The Limits of the Singapore Housing Model – Market Urbanism

The Limits of the Singapore Housing Model - Market Urbanism

In 2015, urban studies professor Anne Haila published a book on Singapore’s land ownership and housing system called Urban Land Rent: Singapore as a Property State. The Singapore housing model has recently been getting some attention for its widespread homeownership and affordability relative to high-cost coastal cities in the United States. Both Haila and, recently, writers at Bloomberg and CityLab approach Singapore uncritically. And Singapore’s housing market does offer some key lessons to the United States. But unlike the story Haila and some other U.S. commentators have told, it has its downsides. Singapore’s housing market works much better for households near the middle of its income distribution relative to the highest-cost U.S. regions, but provides severely inadequate housing for its low-income migrant workers.

The Mechanics of Singapore’s Public Housing

In Singapore, 90% of the land is government-owned, and about 80% of citizens and legal residents live in owner-occupied public housing on leased land. Extensive government landholdings and a leasehold system date back to the country’s colonial era. Following Singaporean independence in 1965, the People’s Action Party, which has been in power ever since, has expanded state land holdings. At independence, about 50% of Singapore was government-owned, reaching its current level of holdings in 2002. Government land ownership has been accomplished through eminent domain along with land reclamation, which has increased the size of the island by a quarter.

Government land is auctioned for housing and other types of development primarily as 99-year leases. The Housing and Development Board (HDB), a government agency, builds the majority of new housing, but some higher-end housing is privately developed. The HDB and private developers compete for land at auctions, and both pay market prices for it. Unlike the U.S. public housing system under which units remain government-owned and are leased to low-income tenants, Singapore’s public housing is primarily sold to middle-income buyers. Purchasers then have the right to live in their flat, sell it at a market-rate price, or lease it to a tenant until the building’s 99-year lease expires.

While Haila didn’t find evidence that Singapore policymakers studied Henry George, she and others have pointed out that their system offers some of the benefits of reducing the rents landowners collect. In his classic Progress and Poverty, George argues that land rents cause poverty because landlords’ monopoly over their property permits them to increase rents when productivity rises. He posits that rents to land prevent wages from rising above a near-subsistence level for many workers. In Singapore, where government land ownership largely prevents individuals from capturing rising land rents, policymakers had a contradictory hypothesisthat keeping housing affordable would also have the effect of keeping wages low, with affordable labor making Singapore an attractive investment opportunity for foreign firms.

Does Singapore succeed at housing affordability?

Yes and no. The median flat in Singapore costs $408,000, 4.6 times the median income. This puts it on par with Salt Lake City, a level of affordability that Demographia categorizes as “Seriously Unaffordable,” but more affordable than many coastal cities in the U.S where the ratio stretches as high as 8.5 in San Jose.

Housing finance in Singapore makes housing accessible to many households at even lower prices. HDB, the provider of most of the city-state’s housing, develops housing at a range of price points affordable to households of different income levels, from studios for seniors, to 3-room flats to higher-end “Executive” flats. HDB provides new flats to buyers at subsidized rates, with income caps for various new units.

Singapore mandates contributions to individual savings accounts, requiring workers to contribute 20% of their pay into individual accounts in the Central Provident Fund. Employers are required to contribute an additional 17% of salaries. Individuals may use the funds in their CPF accounts to help fund a downpayment and monthly mortgage payments.

After residents have lived in the subsidized flat that they purchased for at least five years, they have the right to sell the flat at market value. Throughout their lifetime, residents may purchase two subsidized units from HDB that they can resell at market-rate prices, often reflecting substantial appreciation. Thus, as in countries that aren’t so reliant on public housing, Singapore policymakers’ constituents have conflicting interests. Homebuyers want prices to remain lower while owners want to see more appreciation.

Housing Politics in Singapore

Singapore’s city-state government’s approach to redevelopment stands in stark contrast to how localities in much more expensive regions have used zoning to constrain housing supply. The Singapore Land Authority (SLA) handles land use planning and manages state land. Haila writes:

In 2011 SLA unveiled a new vision, Limited Land, Unlimited Space, embodying ‘the notion that the scarcity of land in Singapore should not be a constraint. Rather it is an opportunity for greater innovation and creativity in land use’.

SLA and HDB both work to ensure consistent opportunities for development and redevelopment on the island to prevent housing constraints from resulting in widespread housing unaffordability. Relative to U.S. cities today, the Singapore model is more like what development in fast-growing U.S. cities looked like prior to zoning. Before local zoning ordinances limited development, fast-growing U.S. cities were characterized both by rapid greenfield development and rapid redevelopment of central locations (see Manhattan Move Uptown by Charles Lockwood for the Manhattan pre-zoning development history). Perplexingly, Haila denies that zoning plays a role in high housing costs:

High land prices and zoning authorities are often blamed for unaffordable housing. However, house prices are not high because land is expensive but vice versa: house prices determine land prices as rent theory explains. The reason for insufficient land supply and high house prices is not planning authorities zoning too little residential land, but that the monopoly of land makes land scarce and invites speculation.

Haila is correct that demand for housing is a key determinant of land prices. But zoning is also a key determinant of both land prices and house prices as a result. Haila argues that prior to her, social scientists have failed to study the importance of land development rights. But urban economists and other social scientists have extensively studied the effects of development rights under zoning. At a regional level, extensive evidence indicates that land use regulations reduce housing supply elasticity and lead to high prices when met with high housing demand. Unlike in the U.S., where many localities use zoning as a tool to severely limit construction and inflate house prices, a key success of the Singapore model is permitting a steady stream of new development to maintain access to housing.

In Haila’s telling, it’s land speculation alone that causes high house prices by incentivizing land owners to underuse land in anticipation of future price increases. She blames speculative house-price increases on those who purchase land or homes that they keep vacant. However vacancy rates in high-cost cities including Singapore are in fact generally very low.

Speculation simply means purchasing an asset with the expectation that it will be worth more in the future. Owner-occupants are speculating when they purchase housing in cities with high price-to-rent ratios rather than renting when current prices make renting look like the better deal. Singaporeans certainly purchase HDB flats with asset price increase in mind. As Prime Minister Lee Hsien Loong has said, “The HDB flat is not just a shelter but also a key investment asset…over the long term, the value of HDB flats depends on the strength of the Singapore economy. Provided Singapore continues to do well, our flats will maintain their value, and Singaporeans can enjoy an appreciating asset.”

However policy designed to ensure redevelopment and new housing supply in Singapore has limited the gains to speculation relative to the windfalls that homeowners in the expensive coastal regions of the U.S. have received. Compared to in the U.S., in Singapore, affordability for new buyers plays a more important consideration in housing policy.

Noah Smith argues that Singapore has “done a better job than the U.S. of using housing to build and transfer wealth across generations…. Because the government manages the supply of new homes, it can ensure that young people earn a decent return by the time they retire.” And this is the line that the SLA and HDB have attempted to walk. Haila explains that Singaporean policymakers have target a rate of leases from the country’s land bank to maintain a rate of house price appreciation that offers gains to purchasers of subsidized HDB flats, but to prevent a level of appreciation that would put new purchases out of reach for many citizens.

Who loses in the Singapore system?

The line to walk between promoting affordability and wealth-building is a difficult one. While Singapore’s model serves many households well, by balancing affordability of subsidized HDB flats with steady appreciation, the system doesn’t serve everyone well. Crucially, of Singapore’s 5.6 million population, about one-fifth are not citizens or residents. These foreign workers are generally shut out from the HDB system although Haila points out some exceptions have been made in an effort to attract skilled foreign workers.

More than 300,000 migrant workers without access to HDB flats live in crowded, dirty dormitories with up to 80 people sharing a single toilet. Housing conditions for these low-income workers in Singapore are much worse than for the typical low-income worker in U.S. cities with comparable levels of affordability for median income earners. Singapore is currently experiencing a COVID-19 outbreak of ten of thousands of cases, nearly all of them among foreign workers living in dormitories.

I’ve argued previously that the availability of bare bones, low-cost housing for low-income workers is an essential part of communities that provide economic opportunity for all. But in the Singaporean system, where the SLA determines how many foreign workers may live where, no market process disciplines the provision of housing that balances cost-effectiveness with desirability, in terms of either location or quality. In a system in which land goes to those willing to pay the most for, those willing to live in denser housing can outbid those who want larger, fancier homes. But this is not an option in Singapore, and instead housing policy for foreign workers has largely been shaped by citizens’ and residents’ NIMBYism toward foreign workers.

Singapore’s system is also designed to encourage heterosexual marriage, childbearing, and living with extended family. For those who want to live in alternative arrangements, HDB offers many fewer benefits. While married Singaporeans become eligible to purchase HDB flats at age 21, singles aren’t permitted to purchase until age 35, and gay marriage is not allowed. Notably Singapore’s housing policy has so far not successfully increased fertility; Singapore’s total fertility rate stands at below 1.2, among the lowest in the world.

Concerns about the values of aging flats are also increasing as seniors are relying on their home equity to help fund their retirement, and yet the prices of older flats inevitably fall as the end of their leasehold term approaches. At the end of a 99-year lease, land and its improvements revert to SLA ownership with no compensation for flat owners. In 1995, the Singapore government established a program called the Selective En bloc Redevelopment Scheme (SERS), under which the government takes over selected buildings in mature estates for redevelopment prior to the expiration of their 99-year lease, compensating the residents for their HDB flats and offering them a chance to purchase in the new development that will take its place. But National Development Minister Lawrence Wong has urged HDB flat owners not to count on this option, as SERS has only worked out for four percent of flat owners to date.

What can the U.S. take away from Singapore?

Haila argues that “Singapore has solved the housing problem” but this certainly isn’t true for those shut out from the HDB system. But the system does allow most citizens the opportunity to both enter the housing market at a reasonable price and sell at a reasonable return.

Were the U.S. as a whole, or a U.S. city to attempt to implement the Singapore system, one key challenge would be building as cost efficiently as the HDB does. The HDB builds flats that are about 1000 square feet for about $135,000 according to some estimates. In high-cost U.S. cities, subsidized housing costs multiples of that price to build, in part because Singapore relies on low-wage migrant workers and also in part, as Conor Dougherty explains of California, it is “a well-known absurdity of the affordable-housing system that it frequently costs more to build no-frills non-profit apartments than it did to build high-end for-profit condos. The public sector [has] too much going on, too many political mouths to feed, to make an even semi-serious attempt to address it.”

The largest U.S. public housing system by far, the New York City Housing Authority, doesn’t build new housing, but currently spends more on both operating costs and capital expenses for the housing they manage relative to private landlords with terrible results. While social housing supporters suggest that foreign systems like Singapore’s could simply be copied in the U.S. with similar outcomes, government-provided housing at reasonable costs would require major reforms to U.S. politics and bureaucracy. Unlike in Singapore’s city-state system, levels of government and various agencies would likely be working at cross-purposes. Congress and federal agencies may want to support low-cost housing in desirable locations, but exclusionary localities that would be involved in siting and managing subsidized housing may attempt to thwart success.

However, any U.S. city where politicians have the will could make major reforms based on the SLA’s motto of “limited land, unlimited space.” Singapore has put development and redevelopment of its land to work to maintain the availability and affordability of flats for the people the system is designed to serve.

The description of SERS has been corrected. Thanks to Singapore resident Chris for pointing out an inaccuracy.

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