Economic development

Economic Development
and Housing Markets
in Hong Kong and Singapore

Economic Development and Housing Markets
in Hong Kong and Singapore

United Nations Human Settlements Programme Nairobi 2011

The Global Urban Economic Dialogue Series Economic Development and Housing Markets in Hong Kong and Singapore First published in Nairobi in 2011 by UN-HABITAT. Copyright © United Nations Human Settlements Programme 2011

All rights reserved United Nations Human Settlements Programme (UN-HABITAT) P. O. Box 30030, 00100 Nairobi GPO KENYA Tel: 254-020-7623120 (Central Office) www.unhabitat.org

HS Number: HS/008/11E ISBN Number (Series): 978-92-1-132027-5 ISBN Number (Volume): 978-92-1-132303-0

Disclaimer
The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers of boundaries. Views expressed in this publication do not necessarily reflect those of the United Nations Human Settlements Programme, the United Nations, or its Member States. Excerpts may be reproduced without authorization, on condition that the source is indicated.

Acknowledgements:
Director: Oyebanji Oyeyinka Principal Editor and Manager: Xing Quan Zhang Principal Author: Xing Quan Zhang and Grace Wong English Editor: Tom Osanjo Layout: Irene Juma

Cover photos:
Hong Kong© UN-HABITAT/X.Zhang Singapore© UN-HABITAT/M.Rao

ii

FOREWORD
cities. Global poverty is Ur b a n i z ainto n moving t i o cities, mostly of in developing countries, in a process we call the urbanisation of poverty.

is

on e

The world’s slums are growing and growing as are the global urban populations. Indeed, this is one of the greatest Africa challenges we , and face in the to a new millennium.

lesser extent, The Latin persistent Ameri problems of ca and poverty and slums are in the Caribb large part due ean. to weak urban economies. We Urban live ineconomic a newdevelopment urban is fundamental era to UNwith HABITAT’s most mandate. of Cities act as human engines of ity national now economic living development. in Strong urban towns economies are and

essenti al for povert provision of y adequate reducti housing, on and infrastructure, the education, health, safety, and basic services. The Global Urban Economic Dialogue series presented here is a platform for all sectors of the society to address urban economic development and particularly its contribution to addressing housing issues. This work carries many new ideas, solutions and innovative best practices from some of the world’s leading urban thinkers and practitioners from international organisations, national governments, local authorities, the private sector,

and pment issues. civil It will serve society UN member . States well in their quest for This better policies series and strategies also to address gives increasing us an global interes challenges in ting these areas insight and deeper unders tandin g of Jo the an wide Cl range os of Underurban Secretaryecono General, mic United develo Nations, pment Executiv e and Director, human UNsettlem HABIT ents AT develo

iii

Economic Development and Housing Markets in Hong Kong and Singapore

iv

Contents

FOREWOR D Contents

iii v 1 1
2 3 4

PART IINTRODUCTION Chapter 1: Introduction
Government Intervention in Housing Markets Economic Development and Housing Markets Housing Markets

PART II:

HOUSING SYSTEMS AND IMPACTS OF GOVERNMENT INTERVENTION ON HOUSING MARKETS IN HONG KONG AND SINGAPORE Housing System and Impacts of Government Interventions on Housing Markets in Singapore
The Housing System in Singapore Government Intervention in Housing Markets in Singapore The Forms of Government Intervention Regulation Direct Provision Subsidies Impact of Government Intervention

6

Chapter 2:

6
6 13 13 13 15 17 19

Chapter 3:

Housing System and Impacts of Government Intervention on Housing Markets in Hong Kong
The Housing System in Hong Kong Government Intervention and its Impacts on Housing in Hong Kong The Forms of Government Intervention Regulation Direct Provision Subsidies

22
22 23 24 24 24 25

v

Economic Development and Housing Markets in Hong Kong and Singapore

The Extent of Government Intervention The Impact of Government Intervention The Impact on the Tenure Structure The Distribution Effect of Government Intervention The Effect of Government Intervention on Housing Market Conclusions

26 30 30 32 36 38

PART III: Chapter 4:

ECONOMIC DEVELOPMENT AND HOUSING MARKETS IN HONG KONG AND SINGAPORE Economic Development and Housing Markets in Singapore
Early Economic Development Growth of Manufacturing Industries

41 41
47 47

Chapter 5:

Economic Development and Housing Markets in Hong Kong
Hong Kong as an International Financial Centre The Globalization Process Dynamics of Hong Kong Changes of Economy in Hong Kong Housing Markets in Hong Kong

47
48 49 50 51

52 54
54 56 58

Chapter 6:

Comparative Discussion of Housing Markets in Hong Kong and Singapore
Public Housing Market Private Housing Market Conclusion

Bibliography

60

vi

PART I INTRODUCTION

Chapter 1: Introduction
perspectives (Ball, et al., 1988; Doling, 1997). However, as housing markets tend to differ across countries, crossnational comparisons Extensive research oncould suffer from housing markets and pricesconfounding effects of has been conducted aroundcultural and attitudinal the world but most of thesedisparity. Hence, the studies focus on a particularchoice of countries for housing market. In contrast,comparison should comparative housingensure that there are no research are fewer and far inlarge variations that between. In addition, thecould render the comparative studies that arecomparison meaningless, carried out tend to be basedand yet remain on developed housingsufficiently distinctive to markets in Westernfeature policy and countries. preference differences. Comparative housing research has been recognized as a means to understand the nature and dynamics of housing systems. The broad patterns of social and economic changes, government policies and institutional structuring could be differentiated through juxtaposing of developments in countries with similar backgrounds. In addition, comparative research also helps to identify the significant factors driving the changes and differences in housing markets. Moreover, policy ideas could be gleaned from such international comparative

1997; La Grange, 1999). Therefore, a comparative discussion of these two countries would provide additional insight into This research projectthe similarities and aims to examine economicdifferences of their development and housinghousing systems. markets in Hong Kong and Hong Singapore. These two cities Furthermore, have been selected forKong and Singapore are suitable for international comparison asvery comparative research as the housing provisions in bear many both cities are oftenthey similarities. First, they regarded as successful models. The two citiesare both cities facing a have the largest publicsevere scarcity of land, housing programs in theand as a result of which, high-density capitalist world, in terms ofhigh-rise developments are the the proportion of population directly housednorm in their landscapes. by the government. AsThe scarce land resources Hong Kong and Singaporehave caused both their have attracted worldwidemarket economies and interests among researchershousing markets to be and policy makers, manygreatly intervened in by studies have already beenthe government. Even carried out on outliningthough the Singapore is well their respective housinggovernment known for its economic policies (for example, Yu,
intervention while

1

Economic Development and Housing Markets in Hong Kong and Singapore

development and housing markets. Part four is a the Hong Kong government is recognized for its comparative discussion laissez-faire approach, there is substantial government involvement in both housing markets, in the form of housing subsidies and market regulations. However, the mechanisms and stringency of government intervention differ between the two countries, providing interesting cross-national variations.

Besides affecting social and physical development as well as access to other material and social resources (Dickens, et. al., 1985), the housing market also has powerful spillover effects on a country’s economy as it has wide-ranging implications for economic efficiency, competitiveness and stability. As such, there is an increasing consensus on the importance of research into the relationship between housing and the economy.

0• In view of the above rationale for the study, the main objectives of the research project are as follows: 0• To provide a qualitative discussion on the relationship between housing markets and economic performance; 0• To examine the housing systems in Hong Kong and Singapore;
0• To study how the government intervenes in housing markets and the impacts of government intervention on the housing markets in Hong Kong and Singapore;

0• To present a comparative discussion of the housing markets in Hong Kong and Singapore.
The research report is organized in the following way. Part one is the introduction and literature review. Part two discusses the housing systems in Hong Kong and Singapore as well as the impacts of government intervention on the respective housing markets. Part three provides an overview of economic development in Singapore together with a qualitative discussion on the relationship between economic

Jackson, 1996). Given the presence of market failure, of the housing markets in Hong Kong andgovernments in most Singapore. Finally, part 5 concludes thecountries have perceived the research report by highlighting the salientneed to intervene in markets and thus correct the market findings. failure or introduce policies The format of the literature review is or measures to compensate its structured according to the three major effects (Dunkerley, 1983; research areas of the research project, namely, Brown and Jackson, 1996).

government intervention in housing markets, economic development and housing markets Brown and Jackson (1996) as well as dynamics of housing markets. Asidentify four possible roles the research project basically examines thethat the government could issues from a qualitative perspective, the focusplay to intervene in markets. of this literature review is on qualitativeFirst, the government could adopt an allocative role, that studies rather than quantitative works.

is, to intervene in the allocative function of the market to achieve efficiency. Government Intervention As the market distribution in Housing Markets may fail to achieve equity, In a perfectly competitive economy, the supplythe government could also of goods and services of the economy and the setassume a distributive role to of prices are determined by the price mechanismensure that the distribution of in accordance with consumers’ preferences andoutcomes is in line with incomes. However, in reality, markets oftenequity principles. In highly operate under circumstances that do not confinevolatile markets, the to the assumptions of perfect competitivegovernment may take on markets. Left to the market alone, the market system is unlikely to be efficient (Brown and
2

contributed to economic growth by lowering a stabilization role, using specific policies or housing and labor costs. measures to stabilize the market. Finally, the government may play a regulatory role so as Singapore has been used as a case study in to maintain the proper functioning of themany researches that examine the linkages between government policies and the housing market. market. This is mainly due to two factors. First, Regulations appear to be the norm rather than there is a huge proportion of the population the exception according to Averch’s (1990) who are public homeowners, estimated at 83% research on housing markets in Western Europe as at 31 March 2002 (Housing and and the United States. Until the 1950’s, there were Development Board, 2002). In addition to the only limited regulations to preserve market direct government intervention in the public frameworks and to ensure minimum housing housing market, public housing policies also standards. This is before the 1950’s; any changes have indirect impacts on the private housing in market prices of housing were perceived to be market, due to the existence of a relationship in response to demand and supply. Due to the between the private housing and resale of high scarcity of land supply as well as massive public housing markets since many of the inflow of population, market prices of housing private housing purchasers are previously had remained very high. This phenomenon was public homeowners. however not regarded as market failure and could
not be considered as grounds for government intervention. It was only after World War II that many market economies began to expand the roleEconomic Development of the government in the housing sector, and as a and Housing Markets result, the government became more pro- In addition to the linkages between government interventionist in its approach. Upon returningpolicies and the housing market, many studies from World War II, many soldiers demanded thathave been carried out to investigate the the government had more control over the market relationship between housing prices and general system to ensure the interests of these returning economic conditions. One of the earliest works in war heroes. Throughout the western countries, the this area shows how the long swings in preferred means of government intervention differ construction and price development synchronize from country to country depending on history and with the long swings in aggregate economic experiences. Countries in Western Europe usually activity (Gottlieb, 1976). In more recent years, implement state provision of housing, whereas in sophisticated models and modern formulation of the United States, rent control and fair rate of market dynamics assume that households and return regulations are generally favored (Averch, firms have rational and adaptive expectations 1990). about the future whereby their forecast into the With regards to the impacts of governmentfuture is based on current market conditions, and intervention on the housing market, Castells, et in response to unanticipated shocks in the housing al. (1990) reveal a positive interaction betweenor property market, they are expected to be able to the role of the state in housing and urbanpredict the market response correctly and are able development, and the processes of introductionto act upon that knowledge. These models are able and capital accumulation in the housingto generate the patterns of price change over time programs in Hong Kong and Singapore.in response to varying conditions in economic Castells, et al. (1990) therefore conclude thatfundamentals and in economic shocks (DiPasquale and Wheaton, 1994; Case and housing has decisively chapter one Introduction Shiller, 1988).
3

Economic Development and Housing Markets in Hong Kong and Singapore

Besides establishing the broad relationshiphousing relative to the between the economy and the housing market,price of other goods, some researches have specifically found thateconomic growth rate, the private housing price fluctuations reinforceexpectation and level of or generate fluctuations in their macro-confidence, unemployment economies through booms and slumps,rate, stock price index, real particularly through consumer spending. Forafter-tax interest rate, instance, Quigley (1999) highlights thelagged real appreciation, linkages between economic ‘fundamentals’inflation rate, supply of and property prices, and finds that economichousing, construction cost conditions, as measured by changes inas well as the difference employment, income, number of householdsbetween actual and and the construction permits, are importantequilibrium real house determinants of housing prices. Quigleyprice levels1. (1999) reveals that ‘bubbles’ in Asian property specifically, markets have real consequences for national More Abraham and Hendershott and regional economies during the late 1990’s.
(1994) have divided the

Wang (2001) discusses the relationshipdeterminants of real house between property and the economy in bothprice into two categories: one short and long run, and shows that property isthat explains the variations in an integrated part of the economy where itsthe equilibrium price and the performance is closely related to andother that accounts for the explainable by some of the economicchanging deviations from the activities. The relationship of property withequilibrium price. The other sectors in the economy reflects that theyvariables for the former group are basically driven by the same set ofconsist of growth in real fundamentals, and consequently, they may notincome, real construction cost move far apart in the short term. The propertyas well as changes in real sector is however more closely related withafter-tax interest rate. The the real sectors of the economy, includinglatter group includes lagged housing, than with the financial sector. Amongreal appreciation as well as the real sectors, construction has the strongestdifferences between the relationship with property in the long run,actual and equilibrium real especially with regards to the stock ofhouse price levels. Either uncompleted new construction. group of variables could
explain a little over two-fifths of the variation in real house Housing Markets price movements in 30 cities In terms of the housing market, manyin the United States over the researchers have explored it from theperiod 1992 to 1997 but perspectives of demand and supply. The manytogether, the two categories determinants of housing demand and pricesare able to explain three-fifths include net household formation, level ofof the house price variations (Abraham and Hendershott, income and real income growth rate, 1994).

availability of housing substitutes, price of

With regards to national and regional demarcations, Munro and Tu (1996)

examine the dynamics of national and regionalhousing prices by Dolde and house prices in the UK and find that householdTirtiroglu (2002), significant income, real mortgage rate and housingassociations have been completions are significant factors influencinghighlighted between price house prices at the national level. While studyingvolatility and the underlying structure of the UK national market, Munro and Tu (1996) discovered that the 1 See Whitehead, 1974; Waxman, 1989; price trends in some regions of UK were stronglyCapozza and Helsey, 1989 and 1990; Holmans, 1990; Green related while other regions remained relatively and Hendershott, 1993; Clapp and 1994; DisPasquale independent. In another study of regional Giaccotto, 1996; Waxman and and Wheaton, Lenard,
1997; Chen and Patel, 1998

4

chapter one Introduction

economic conditions, especially in relation totaxation policies, returns from residential national and regional income growth,property, availability of mortgage financing, foreign investment guidelines, existing inflation and interest rates. housing stock, expectations as well as In addition to the above commonly discussed alternative investment opportunities price determinants, Meen (1996) further explores (Waxman, 1989). In the short run, however, the role of user cost of capital. Meen (1996) housing supply may not be able to respond suggests that user cost has implications beyond effectively to price and cost changes as the housing market, generating significant impacts evidenced by Buckley and Ermish (1983).
on the aggregate demand and supply in the wider Another major influence on the housing economy. Drake (1993) applies the Johansen coactivity and influence (Anas and Choo, 1988; integration technique to derive a long-termWaxman, 1989). In the research by Anas and equilibrium relationship for the determination ofChoo (1988) on the Swedish mixed housing UK’s national house prices, and subsequentlymarket, regulated sub-markets with rational utilizes this to develop a short-run dynamic modeldwellings and queues are explicitly of house prices in UK. In the short term, private i stud investigat housing starts and the lagged influence of house n their y to e incorporate d prices are the main forces driving short-term regulatio fluctuations in house prices within the UK. Drake the effects of institutional n on (1993) also reveals that UK’s house prices reactthe housing market. It is found that the relatively slowly to changes in these explanatorycomplexity of Swedish institutional schemes variables. and policy instruments creates a number of

market is that of government intervention,

The supply of new dwellings, on the othercounterintuitive, unintended and possibly hand, is likely to be influenced by changes inundesirable effects in the housing market. real construction costs, house prices and In our study we tend to adopt a more interest rates (Whitehead, 1974; Waxman,qualitative approach, housing and economic 1989; Capozza and Helsey, 1989 and 1990;policy development, their implications and Holmans, 1990; Chen and Patel, 1998). Whileimpact on the housing markets in Hong Kong the supply of housing is essentially demand-and Singapore are examined in a series of determined, it is also affected by government qualitative discussions.

5

PART II: HOUSING SYSTEMS AND IMPACTS OF
GOVERNMENT INTERVENTION ON HOUSING MARKETS IN HONG KONG AND SINGAPORE

Chapter 2: Housing System and Impacts of Government Interventions on Housing Markets in Singapore
The Housing System in Singapore
to Wong and Yeh (1985), in the 1950’s, Singapore “had one of In Singapore, home ownership is well segmented into South-east Asia’s largest urban private homeowners and public homeowners. The public slum and squatter populations”. home ownership sector is the dominating sector The island was replete with accommodating 85% of total households (Housing and squatters and slums, which were Development Board, 2002). death traps and breeding The government’s involvement in the housing of Singaporeansgrounds for disease, crime and began with the formation of Singapore Improvement Trust (SIT) in fire hazards (Singapore Housing 1924 “to provide for the improvement of the Town and Island ofCommittee, 1948; Yeh, 1975). Singapore” (Yeh, 1975). SIT was established as a result of the The housing condition of the proposals made by the Housing Commission in 1918, which wascountry was characterized by set up by the then Colonial Government to report on the housingovercrowding, dilapidation and situation. The ad hoc efforts of the SIT to provide housing were inadequate infrastructure. Based ineffective against the massive post-war baby boom and highon estimates at that time, a immigration rate. According to the 1948 Report of the Housingquarter of a million people lived Committee, 72% of the population was housed within the centralin badly degenerated slums area of Singapore with densities of about 1,000 persons per acre while another one-third of a million lived in squatter (Singapore Housing Committee, 1948). settlements. The slum residents By the time the People’s Action Party (PAP), that is the present constituted 37% of the then government, came to power in 1959, the housing shortage problem population of 1.58 million. had reached epidemic proportions. According Although the severity of the housing shortage warranted the construction of 150,000 new housing units over the decade from 1961 to 1970, the private sector was able to provide only 40,000 dwellings. In response to the urgent and appalling housing situation, the Singapore government assumed the responsibility to “provide decent homes equipped with modern amenities for all those

who needed them” (Yeh, 1975). Consequently, the governmenttarget households. established the Housing and Development Board (HDB) on 1undertakes duties from February 1960 with the responsibility for inter alia, the provision of low cost public housing and related facilities for sale or rent to
6

HDB

Chapter Two Housing System and Impacts of Government Interventions on Housing Markets in Singapore

public housing production, housing The management, and housing finance tohomeownership sector is formulation of housing policies. Overdivided into three subthe past 44 years, the public housingmarkets, namely, the new sector has been heavily subsidized bypublic housing market, the the State, in terms of construction,resale public housing market, and the Executive financing and land costs.

During the past four decades, along withnew public housing market, Singapore’s rapid economic expansion,the dwellings are newly major structural changes are evident in theconstructed by the HDB and country’s demography strata as well asare sold at a highly economic framework. The nature,subsidized price. This market provision and financing of housing areis however characterized by therefore products of such socio-economicstringent entry regulations, development. For instance, the housinglimited supply of dwelling tenure structure has undergone drastictypes and locations, and structural changes since 1970, see Table 1.under certain circumstances Public homeownership has become athere is also a waiting period, major sector while the private rentalhence making it accessible sector, which used to be the dominatingand attractive to only a sector, has become very diminutive in thespecific segment of the current tenure structure. population. Since 2002, the

Condominium market. In the

The public housing sector in housing is based on two Singapore is managed by a statutory main allocation systems: the board known as the HDB, that was Build to Order (BTO) established in 1960 by the government Scheme and the Walk-in especially for this purpose. The HDB isSelection (WIS) Scheme. the sole authority to control andThe BTO Scheme, which is a implement public housing productionresponsive allocation system and management initiatives, subsidiesthat offers flexibility in terms and financing measures as well asof location and timing, specific programs and policies. allows public housing
applicants to apply for dwellings from specific sites launched in suburban zones. The sites launched under the BTO Scheme offer 4-room and 5-room public housing apartments for sale. The construction will only begin when majority of the public housing in a specific site have been booked. The WIS Scheme, on the other hand, is a more convenient and faster allocation system that

allocation of new public

enables households, particularly those in urgent need of accommodation,

Table 1: Tenure Changes in the Singapore Housing System (19702000)
1970 Tenure Singaporean households living in public housing Singaporean households living in private housing Singaporean households living in other dwellings Total Own 1980 Rent Own 39.4 % 15.6 % 1990 Rent Own 77.0 % 10.5 % 2000 Rent

7.0% 22.4 %

26.0%

26.6%

9.0%

38.6%

13.0%

2.9%

6.0% 100.0 %

5.4% 100.0 %

0.6% 100.0 %

Note: 1.Out of all Singaporean households in 2000, tenants constitute 6.6%. Most of the tenants are in the lowest income group, renting one-room or two-room public housing. Few Singaporean households rent dwellings in the private housing market. Sources: Department of Statistics (1970, 1980, 1990 and 2000), Singapore.
7

Economic Development and Housing Markets in Hong Kong and Singapore

to purchase their new public housing “on themarkets target the low and spot”, and move into their new homes withinmiddle-income households, Executive three months. With the expansion of the publicthe housing program over the years, the stringentCondominium market aims eligibility criteria which include citizenshipto provide high quality status, minimum household size, non-condominium housing for ownership of other residential property as wellthe upper and middleas household income ceiling have graduallyincome households. The Executive Condominium been relaxed. market is basically driven Established in 1971, the resale public housing by market forces but as its market is a secondary market where the prices of prices are subsidized to a the resale dwellings are determined by market small extent, there are a few forces. With the liberalization of the resale restrictions regarding its public housing policies over the years, the resale. Compared to the new transaction volume and prices of resale public and resale public housing housing have gradually increased. As at 2002, markets, the Executive the volume of resale public housing transactions, Condominium market, and the resale price index were 38,828 and 95.4 which was only established respectively with the fourth quarter 1998 resale in 1996, is still a relatively price as the base (Housing and Development new and small market.
Board, 2002), see Figure 1. The average age of resale public housing transacted is 14 years and Although the dwellings the average period of transaction takeswithin the three sub-markets approximately three months (Ong and Koh,are constructed similarly in high-rise high-density 2000). developments with 99 years While the new and resale public housing leases, the new and resale public housing are differentiated from each other by the locations, dwelling sizes, ages and designs, and also from the Executive Condominiums in terms of the locations, dwelling sizes, ages and designs as well as facilities and amenities.

As HDB has the sole authority and responsibility to provide subsidized public housing, it is financed through two main types of loans, namely, housing development

Figure 1: Resale Public Housing Price Index in Singapore (1990-2002)
160

140 120 100

In d e x 80
60 40 20 0

199 0

199 1

199 2

199 3

19 9 4

199 5

199 6

199 7

19 9 8

1 99 9

200 0

200 1

2002

Year Sources: Housing and Development Board (1990-2002), Singapore.

8

Chapter Two Housing System and Impacts of Government Interventions on Housing Markets in Singapore

loans and mortgage financing loans. Theinterest payments of the housing development loans are basically tohousing development loans finance the public housing construction andas well as the operating development programs and operations thatcosts incurred during the are carried out by the HDB. On the othersale or rental process. As hand, the mortgage financing loans are loansthe land costs are highly given to the HDB by the government so thatsubsidized by HDB and the it could provide mortgage-financing facilitieslatter also controls the to purchasers of public housing at adwelling designs and subsidized interest rate. The amounts ofconstruction materials, outstanding housing development loans andHDB is able to keep the mortgage financing loans as at 31 Marchbuilding costs of new 2003 are S$9.99 billion and S$64.23 billionpublic housing significantly respectively (Housing and Developmentlower than that of private Board, 2003). In addition to these loans, thehousing. As such, HDB is HDB is also given government grantsable to provide new public annually to cover its annual budget deficithousing at a price that is arising from the construction, developmentmuch lower than the market and improvement of subsidized publicprice. The subsidy in the housing as well as rental and sales of publicprice of new public housing housing and related properties. Since itsessentially consists of four inception in 1960, the HDB has received acomponents. Two total of S$12,259 million in governmentcomponents clearly reflect grants (Housing and Development Board,the Singapore 2003). These government grants have beengovernment’s commitment necessary to ensure the affordability ofto housing, that is, the public housing to all eligible households.subsidized interest rate for Despite the continuing argument between thethe housing development laissez-faire and interventionism systems onloans as well as the subsidy housing over the years (Hall and Jacques, in the land prices. The other 1983; Coleman, 1985; Hillier, 1986; Lipman two components are not as and Harris, 1987; Ball et al., 1988; Teymur obvious. One is the et al., 1988), interventionism in this case has potential profit that is equal succeeded remarkably in providing decent to the difference between and affordable housing for all households the selling price of a new with a current household income of less than public housing unit and the S$8,000.

market price for the same dwelling. The other is the The housing development loans have agovernment grant, which is repayment term of 20 years, and are peggedutilized to cover HDB’s budget deficit at a floating interest rate of 2% above theannual Central Provident Fund (CPF) savingsarising from sale, rental and interest rate, which is lower than theother operations.

commercial banks’ lending rate. Using the There are two types of housing development loans, the HDB is able mortgage financing loans in to finance the construction of new public the public housing market: housing units, which are either sold or rented the mortgage loans provided to eligible households. The revenue by HDB and those provided generated from the sale of new public by commercial banks. The housing are utilized for the

mortgage loans provided by HDB arepayments on the mortgage targeted at public homebuyers who qualifyfinancing loans as well as to for subsidized mortgage loan interest rates.cover operating costs. Under These loans are repayable by the HDB to thenormal circumstances, public government over 20 years at the prevailinghousing purchasers can CPF savings interest rate. The HDB usesobtain a maximum mortgage these loans to provide mortgage loans toloan amount of up to 80% of public homebuyers and charges them atthe selling price. On the 0.1% above the prevailing CPF savingsother hand, the mortgage interest rate, repayable to the HDB over 20loans provided by years (Housing and Development Board, 2001). The extra 0.1% is for interest

9

Economic Development and Housing Markets in Hong Kong and Singapore

the commercial banks are aimed at privatea certain percentage of the housing homebuyers, and public homebuyers employee’s monthly salary who do not qualify for subsidized mortgage toward the fund, see Figure 2. interest rates. There are two types of mortgage Both the CPF contributions instruments currently offered by commercialand the interest income banks: fixed mortgage interest rates andearned on the CPF savings variable mortgage interest rates. For fixedhave been exempted from mortgage interest rates, the rates are fixed forincome tax since 1983. As the a certain period of time, normally up to fiveCPF itself is not an active years, and are lower than the prime lendingfund manager, the CPF rates. Variable mortgage instruments havesavings interest rate is based prime lending rates, which are determined byon the average of one year fixed deposit and the monthmarket forces.

In addition to the housing developmentSingapore banks. CPF loans and mortgage financing loans, themembers are therefore Singapore government has also grantedencouraged to invest their other purpose-specified loans to the HDB,CPF savings in property, for example, the upgrading loans which areapproved unit trusts and for the improvement of existing publicshares or gold. In recent housing estates. years, CPF has developed
An important component of the public housinginto an extremely dynamic finance system is the CPF, which is Singapore’ssaving and consumption institution in which rules equivalent of a social security system that governing the use of CPF provides pension, housing and medical schemes savings have been gradually among others. The CPF is a compulsory saving liberalized to allow scheme whereby both the employee and the withdrawals for education employer have to contribute and health expenses as well as insurance and personal investments in various financial assets (Phang, 1992; Low and Aw, 1997). Since 1968, public homeowners are allowed to withdraw their CPF savings and monthly contributions to pay for their mortgage loan instalments (see Table 2). From 1993 to 1997, the CPF annual contributions have been a steady proportion of the GDP while the CPF annual withdrawals for public housing purchase have gradually increased to form a major portion of the total withdrawals

end savings rate of four major

Figure 2: Combined Central Provident Fund Contribution Rates in Singapore (1955-2002)

60

%

50

Ra te 40 Co ntr ib uti on 30
20 10 0

5 195

1 197

4 197

7 197

0 198

3 198

6 198

8 198

1 199

4 7 199 199

200 0

Sources: Central Provident Fund Board (1955-2002), Singapore.

10

Chapter Two Housing System and Impacts of Government Interventions on Housing Markets in Singapore

land resources, there is both direct and indirect government intervention in the private housing market. The private owner-occupier housingSince housing is deemed a market, on the other hand, accommodatessocial good and is often used less than 10% of the total number ofas a policy tool to achieve households. However, it is expected that thesocial-economic objectives, proportion of private housing householdsthe Singapore government will increase in the future. This is indicatedhas also actively intervened by the rising private housing stock, whichin the private housing increased from 14% in 1989 to 18.1% inmarket. For example, 1999. This trend reflects the Government’spolicies on resale public long-run planning embodied in the 1991housing, CPF, housing Concept Plan that aims at increasing thefinance terms and conditions, private housing stock to 30%. and the release of state land The submarkets of the private housingfor development are several market include apartments,ways through which the condominiums, detached, semi-detachedgovernment affects prices in and terrace houses with prices governed bythe private housing sector market forces, see Figure 3 for the(Phang and Wong, 1997). structure of the Singapore housing system.State lands are made The supply side of the private housingavailable to the private sector market is an oligopoly as the high capitalthrough auction and tender values make it nearly impossible for smallby the Urban Redevelopment players to enter the market. Most of theAuthority (URA) Sale of private housing developers have a goodSites (SOS) program. Figure track record with tremendous holding4 shows the overall pyramid structure of the housing power and resources at their disposal. market in Singapore. As the government owns three-quarters of Government policies and the intervention in the public housing sector could filter upwards and affect the private housing sector.

(Central Provident Fund Board, 1993 to 1997; Department of Statistics, 1993 to 1997).

The two public housing sub-markets are interlinked as resale public housing prices are often taken into account in pricing the new public housing units, although this effect is moderated by the affordability consideration. Conversely, variations in new public housing

Table 2: Central Provident Fund Annual Contributions and Withdrawals in Singapore (1993-1997)
Year CPF annual

CPF annual CPF annual CPF annual withdrawals1 contributions contribution as a withdra percentage of public h (S$million) GDP (S$million) a percent total CP withdra 10,427.0 11,278.6 13,536.1 14,623.0 15,873.8 11.1% 10.4% 11.2% 11.2% 11.1% 10,943.9 7,292.0 7,252.7 10,529.6 11,456.5 26.2% 49.3% 61.7% 49.9% 51.8%

1993 1994 1995 1996 1997

Note: 1. The CPF annual withdrawals may include the purchase of public and private housing, approved medical insurance, approved investment schemes and pensions. Sources: Central Provident Fund Board (1993-1997) and Department of Statistics (1993-1997), Singapore.
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Economic Development and Housing Markets in Hong Kong and Singapore

prices could bring about corresponding changes in resale public housing prices.

in turn would help to boost the prices of larger and more expensive private The private and public housing markets arehousing units. This upward also interrelated. For instance, higher resalefiltering phenomenon is public housing prices could affect the privatehowever not one-sided as housing market as public homeowners wouldthere have been many have greater affordability to upgrade andhouseholds moving back purchase the lower-end private housing units.from the private housing Thus, a rise in resale public housing pricesmarket to the resale public would likely increase the prices of lower-endhousing market in recent private condominium and apartments, which years when the Singapore economy was in recession.

Government Intervention in

Figure 3: Structure of Singapore Housing System
Singapore Housing System

Private Sector

P ublic S ector – HD B

New Housing Sector

Resale Housing Sector

Resale Housing Sector

N ew H ousing S ector

• Freehold • Leasehold

• Leasehold - 99 year - 99 year - 999 year

High Rise • Apartment • Condominium

Low Rise • Terrace • Semi-Detached • Detached

High Rise • 1- to 5-Room • Executive Flat • Executive Condom inium

Source: Authors.

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Chapter Two Housing System and Impacts of Government Interventions on Housing Markets in Singapore

Figure 4: Pyramid Structure of Singapore Housing Market As At Year 2001
Detached 9918 P S e m i-D etached T e rrac e 20301 35993 ri v a Apts / Condos / Exec. Condos 5-room / Exec. Flats 138930 t e 260007

1- to 4-room

Sources: Housing and Development Board Annual Report (2000/01) and Urban Revedelopment Authority Quarterly Publications (2001), Singapore.

P u b li c

Housing Markets in Singapore

el ig The government has actively intervened in the public andib private housing markets in Singapore in several ways that couldil be categorized in terms of regulations, direct provision, andit subsidies. y cr it The Forms of Government er ia Intervention f o Regulation r Although the current system of public housing operations and n financing in Singapore has been shaped through successive waves of e public housing policies and economic development, its main objective w of promoting public homeownership has not changed. The development p and success of the Singapore public homeownership program, which u started in 1964, is basically supported by a number of strategic public bl housing policies and regulations. ic At the onset of the public housing program in the 1960’s, due to h o the acute shortage of housing at that time, the initial access and u si n g w er e v er y st ri n g e nt ta r g et in g o nl y S in g

aporean low-income large households of at least five persons. Over the years, as more of the urgent housing needs are being met and the housing shortage problem gradually decreases, the access and eligibility criteria have also become less restrictive. For instance, the citizenship criterion for new public housing in the 1960’s required all persons in the household to be Singaporeans but that has been relaxed in 1996 to include at least one Singaporean and one Singapore Permanent Resident in the household, with the Singaporean being the applicant (Housing and Development Board, 1996). Another eligibility criterion is the household income ceiling, which was pegged at S$1,000 per month in the 1960’s so that only the lower-income households had access to new public housing. This criterion has since been adjusted numerous times to include more households, where the latest household income ceiling is S$8,000 per month for nuclear households and S$12,000 per month for extended households (Housing and Development Board, 2003).

Among all the policies that promote public
13

Economic Development and Housing Markets in Hong Kong and Singapore

homeownership, the CPF Public Housingthe potential profits are Scheme has been a major policy instrument togreat incentives to boost household affordability for public housing.households to become When the CPF Public Housing Scheme was firsthomeowners. The resale introduced in 1968 to allow households to utilizepublic housing market is their CPF savings and monthly contributions tobasically driven by market purchase public housing, the number of publicforces except for a few housing units sold in that year was twice asregulating policies that work many as that sold in the previous three yearsto complement the new (Housing and Development Board, 1965 topublic housing market. 1968). In October 1993, the CPF Public Housing of the major Scheme was de-regulated to allow public One regulations controlling the homebuyers to withdraw their CPF to service the mortgage loan interest payments in addition toresale public housing market 100% of the value of the property as at the timeis the compulsory occupation of purchase. To further encourage publicperiod before resale. For homeownership, this scheme was revised ininstance, in 1971, before 1996 to allow public homebuyers to utilize up topublic homeowners could sell 100% of their CPF to pay for the 20% initialtheir dwellings on the resale deposit as well as subsequent mortgage loanpublic housing market, they repayments. In the main, the CPF Publichad to fulfill a minimum Housing Scheme has worked well to promoteoccupancy period of three public homeownership so much so that by theyears. This regulation was end of the 1970’s and 1980’s, the public housingincreased to five years in homeownership rate was 38% and 79% of the1973 and then shortened to 30 total population respectively. However, duringmonths in 1985. Public the Asian Financial Crisis in 1997, many public homeowners who wish to sell homeowners were found to be in mortgage loantheir dwellings but who do arrears. Thus, this scheme was stringentlynot satisfy the minimum regulated in 1997 to tighten credit and householdoccupation period affordability by requiring public homebuyers torequirement could only sell utilize all their existing CPF savings beforetheir dwellings back to HDB mortgage loans are granted to them. This creditat the original purchase price tightening regulation aims to lower the amountplus the depreciated cost of of mortgage loan granted, thereby reducing theany improvements (Wong quantum of monthly mortgage loan repayments,and Yeh, 1985). and hence decreasing the likelihood of arrears. In 1989, the access and

After a decade of providing new publiceligibility regulations within housing, a resale market for public housingthe resale public housing was established in 1971. Public homeowners market were relaxed to are given the option of selling their dwellings promote public at a profit under certain conditions. Thus,homeownership among more purchasing public housing is no longer just forcategories of households. For shelter but also for investment where example, Singapore
permanent residents have been allowed to purchase resale public housing and the household income ceiling restriction is removed. In

addition, owners of resale public housing arethen purchased a second new allowed to purchase private housing forpublic housing from the HDB investment purposes, while private homeownerswere required to pay a resale are allowed to purchase resale public housing forlevy of 5% of the selling occupation (Tan and Phang, 1991). price of their first dwelling. A graded resale levy was Another regulation that affects the resale subsequently implemented in public housing market is the resale levy, which 1982 whereby sellers of was implemented in 1979 (Phang, 1992). Since public housing could choose 1979, public homeowners who sold their to dwelling in the resale public housing market, and

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