Are Housing Board subsidies regressive?

Source : Straits Times - 29 Oct 2008

IN THE 1990s, the Housing Board changed its subsidy policy of flats to, in effect, be a discount on the market price. Hence, a HDB flat located in the same precinct as a private condominium sold at a much lower price.

In the Government’s drive towards home ownership so everyone has a ’stake in the country’, 95 per cent of the 80 per cent of HDB dwellers are owner-occupiers. This is a remarkable achievement in a country just over 40 years old - a true testimony to the success of the Government and the HDB.

However, there has been recent public discussion of the rising costs of HDB flats and whether housing is still affordable in Singapore. Some asked why government subsidies are not cost-based or break-even, but rather a discount on the market price.

To this, the government stand has been that such a market-based approach ‘reflects the true subsidy buyers enjoy’ and has allowed the HDB to price its flats affordably despite the sharp escalation in construction costs. Indeed, this is true. If the HDB changed its policy to a cost-based break-even subsidy, the amount of subsidy would increase with construction costs and this might prove unsustainable over a prolonged period. Basing a subsidy on the market price means the state as public housing provider gains less than if it was a private developer. The public benefits from this discount. The state still gains an excess over costs from its public housing developments, which is used to keep future public housing prices affordable. All this works well.

However, let us explore deeper the contributors of these subsidies - who subsidises public housing in Singapore?

Under a cost-based break-even subsidy, an increase in construction costs means the Government will have to use more taxpayers’ funds. Tax in Singapore is progressive, which means the better off contribute a larger percentage of their wealth. Paying for subsidies from taxpayers’ funds means the better off will subsidise an increasing proportion of the subsidy increase. This is definitely progressive.

Under a market-price-based discount subsidy, the reduced profit from current public housing developments the state receives is used to subsidise future public housing developments. The reduced profit is received from Singaporeans living in public housing developments today. The subsidy for future public housing is for Singaporeans living in public housing developments tomorrow. This means the population living in public housing is, effectively, subsidising itself over time.

But what about the state subsidy - the discount on market price given to this 80 per cent of the population? Who actually pays that? The answer depends on the actual market price of these public housing developments, based on supply and demand. Simply put, if there was no demand for these developments without the discount (because those who can afford it would seek out private developments, and those who cannot afford it, cannot afford to own a home), the discount would not exist. The market price of something with no demand is zero, and a discount on zero is zero.

Therefore, it seem that having 80 per cent of public housing dwellers subsidise themselves over time, with 20 per cent in private housing unaffected, is regressive. This housing subsidy policy seems to go against our quest of a progressive society, outlined in other policies. Crucially, this regressive policy affects 95 per cent of the 80 per cent in public housing, as they are home owners. This is a percentage much larger than the population actually paying progressive taxes.

However, I do not advocate a cost-based break-even subsidy, as it is undeniable that over an extended time, that may prove increasingly unsustainable as construction costs and the living standard demands of public home owners rise. Nor do I think we should relook the home ownership policy of Singapore, as the ‘everyone has a stake in this country’ argument is a good and justified one. The solution may lie in an area in which Singapore was weak and could not afford to rely on when a young nation in 1965, but which has since grown from strength to strength - private property developers. Can they offer affordable social housing?

Foo Cexiang