We came across this post on The Real Singapore just the other day, as we were surfing for the latest happenings in Singapore. It raised a few points that struck us as a good critique of the current situation in Singapore, vis-a-vis the policy direction of the government.

The author, Jeremy Chen, is a PhD student with the National University of Singapore School of Business. In his article, he raises a point that is quite close to our hearts, in that it involves housing. Specifically, Housing Development Board flats and the Build-to-Order (BTO) scheme mentioned in our earlier article, BLUTA on Housing – Part 2. He contends that the way the BTO scheme is set up transfers inventory risk from the government to young couples, who now have to wait several years before being allocated a flat. Either that or they must have “crystal ball” planning, and make decisions now (for example, get married) for something that is a good 3 to 5 years down the road.

Clemenceau Avenue, Newton, Singapore - State property for rentJeremy’s view is that this demonstrates how current policies are aimed at over-protecting the goverment and investors, to the detriment of citizens’ general well-being. Unfortunately, we have to agree with him that this trade-off is unsatisfactory. From our observation, this is not the only example in property that demonstrates the current policy direction.

Previously, state-owned properties*, the most well-known of which are the pre-war black-and-white bungalows, were leased out on the basis of a renewable lease. As long as you were a prior lessor, you had the priority to extend the lease when it expired, with only a nominal adjustment in rental amount. This situation favoured individuals who had been staying there the longest, since other property prices and rentals would have gone up much more over time. Imagine renting a landed property in the prime areas for just $200 to $300, with outlying areas rented for even less, when other similar properties were going for up to ten times as much.

Obviously, this would not have maximised returns at fair market value for such properties. So what did the government do to correct this? They created a tender system for such properties, with the two-year lease going to the highest bidder. Just as Jeremy highlighted in his article, the government has transfered their risk onto the shoulders of the tenants of such housing. In addition, the mandatory tender every two years introduces renewal risk, since they cannot say for sure if their bid will be successful until it is finally awarded. Now, the system is fully capitalistic, which means that all applicants, local, foreign or commercial, would have to outbid each other to rent one of these.  Rents of such properties have climbed significantly as more foreigners and even businesses muscle in.  How much have rents climbed? Think “five-figure sums” for the bungalows and even some semi-detach houses.

What businesses could possibly run from such premises, you may ask? If you guessed child-care, you’d be pretty accurate. Examples would include those around Royal Road, Russels Road and Winchester Road. There are also a few along Halifax Road. We’ve spoken to some of these schools, and they too are subject to the above-mentioned renewal risk. This is bad for both the school, the parents and the children.

And just as with residential tenants, they too face pricing risk in the form of exclusive schools with much deeper pockets (some have been known to pay six-figure rents), which will be able to outbid and eventually squeeze out the schools with less focus on the bottom-line.

A quote from T. Chandroo, president of the Association of Early Childhood and Training Services, sums it quite well. He was quoted in an October 2012 Straits Times article: “Because people can see what someone else is offering, the rent keeps getting higher…it’s like an auction.” He added that rent at a void deck in Punggol hit $50,000 a month recently. Five years ago, it was between $10,000 and $20,000.

But it gets even worse. In this scenario, the risk goes even further down the line, to the clients of such schools, namely Singaporean parents and their children. For parents who have to pay a premium on school fees, how much of it actually goes into educating and caring for your child, and how much goes into just paying for the lease? While hard figures are hard to come by, we’d be willing to wager that such a profit-oriented direction increases prices (that is, school fees) while lowering quality.

Which brings us to one of the latest announcements of the government; the enhanced Baby Bonus. The government has to give out a “Baby Bonus” to encourage citizens to have more babies. But the tender-for-lease system introduces property price risk that affects the schools and parents, driving up costs and discouraging childbirth.

Effectively, we have a vicious cycle of increasing rents, which decrease birth rates, which then require even more Baby Bonus, thus negating the additional revenue from the increased rent. It sure sounds like a zero-sum game, but it’s actually worse. An unintended side effect is accelerated inflation, which will likely mean even higher property prices across the board.

Do you think that means round eight of the cooling measures? If you have an opinion or viewpoint of your own to share, please let us know on our Facebook, Twitter, and Google+ pages.

* For more details, see http://www.landapplications.gov.sg/SPIOWeb/SPIO/Public/SPIOHome.aspx

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  4 Responses to “Our Take on Risk Transfer from Government to the People”

  1.  

    This article needs more exposure. It pretty much explains why Singapore has such a high inflation rate compared to the rest of the developed world, even with a strong dollar!

    •  

      @Xmen
      Thank you for your compliment, on behalf of Jeremy as well! We’re glad you think our views have some merit. It would be greatly appreciated if you could help to spread the word as well, as we think the message is something all Singaporeans should hear.

  2.  

    Another cause of local inflation can be attributed to the immense population growth. For example, property and car ownerships, school admissions, and healthcare.

  3.  

    Another nice one BLUTA. Definitely I’ll be citing you guys in coffeeshop arguments. Keep up the great work! :-)

    There’s one thing I’d like to learn more about – why do rental prices keep going up in Singapore? What are the mechanisms, why does it occur, and what are the fixes we can consider? If you guys can somehow afford to address these questions, maybe in articles in future, I’d be very appreciative.

    Cheers!

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