TR EMERITUS

To keep a BTO flat (new public housing flat) “affordable”, the government takes the resale price of public housing flats in its vicinity as a benchmark, and then apply a subsidy. In so doing, BTO prices are pegged to “fair market price”, albeit at a discount. However, in addition to market forces, property prices in Singapore, including that of public housing, is significantly affected by government policies, rather than the usual factors like economic growth and interest rate - a peculiarly Singapore trait. In 1981, the government announced that mandatory personal retirement savings called Central Provident Fund (CPF), which till then, could only be used for purchasing HDB flats (public housing), could be used for purchasing private property. Almost immediately, private property prices shot up, and that policy continue to support prices, to the delight of property developers and their associates. In 1989, a slew of new policies were announced: the income ceiling for the purchase of HDB resale flats would be removed, Permanent Residents (PRs) would be allowed to use their CPF savings to purchase HDB resale flats, private property owners would be allowed to use their CPF savings to purchase HDB resale flats for owner-occupancy and people who had bought HDB resale flats would be allowed to use their CPF savings to purchase private property for investment purposes. Almost immediately, prices of HDB resale flats shot up, and within 7 to 8 years, more than doubled. While the liberalization of the purchase of HDB resale flats did not lead to a substantial increase in private property prices initially, it nonetheless, had a significant positive effect on prices in subsequent years, and indeed formed a solid support for private property prices. According to the Straits Times of 8 October 1998, the 13 major developers made a combined net profit of $6.2B in the eight years following the liberalization, despite paying $7.6B for land. The Singapore government has also long used foreign liquidity to regulate property prices by loosening or tightening rules on foreign investment. Even though foreigners are not allowed to purchase HDB flats, private property prices have a ripple effect on the public housing market. So, while the government takes the price of resale HDB flats as the benchmark when pricing BTO flats, since it is “fair market price”, it is not entirely set by market forces - rather, government policies have a significant impact on it. For example, if the government were to suddenly announce restrictions on PRs buying HDB resale flats with their CPF, the price may well crash. But having implemented the rule, the price is supported at a higher level and seemingly a “fair market price”, but in fact, is created by the government. Thus, taking the high price of resale HDB flats as the benchmark, which to a large extent is manipulated, the government sets a high price for BTO flats, which comes back to affect the resale price in a self-sustaining loop that keep prices at a lofty level, supporting the prices of not only private property but also state land. The property game is closely watched by property developers, banks and big investors as it affects their profits. If the “virtuous” cycle of high prices becomes unfavorable, there are many policies that they can influence the government, which oftentimes, is on the same boat, to apply. It would be naive to assume otherwise. Thus the so-called “asset enhancement” of public housing is a sick joke. It is predicated on the government inflating prices on ever more inflationary policies that benefits the corporate sector but oppresses the people, especially the younger generation. As it is, many of them will have to spend the rest of their most productive working lives paying off their housing loans. Even worse, the policy, while it was good for securing votes as many owners saw their wealth increasing as prices started from a low base, is nonetheless, reckless because the wealth is but paper wealth and the upward momentum can’t go on perpetually. What will happen when the government has run out of levers to boost prices? Or if they won’t work anymore? For example, if the people is fed up because their salaries have not kept pace with inflation and rising HDB prices and punishes the PAP at the polls, which then placates them by lowering BTO prices to try to stay in power, and investors, both local and foreign, sensing that the government is succumbing to the wishes of the people and thus a downward property cycle is likely and exit the market, first in drips, then in droves, and later, despite the government loosening the rules for property purchase, can’t stop the downward spiral, will the bubble then collapse? If it does, many people will be sitting on negative property and the economy will be deflationary for years, even decades, not unlike the lost decade of Japan, only that it will be worse since Singapore is a “property state” and a disproportionate chunk of the economy is based on real estate. This is thus the fundamental contradiction of “asset enhancement” that we have blindly walked into - we have to keep inflating prices to support “enhancement” but at the same time, the high price and rental of property is the Achilles heel of many sectors of the economy as well as a burden for the younger generation, yet if we attempt to deflate it, we may unwittingly crash the economy - damned if we do, and damned if we don’t. The government should focus it’s energy on how to walk us out of this conundrum instead of turning a blind eye to it and squeezing as much profit as possible out of it, in the meanwhile. Furthermore, unlike big countries where folks can sell their house in the more expensive city area and shift to quality yet affordable housing in the less-expensive suburb area to enjoy retirement with the profits, there’s no suburbs in Singapore. To cash out, owners will have to downgrade to smaller HDB flats, which is not popular, or emigrate. Last but not least, most of us have only one house and it does not matter if “asset enhancement” inflate prices to stratospheric levels - we still need a roof over our heads, and as Lawrence Wong has pointed out, prices will come back down, and eventually to zero. Thus if we do not cash out around the peak, but continue to stay on as we only have one house, the paper wealth will disappear. It is wrong to say that Singaporeans are “asset rich but cash poor” as if they are actually quite rich because they are not, as the asset cannot be cashed out unless they have at least two properties. “Asset enhancement” is thus a sick joke for the working class, but it is the ladder upon which real estate corporations, banks, and their associates make their profits, and many of these entities are linked to state-owned Temasek Holdings. It is the right of every Singaporean to have a roof over their head at an affordable price. As such, public housing must be for ordinary Singaporeans to live in, period. It should never be made into an investment commodity and manipulated to lofty heights which are then traded for profits. And certainly, public housing should never be used as a base to boost private property for corporate profits.   Foong Swee Fong      Read More →

Matters of national concerns arising from new or amendments to legislation draw no comments from the Law Society. The general medical community stays absolutely silent on serious concerns over mRNA vaccines. Zero input from the Society of Accountants to the conundrum of our reserves is no surprise. The apathy of people in leadership roles in relevant professions in Singapore is a crying shame. It is testament to the veracity of my old blog on kiassu, kiassi, bo-chup. Indomitable opposition MP Leong Mun Wai had spoken recently in parliament on the high cost of public housing in which land cost is the underlying factor. Leong's argument was the government sells land at market value thus making significant gains in reserves, and since the state already has a reputedly high reserve, public housing cost can be lowered with land sales at below market prices. The 2nd Minister of National Development M/s Indranee Rajah responded thus: “When we sell State Land, we convert the physical asset into a financial asset. For example, if we sell a parcel of State Land at its fair market value of, say, S$1 million, we no longer have the land for the term of the lease sold, but we have S$1 million. There is no net increase in the reserves. We have merely changed the physical land in our reserves into a distributed amount of financial reserves. There is no new value created and hence no addition to the reserves.” This legal-economic obfuscatory statement to an accounting issue is now template explanation in various government websites. Never mind that it goes against the grain of every ordinary person's understanding of changes in asset values. Obviously, the intricacy of government accounting has a lot to do with this. Should we walk quietly into the financial hell of astronomical HDB prices in accepting this anguished verbiage, or do we try to understand what it is all about? Let's look at simple accounting 101 Supposing a plot of land is bought for $1m. It was sold 5 years later for $2.5m, netting a profit of $1.5m. Government accounting is on a cash basis, thus recognition of the net profit is upon sales of the land. Reserves is the net unencumbered assets. Thus in year 1 where assets-liabilities = 0, there was no reserves. Upon sales, it is irrefutable wealth has increased by $1.5m. This is so fundamentally simple I am insulting readers' intelligence with the above chart. In magic tricks, the performer uses what is known as the Art of Misdirection. It is a deception to get the audience to focus on something else so they miss out on the mechanism of the actual trick. In reference to the chart above, Minister Indranee attracts your attention to the left, the Assets. Like all good magicians, she fills your mind with irrelevant details to retain your attention on the deception. She tells you it is purely a monetisation of land, changing one form of asset to another. And so she talks of land as non-earning assets and cash as financial earning assets. For good measure, she screws your brain with term of leases. By then, brain fog would have gotten hold as you go thinking of 99 year HDB leases which she did not even have to bring up. Meanwhile, you are missing out on the right hand side and see the increase in wealth of $1.5m. Indranee's explanation in parliament was either a verbal magic trick or mis-information. Land acquisition and land reclamation by the government is funded by past reserves. To this extent, Indranee's explanation about changing reserves from one form to another without increase in reserves is absolutely correct, but only in respect of year 1, the year of acquisition, not sales. A financial asset ($1m of cash from past reserves) is changed to land (investment). There was no change in reserves, thus I assume presidential consent was not necessary in year 1. The more discerned readers would surely be asking where is the cash coming from when past reserves fund some payments, such as land acquisition, land reclamation and pandemic aid packages? To explain this, I refer to my old chart on government cash inflows and outflows. Regular readers should be familiar with this chart by now. The operating revenue cash inflow (from taxes, duties, fees, fines, rental, NIRC from SWF. part of earnings from MAS) all goes into the Consolidated Fund to meet the government's fiscal obligations. Using past reserves to pay non-fiscal disbursements, the transactions are not routed through the Consolidated Fund. The government simply pays out from the cash account at MAS. So for the land acquisition in year 1, there is no change in the net value of assets. In the government Statement of Assets and Liabilities, there are only 2 asset types -- Cash and Investments. So cash goes down by $1m and Investments increase by $1m. A change from a financial asset to land. No net change in reserves. On disposal of the land in year 5, Cash goes up $2.5m, investments down $1m as the land has been sold, making a net asset increase of $1.5m. This should be matched by $1.5m on the liabilities side in one of the fund accounts, representing the profit on the land sales, in other words, the increase in reserves. I am not certain which funds account it ended up with. My guess is The Development Fund. I am not quite sure if Indranee said this, but a Petir (PAP newsletter) article in relation to this subject matter, stated : "The land will not do much for Singaporeans when it’s just left unsold. But converted into liquid cash at fair market value, it helps appreciate Singapore’s reserves indirectly and eventually for the next generation." This could be referring to the fact that proceeds of the sales are invested by GIC which provides investment returns in the form of NIRC to help fund the national budget. It could also mean when converting to liquid cash, or sales, at market value, it appreciates the reserves, meaning, it increases the reserves. Take it which way you want. This here is a bit off track, but I cannot help resist a little tale to add spice in connection with the Petir quote "... "land will not do much for Singaporeans when it’s just left unsold". SLA is the agency that manages some of the government properties as well as the sales of state land, amongst other functions. Some state land is left for temporary use, managed by SLA. Readers may remember a large plot of fantastic land in the Dempsey Road area. In deference to ONE very important gentleman who likes to jog in the area, the plot has been left undeveloped for decades. So a small community of quaint little shops prospered there and were left undisturbed by officialdom as there was no development plan. By and by, SOMEONE UNKNOWN came along with new ideas for the land. Not a full land development, but just to spruce up the area. Whose idea, we don't know. The agency concerned started talking to existing shop owners who were all sub-tenants. As compensation is an issue, a brouhaha ensued as it became clear no one knew who was the MASTER TENANT, and the government had no master tenancy agreement with anyone. Those in the know knew the master-tenant is the brother of another VIP. Eventually the area was tendered out which was not won by the highest bidder, but by someone with a lower bid. The reason was the winner had a better proposal, ahem. And the winner is a well-know VIP who is the wife of another VIP, someone who likes vroom-vroom, hint, hint. So unsold land can and do help earn some returns for the benefit of Singaporeans. Sometimes, we wonder which Singaporean.     * Article first appeared on Down The Rabbit Hole.      Read More →

I make these suggestions to introduce "common prosperity" in Singapore. 1. Provide an adequate wage for every worker that is sufficient to meet the cost of living. The wage should be guided by national statistics of the supply, demand and average wage for each job category. The wages should not be depressed by unrestricted entry of foreign workers from low cost countries. 2. Keep the cost of living low, by removing levies, GST and price gouging by suppliers. 3. Make education, health care and housing affordable to the average income earners. 4. Encourage people to save for the future and provide them with suitable non-speculative investments that offer a fair rate of return. They should get a better return than that offered by private banks or asset managers (who take off a large part of the returns). 5. Adjust the working hours according to the economic cycle to minimize unemployment and allow those who are unemployed to withdraw their retirement savings or access low cost government loans. This is in lieu of providing unemployment benefit. 6. Create suitable employment opportunities for every person who is fit to work until an advanced age, say 75 years. Allow the older workers to work for fewer hours and in non-strenuous jobs. 7. Manage the supply of housing to keep the prices in line with increase in median income, and avoid the excessive prices due to speculation. 8. Encourage a free market for small business, but keep large businesses under public ownership, e.g. energy, infrastructure, telecommunications, public transport, schools and hospitals. The capital cost can be funded by national savings and the operating cost by user fees. 9. Have a fair tax regime to collect tax on high incomes and luxury purchases. I will elaborate more on this topic in separate articles.   Tan Kin Lian      Read More →