Thursday, January 10, 2013

Goodbye To ECs

The recent news of a $2m Executive Condo (EC) has prompted many to call for a review of the rules governing ECs. MND has responded to say it will look at building regulations.

There is a simpler solution – get rid of ECs altogether.

What was the rationale for such housing? Government wanted to help those who aspire to, but could not afford, private housing. It was a noble intention – but that is the problem. As is the experience with many countries (we are by no means unique on this score), government policies are usually founded on good intentions, but have altogether different consequences.

What has been the consequence of the EC scheme? While there is an income limit to restrict applicants, the fact is that many applicants can afford private properties, usually through savings or help from their families. On the other hand, many who qualify but do not have help, would rather purchase a cheaper HDB flat because they do not want the burden of a large mortgage or have other commitments (children, elderly parents, etc). Of this group, those who earn over $10k a month have fewer options as they cannot purchase a HDB flat.

The result is that large government subsidies are being given to some who can otherwise afford to buy private property. Developers who are in the business of making money – not their fault – have been quick to pick up on this. They know that there is a ready market for large EC units because an equivalent sized private unit will be far more expensive, and there are many Singaporeans who have parents or relatives who will help them buy an EC because they see them as a good investment. So they build them. And can sell them.

The other unintended consequence is that there is there is a group of Singaporeans who do not qualify to buy HDB, but who find themselves priced out of ECs or end up competing with those who can afford more expensive housing.

What we also have is a minefield of rules and regulations on the differences between HDB, DBSS, EC and private property many do not understand, so that there are no loopholes. But these will always exist, and we should never under-estimate the capacity of people to exploit a system to make money.

So, the Government should get out of the EC/DBSS market altogether. Government’s role is to provide public housing for the masses. It is not to help people own private property. The latter is an aspiration individuals can work towards. Not everyone may want to stay in private property, and there is no reason to subsidise those who do. Where private property is concerned, government’s primary role should be to ensure that there are no distortions in the market which would adversely affect the overall economy – speculation, over-leveraging etc.

So what should HDB do? Here are my simple suggestions:

(1) Focus on building affordable, practical, good quality, public housing;

(2) Increasing the income ceiling so that most Singaporeans have the option of buying HDB flats, and fewer people are priced out of either segment;

(3) At the same time, do not allow HDB flats to become financial instruments, so that those who can afford private housing will find it not worth their while to venture into the HDB market. This can be achieved by simple rules, such as mandating anyone who owns a HDB flat to stay in it. There is no reason to stop HDB dwellers from investing in the private property market – but if they want to hold on to their HDB flat, they must live in it. We should put a stop to private property dwellers renting out HDB flats. That is another subsidy to those who do not need it. There is no public interest in allowing this; and

(4) Use subsidies to make smaller HDB flats more affordable so that more poor families can get out of rental flats. 1 and 2 room flats should be priced such that the mortgage can be serviced with the same amount families are currently paying for rental. That gives them a stake in their homes. Home ownership can make a huge difference to the financial well-being and progress of poor families. It also encourages families to stay together and promotes stability. That is the foundation on which Singapore was built. Building more rental flats is a short-term solution which will only put more poor families into a cycle they will find difficult to get out of.

Some of these suggestions will sound familiar, as that was what HDB first started doing. HDB needs to go back to its roots, and not try to be all things to everyone.