Amid the hue and cry about rising home prices and all the speculation as to whom to blame for pushing up prices, I think Singaporeans are failing to see a monster of a problem developing before our very eyes.
We have become addicted to government subsidies. Experience from everywhere else has shown that subsidies are very hard to wean people off from. Even when they undermine the fiscal position of the state, a huge political cost is involved in trying to end them. Governments have fallen, riots broken out, blockades erected and the entire stability of the state sent reeling when attempts are made to remove subsidies.
Over the long term, subsidies are untenable. Over the short term too, they have damaging effects: they distort what should be rational economic decisions.
What is even crazier is that this has happened under the watch of the People’s Action Party, whose political philosophy, we are have been told over decades, is that of self-reliance and hard work.
By now, I think, almost all Singaporeans are familiar with the various grants given out by the Housing and Development Board. This webpage from the HDB gives the details:
The main grant is for family units whose two core persons are both Singapore citizens and who have never enjoyed a grant before. They get S$30,000 towards buying their first flat.
They get S$10,000 more if the flat is within 2 kilometres of their parents’ home.
The income ceiling is the same as that for getting an HDB flat: household income of S$8,000 a month. At this level, a great majority of Singaporeans will enjoy this subsidy when they make their first HDB purchase. This is not a subsidy for the needy; it is for nearly everybody.
There is also something called an Additional Housing Grant, which is a separate grant on top of the aforementioned. Households whose monthly income is under S$5,000 are eligible, though the grant quantum is on a sliding scale up to a maximum of S$40,000 for the lowest-income (S$1,500 or less).
In late January 2010, Finance Minister Tharman Shanmugaratnam, in announcing the increase in the Additional Housing Grant from the previous S$30,000 to S$40,000, said that with the increase, some 8,000 households annually would benefit. (Straits Times breaking news, 23 Jan 2010, Bigger HDB grants for buyers)
What does “8,000 households annually” mean? What percentage of Singaporeans would qualify for the Additional Housing Grant? Is that a large percentage or not?
In attempting to grasp the significance of this figure, I tried to compare it to the annual demand for ownership flats as reported by the HDB in their Annual Report. Over the last three years, this has averaged about 10,000 flats per year. The HDB defines “demand” as “bookings received by HDB for 2-room and bigger flats under the various allocation exercises, as well as bookings for Design, Build and Sell scheme flats.” (Housing and Development Board, Annual Report 2008/2009)
At first glance, 8,000 eligible out of an annual demand of 10,000 suggests that even the Additional Housing Grant is a scheme that throws money like confetti to all and sundry.
However, the details complicate such a simplistic conclusion. The Additional Housing Grant can be used for resale flats, but not for second-time purchases, whereas HDB’s 10,000-figure for demand includes second-time purchases, but excludes resale transactions. Hence, it is not possible to compare the two figures. Nevertheless, one is left with the distinct impression that not only do all Singaporeans’ first-time flat purchases get an assist from the first grant, perhaps a majority also get the Additional Housing Grant.
It is hard to avoid the conclusion that the great majority of Singaporeans depend on subsidies to get a roof over their heads. We’re breeding a culture of dependency.
This cannot be tenable. I’m not against subsidies in principle, but it should only be for a small percentage of the population to mitigate extremes of poverty. Dishing out subsidies — and the schemes are permanent — to well over half the population cannot be fiscally responsible.
Unless…. they are not subsidies.
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For the discussion below, let P be the price that Singaporean first-time buyers pay, and Q be the price others pay. Let G be the difference between P and Q. Therefore G represents the various grants.
What do I mean when I say unless G is not a subsidy?
One can see it another way — as a dual pricing scheme, under which Singaporeans who are first-time home-buyers pay prices that are S$30,000 to $80,000 less than non-Singaporeans and Singaporean second-time buyers.
This changes one’s understanding of it completely, and now it sounds defensible. Why shouldn’t a state favour its own citizens? Isn’t there a social good to help first-time buyers acquire a home to raise a family?
Yet, it is not just another way to look at it. There is a right way and a wrong way. Which is right depends on what the cost of building the flats is.
If the cost is P, then selling the flats to first-time buyers does not involve a subsidy. P is then a discounted price that represents a waiving of profit. The corollary is that when flats are sold to non-citizens and second-time buyers at price Q, the HDB makes a profit equivalent to G.
But the HDB has maintained for years that it does not make a profit on its prices. If we give credit to these denials, than Q — the usual prices — represents more or less the cost of building the flats. P is a below-cost price, in which case G is a real subsidy from the common national purse, a habit that eventually will lead to fiscal suicide.
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But what else can be done? How else are first-time buyers going to be able to afford their first home?
This is where the HDB needs to reevaluate its mission. It needs to set lower cost targets for design. For example, do we really need the thick reinforced concrete “household shelters”? Do we need brick walls to separate the various rooms? Can’t we use lightweight partitions like in the offices where we work? Won’t putting up lightweight partitions also increase productivity, to use the latest buzzword?
We need to be able to build cheaper flats. Too much of Singaporeans’ disposable income is spent on an investment that does not give productive returns.
The policy direction should be not to build costly flats with bells and whistles and then dishing out subsidies so people can buy them. Instead, it should be to build them at an affordable cost, so that no subsidies are necessary.
Yawning Bread 
I wonder if we should look at this from the bigger picture: how the Singapore government actually raises the money to pay out these subsidies. Where do they come from? Are those fundamentals sound?
This is independent of the argument by some critics that these HDB subsidies aren’t really subsidies at all, but a reduction on an artificial valuation based on pricing in the much smaller private housing market.
Dear yawningbread,
I do think that brick walls are necessary. But the brick walls are not the reason why HDB Flats are so expensive. The price of a HDB as pointed out by many political blogs arise from the market-price based approach that the government has taken as compared to construction cost based approach it had first taken.
Granted, there are more cost and environment friendly ways to build a flat and still get a quiet and good quality home compared to a brick and motar one.
welcome back. yb. This is a brave article, however politically incorrect or disagreeable it may seem considering there are more people clamouring to raise the existing income cap of $8,000 to qualify for the grant.
Although it regards welfare as a dirty word, especially the so call Swedish model, it has a systematic regime of subsidies, that are generously heaped on not the really down and out who have to be completely humiliated before getting anything. More importantly, it has become a convenient political tool to blatantly buy legitimacy. Unlike the first generation of PAP leaders, I personally find little moral and political inspiration from the current generation of ministers. So, monetary incentives are the only means left for them to buy support. This form of welfarism is serves narrow political needs rather than help to reduce inequalities and indignities in the long run.
I agree with your comments. While it would most certainly be somewhat painful for prospective flat buyers, the rampant incessant subsidies do pose a greater threat to Singapore in the future. In addition to the strain imposed on government budget, the subsidies mean that on average, a flat costs less. This will no doubt drive demand up, leading to more expensive houses. Houses in Singapore already costs much more than the average city, and Singapore already has one of, if not the highest percentage of house-ownership. It is about time that subsidies are reduced.
It amuses me that at the time of introducing subsidies, the government is actively imposing policies that curb the operation of foreign workers in Singapore. What does it result in? More expensive flats due to a shortage of foreign workers, which the government intends to deal with by introducing MORE subsidies.
I shouldn’t complain so much though. The flat that I and my parents live in now has seen at least a 20% rise in value, though we only bought it 7 years ago. What I am worried about now is what will housing prices be like when I am ready to move away from my parents?
1. Subsidies are there because of high cost of housing. We won’t need them if housing prices are more affordable.
2. Cost of housing is not high because of frills – it is high because we are land scarce and cost of land is astronomical. Our HDB flats are already very no-frills.
3. Almost every crowded city has subsidised public housing. It is more necessary in Singapore because we don’t have cheaper alternatives such as sub-urban areas to go to.
4. Our public housing although subsidised is the most expensive in the world.
5. Subsidized housing do not cause fiscal strain because the land is owned by the govt and acquired at low cost. In fact there is a big surplus due to these sales for public housing even with the subsidy. Actually the higher the price of public housing, subsidy is proportionately and the more money the govt collects – strange but true this year’s subsiday is likely to be one of the highest given the high price of HDB and the govt will be in great fiscal shape.
6. Those with 8K income and above don’t qualify. But Singapore has very very low tax for high income earners so please don’t worry about middle income families getting something.
Completely agree with you that lower housing cost can potentially lead to many good things – more disposal income leading to entreprenuership/small businesses and great domestic consumption which will wean us off this export dependent economy. …and it will certainly help with the retirement problem. However, we are not going to get cheap housing if we are packing 6.5M people onto this small island – its just not going to happen!
I suspect the obsession with housing subsidies has more to do local-born Singaporeans asserting their perceived privileges as citizens in the face of increasing numbers of foreigners in our midst. From 2005 to 2006, the number of non-residents (i.e non-citizens and non-PR) jumped from 798,000 to 875,500 (+9.71%). From 2006 to 2007, it went up to 1,005,500 (+14.28%). From 2007 to 2008, the number reached 1,196,700 (+19.61%). Beside putting a strain on the existing housing facilities and transport infrastructure, these migrant laborers make local-born Singaporeans feel besieged. Since the laborers tend to come from those countries where the forefathers of local-born Singaporeans migrated from, local-born Singaporeans start to ask for more subsidies to differentiate themselves as citizens from the non-residents among them.
because of high HDB property prices, 40K is a small amount these days (and I think you know this already), though for people buying the cheaper flats it still makes a difference; it might be available to almost everyone, but it does not have the same impact on everyone (e.g., the better off often decide to buy in the resale market to get desired location/height/facing, forgoing the subsidy so it obviously matters little to them)
the purpose of the subsidy is multifold – making singaporeans feel they get something PRs do not get, encouraging children to live closer to parents, etc; the mentality of economic dependence you say it is breeding is negligible, compared to the level of social control it adds to – but I am sure you already know that too
Please don’t patronize us by peppering your article with “subsidy” when our flats are in no way or form subsidized.
Cheaper style flats? Already our HDB has shoddier quality materials compared to our colonial period’s SIT. My green windows, manufactured in Britain, won’t be killer litter.
Thinner partitions? To hear neighbours’ blaring their dreadful televisions and foul-mouthed Singlish? You gotta be joking.
Thicker walls, room sized verandahs for our climate, more space in-between buildings, greater attention to flat orientation vis a vis the tropical sun and monsoon currents, larger units, and yes, advocate a population DECREASE policy in Singapore, let the our natural birthrate decline us to oblivion.
More gays and God Save the Queen.
Is tax a legitimate part of the “cost” of a flat? I would say it should be, from the perspective of HDB. This changes the equation but doesn’t entirely invalidate your points.
Old fox harry lee has ALWAYS lambasted the western world’s “Welfare State” model as welfare NOT WORKABLE.
And yet, it is he WHO Most Patronizingly PROMOTES “The HDB Heavily-Subsidized” CRUTCH-MENTALITY….. And even GETS AWAY with it with the Western Media!!!! WHY SO????
What a two-timer idiot!
Because the “REAL DEVIL” is IN The DEVILISH Details which are NOT AT ALL ‘juicy’ enough for interest to command attention!