HDB Point Block Henderson Estate SingaporeThere has been quite some response to our recent article about leasehold properties, Limited Term Ownership – COEs and Leaseholds.

We do appreciate the feedback and comments from the public, and it has given us food for thought as well. We’d like to quickly address a few of the points brought up recently.

Property-buying behaviour and mentality

One of the more common comments is about the mentality of property buyers. It seems that many believe buyers do no behave logically when making property decisions, and that they are often motivated by fear or greed. While we agree that this is prevalent enough to affect market prices substantially, we don’t believe it should be the case, especially in the 99-year lease public housing market. To a certain extent, the private property market will be subject to this, as there is a lot of liquidity competing for a limited supply.

However, as we have pointed out in our article, rational thought can be applied when buying property, especially when one is buying for mainly housing purposes, as opposed to the heavily investment-skewed mindset that is currently prevalent. We fully agree with one commenter who stated “If public housing is for asset enhancement or investment, it is an oxymoron.”

People still need a roof over their heads

Housing is definitely a necessity in any urban setting like Singapore. Without a proper housing plan and economy, Singapore will end up with something similar to the slums of certain South East Asia cities, where the poorest residents live in abject poverty, literally scrounging for their next meal in a landfill or dumpster. This is where public housing comes in. However, when the idea of meeting essential housing needs gets conflated with “asset enhancement”, things start to go awry. We believe that it is possible to provide basic, decent housing for Singaporean families, but this idea of capitalising on public land for profit has to go. Again, if buyers made decisions based on current utility and suitability for purpose, instead of speculative fervour, we wouldn’t have a problem of million-dollar public housing.

Public Housing and the 99-year lease

One commenter noted: “many singaporean does not know that buying resales hdb flat does not have a 99 yrs lease, the resales hdb flat life should be 99 – age of the flat… they tot that they buy hdb flat and will get 99 yrs lease by default…(sic)”.

We interpret this to mean that some buyers are under the impression that when they buy a Housing and Development Board (HDB) flat (resale or not), the lease is automatically renewed to 99 years. This is patently untrue for resale flats, and even newly-completed HDB flats may not come with the full 99 years. For example, the new units offered under the (former) Walk-In Selection Exercise and Sale of Balance Flats Scheme would already have some of their lease ticked away. The longer it took for a unit to be sold, the less a new owner would have left on his lease. Such a fallacious impression may be unfathomable to minds that are very in-tune with the local property market, but the seriousness of this fallacy warrants a further look into the claim shared by the commenter. If there is a portion of the market that has this misconception, it is very worrying; the authorities obviously need to put more effort into education and creating awareness.

Speculation versus public housing

In response to our statement “Just as with any other speculative and gambling endeavour, there are ups and downs. If one takes the chance for a big reward, then one should also be prepared to face the risk. In the face of a market bubble deflation, or even worse, implosion, there should be no state resources allocated to help these people. That would only be further condoning such behaviour going forward”, reader eremarf said:

“Interesting stance – but rather harsh on non-speculators? I’m not sure I fully understand you. I think you could give this topic a more in-depth treatment. I think many would be very interested! It’s great you’re writing about this – it gets people mentally prepared for contingencies (not much time for thought if a bubble bursts).”

In response, we’d like to clarify that apart from pure speculators, there are another two groups of buyers who bought at the currently ridiculous prices. In terms of the total number of HDB dwellers, these groups are relatively small, judging by the resale transaction volumes in the past few years. However, their situation is important enough to highlight.

One group bought because they felt they simply had no other choice but to own their home, despite the high prices being asked. The need to own their own home over-rode their concerns about potential market downturn. The other group also felt the need to own a home, the difference being that they feel the high prices are justified because the market will just keep going up in the future. This group, even if they don’t realise it, are speculators. Their prime reason for buying a home may not be for investment, but the justification to make that buying decision is speculative.

Let us be clear what we are saying here. Everyone needs a home. But not everyone needs to own a home. There are many other options, albeit inconvenient, other than owning your own home. One must weigh the inconvenience versus the price one must pay for a property in this market. Inconveniences such as having to resecure a rent agreement, not being able to renovate and customise your home, putting up with housemates or relatives, longer commutes and walking distances or even just managing expectations, should be weighed against the potential loss if one buys at current prices. Don’t be mistaken, there are actual financial costs to these “inconveniences”, such as rental, moving and transport expenses, and these can add up to significant amounts. But at current prices even the most severe inconveniences might be worth enduring or paying for. The alternative is to risk negative equity. In simple terms, one could rent instead of buy a HDB unit. At $2,500 a month, that’s $30,000 a year. But if there is a downturn, that unit bought for $500,000 might lose as much as half its value. So one is paying $30,000 a year to avoid the risk of losing up to $250,000. That is what we mean by being a rational buyer.

While we can empathise with eremarf and those who might be affected should the market experience a downturn, neither of these non-speculator groups should be given a bail-out, harsh lesson as it may be. By giving them a bail-out, it would trivialise the sacrifice and effort made by conservative, cautious Singaporeans. Even worse, these tax-paying conservatives would be effectively subsidising these risk-takers against their own folly. It would clearly signal to prudent, careful Singaporeans, who refused to participate in these market shenanigans, that the state endorses speculative, bubble-like behaviour, risks be damned. In effect, the state would be encouraging even more bubble behaviour in subsequent property cycles. No, that should not be the message given by the state. It would be as good as endorsing those bankers who took on massive risks on loans for their banks, reaping the benefits of all that initial revenue, but eventually causing banks to become caught in, or even precipitating, the recent financial crisis, as mentioned in our article Banks Can Take Steps to Minimise Risk.

As always, we’re interesting on your opinion and we’d love to hear from our readers. Comment below or via our social media channels, FacebookTwitter, and Google+. Check out our other articles on property at BLUTA-log.

 

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