDB eligibility requirements for homeownership.“
- 1981: Also, “Between 1968 and 1981, CPF savings could only be withdrawn for purposes of down payment, stamp duties, mortgage, and interest payments incurred for the purchase of public-sector-built housing. In 1981, the scheme was extended to allow for withdrawals for mortgage payments for the purchase of private housing.“
- 1989: Prior to 1989, “Only citizens, non-owners of any other residential property, households with a minimum size of two persons with household incomes below the income ceiling set by the HDB were eligible to purchase new or resale HDB flats… In 1989,… the income ceiling restriction was removed for HDB resale flats; the resale market was opened to permanent residents as well as private property owners who had to owner-occupy their HDB flat. HDB flat-owners who could not own any other residential property before, could also invest in private sector built dwellings.”
- 1993: “In 1993, the CPF Board also began to allow withdrawals of CPF savings to be used to meet interest payments on mortgage loans for resale HDB and private housing purchases. Before this, CPF members were allowed to withdraw only up to 100 percent of the value of these properties at the time of purchase.” “This liberalization in housing finance regulations helped fuel the asset bubble in the next few years.”
- 1994: “Since 1994, CPF Housing Grants have been introduced for the purchase of resale flats provided the household meets eligibility conditions. First-timer married couples can buy a resale HDB flat and apply for a CPF Housing (Family) Grant to assist them in the purchase.“
Not only that, the PAP then started artificially pushing up prices for HDB flats in “the 1980s … (by) reduc(ing) subsidy (where) HDB changed and gradually increased its prices based on housing type, location, floor level, view, and other aesthetic factors.”
Also, while flat prices were previously kept below market rates, “Land cost (was eventually) incorporated in the final selling prices … though the true formula is not revealed. The consequence has been gradual, but certainly higher housing costs invariably impinging on wage and land costs.” Today, land costs have grown so significantly that “Land now makes up about three-fifths of development cost on average, up from two-fifths in 2008“.
And from 2008 to 2013, “land costs have grown at an average compound rate of 18.2 per cent a year, compared with 9.1 per cent for HDB resale prices” but “incomes (only) rose at a compound annual rate of 5.3 per cent for the average household“.
And because of these policies, “Deregulation of the HDB resale market has been accompanied by an increase in the number of transactions. The transaction volume of resale HDB flats increased from fewer than 800 units in 1979, to 13000 units in 1987, 60000 units in 1999, and 31000 in 2004. Resale transactions as a proportion of total (new and resale) owner-occupied public housing transactions, were three percent, 37 percent, 64 percent and 68 percent in 1979, 1987, 1999, and 2004 respectively. The increase in the demand for resale flats in the latter half of the 1990s is in part due to the introduction of demand side housing grants.”
“A study by Phang and Wong (1997) shows that policies on the availability of HDB and CPF finance for housing had the most significant impacts on housing prices. These policies include extending the use of CPF savings for private housing in 1981, liberalizing the terms of HDB mortgage loans for resale flats in 1993, and the introduction of CPF grants for purchasing HDB resale flats in 1994. Such ‘shocks’ on the demand side needed to be offset by government policies to generate the requisite supply, although these have not always been well synchronized.”
In fact, when you look at the introduction of these policies and the subsequent increase in HDB prices, you can see the immediate effects of these policies in the chart below. Also, over the past decade, there has also been an escalation in housing prices due to the sudden influx of migrant inflow (see chart on migrant inflow trend below). Whether or not the intention was to bring in foreign demand due to the saturated demand among Singaporeans, the policy was effective. But the ill-effects were to drive up not only housing prices but prices across the board, as can be seen in how Singapore is now the most expensive place to live in, in the world.
This spurred Lee Kuan Yew to ponder later on:
I should have known that it does not pay to yield to popular pressure beyond our capacity to deliver. Yet I was party to a similar mistake in the early 1990s. As property prices rose, everybody wanted to make a profit on the sale of their old flat and then upgrade to a new one, the biggest they could afford. Instead of choking off demand by charging a levy to reduce their windfall profits, I agreed that we accommodate the voters by increasing the number of flats built. That aggravated the real estate bubble and made it more painful when the currency crisis struck in 1997. Had we choked off the demand earlier, in 1995, we would have been immensely better off.
Yet, why then did the PAP government ignore the early warnings in 1986 which had detailed the side-effects of an over-fuelling of the housing bubble, via the over-use of the CPF, and why did the PAP government continue to create three more housing bubbles in 1997, 2008 and today?
One can infer that housing and land price levels in Singapore are higher with the CPF housing scheme than without. In the first decade (1968 – 1981) when the CPF savings was directed only toward public housing, administered prices, stringent eligibility criteria, and long waiting lists were used to allocate the HDB’s supply of new flats. Moreover, in the absence of a secondary market for HDB flats during that period, the inflationary impacts on a tightly regulated housing sector were not immediately apparent.
However, such mechanisms could not be used when savings were similarly directed to private housing beginning in 1981. The 1981 liberalization as well as the 1993 liberalization of HDB and CPF regulations for HDB resale flat housing loans had significant impacts on housing prices, contributing to the development of speculative bubbles that subsequently burst.
When the CPF contribution rates were used for macroeconomic stabilization, increased to mitigate inflationary pressures from higher wages (1978 – 1984) or cut to reduce wage costs and preserve jobs (1985 and 1998), the effect was to exacerbate the housing price boom and bust by channeling resources into real estate during an inflationary period and reducing resources to the sector during a recession.
Singapore’s mandatory savings and housing policies have very substantial impacts on household’s consumption and investment patterns. Savers’ and consumers’ rights in decision making are constrained by numerous CPF and HDB restrictions and regulations. Consumption inefficiencies arise when households value the in-kind transfers/subsidies at less than the costs of providing them, or alternatively, at less than an equivalent cost but unrestricted cash grant. Moreover, numerous regulations to prevent profiteering and speculation as well as restrictions in housing location choice resulted in inefficient location and commute patterns for households.
Dr. Richard Wong, Director of the Hong Kong Centre for Economic Research, also summed up the problem with using the CPF to fund HDB:
The Homeownership Scheme had many important consequences. First, the CPF started to withhold from individuals an increasingly large portion of their own financial wealth. The result was, according to the Report of the Central Provident Fund Study Group (1985) chaired by Professor Lim Chong-Yah: “to emasculate their sense of economic initiative and enterprise”.
Second, the CPF ceased to be a simple old-age security savings-withdrawal scheme, but became the vehicle for massive state intervention into the housing and capital markets with profound effects. The principle that an individual’s benefit would equal what he contributed was effectively abandoned since the gains and losses from home purchase decisions were heavily influenced by the terms and conditions of the financing schemes and housing allocation rules that have unavoidable distributional effects. The timing of the purchase was, for example, often an important determinant of capital gains. Since the terms and conditions have evolved over time, the redistribution may be very complex, but there can be little doubt that the allocative distortions must have been enormous.
This sequence of liberalization measures contradicted the original aims of the CPF as a compulsory savings scheme. Why compel in the first place if you were going to allow for so many types of withdrawals later on? What it does reveal is the enormous unpopularity of the mandatory savings scheme so that its most unappealing constraints on personal choice have to be mitigated.
The advisability of putting large sums of money in the hands of the government was questioned in the highly influential Report (1985) by Lim. It states: “[T]he large sums of money vested with the fund are in effect held `hostage’ to governmental decision-making: ipso facto, this would be acceptable if there is a guarantee that future governments would be as honourable and as capable as the present one, but can such a guarantee ever be forthcoming?”.
First, it is doubtful that the vast CPF machinery has resulted in a more efficient allocation of resources. Second, one can argue, at least in principle, that the Singapore CPF has probably resulted in a society where most people are more equal, except for the gap between the rulers and the ruled. But this has been achieved by forcing everyone to earn a 2 percent real rate of return on some 40 percent of their savings.
Indeed, today the income inequality in Singapore has become exacerbated precisely because of the PAP’s over-control and dominance in not just the political landscape, but the housing landscape as well.
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