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Singapore’s mechanism design approach to housing policy


Author: Sock-Yong Phang, Singapore Management University

Despite being a land scarce city-state with close to 6 million people, Singapore has achieved a high homeownership rate of 91 per cent. Its 2018 median house price to median household income ratio was just 4.6, in contrast to Hong Kong (20.9), Sydney (11.7), Los Angeles (9.2) and London (8.3). The framing of affordable and inclusive housing as socio-political goals led the government to design mechanisms to most efficiently achieve these goals.

General view of apartment blocks consisting of private and public housing in Singapore, 27 September 2018 (Photo: Reuters/Kevin Lam).

Mechanism design is often described as the ‘reverse engineering’ part of economics. A policymaker starts with the goals to be achieved, and then works backwards to decide what mechanisms (such as legislation, institutions or the market) or incentives can best achieve these desired outcomes.

While mechanism design has been successfully applied in numerous settings from the hiring of new doctors to kidney exchange, it is not typically used to describe housing market interventions. Yet it is widely recognised that in fast-growing cities, markets and profit-driven institutions are unlikely to deliver decent housing at prices affordable to low-income households, leading governments to intervene in numerous ways. In many contexts, common policy responses such as rent control and restrictive land use regulations actually act to limit supply and increase housing prices.

Well-designed mechanisms for affordable housing that have stood the tests of time are fair, transparent and not overly complicated. They are subject to constant oversight, and require regular re-engineering and improvement. Conversely, poorly designed mechanisms can result in substantial welfare losses, with the 2008–09 subprime crisis as the most dramatic example.

During the colonial period, there was a critical housing shortage in Singapore. Pre-war shophouses, slums, squatter colonies and zinc-roofed settlements dotted the landscape. The first elected government in 1959 had a vision ‘to provide decent homes equipped with modern amenities for all those who needed them’. It established the Housing and Development Board (HDB) in 1960 to clear and redevelop slums and urban areas, develop rural or agricultural areas for resettlement, and erect housing and other real estate. In those early days, the HDB faced tremendous obstacles when acquiring land for redevelopment and resettlement.

At the time of separation from Malaysia and independence in 1965, the Parliament of Singapore adopted all the provisions of the Malaysian Constitution with one exception: the right to adequate compensation in the event of compulsory land acquisition. Soon after, Parliament enacted the Land Acquisition Act that gave powers to the government and its agencies to acquire land at prices fixed on a date determined by legislation. Today, 90 per cent of land belongs to the government and 81 per cent of the resident population live in high-rise HDB flats, which comprise 73 per cent of the housing stock.

Another goal was ‘a home-owning society’ that Singapore’s visionary founding prime minister Lee Kuan Yew considered essential for social and political stability. To enable low-income households to afford to own their homes, the government transformed the pension fund, the Central Provident Fund, into a housing provident fund in 1968. Employees and employers had to make compulsory contributions to the employee’s account. Savings could then be withdrawn for down payment and mortgage payments to purchase HDB flats sold on 99-year leases, with housing loans also provided by the HDB.

This mortgage design mobilised domestic savings on a nation-wide basis and made homeownership the default choice for households. Not surprisingly, the homeownership rate climbed rapidly from 29 per cent in 1970 to 88 per cent by 1990.

HDB’s allocation mechanisms and calibrated housing grants are based on means testing and household profiling, which help ensure priority for first-time homeowners and net housing prices that are within five years of annual salary. A secondary market for HDB flats was created in the 1980s and deregulated over time. Resale at market prices served a few purposes: household mobility, affordable housing for those not eligible for subsidised HDB housing and market valuation of HDB flats.

The housing market is carefully segmented with subsets based on household characteristics. Spatially though, land use planning has integrated different housing types for inclusive neighbourhoods. Ethnic quotas regulate resale transactions to achieve a ‘healthy mix’ in HDB estates.

To increase private housing supply, the government reformed land use planning processes, and held periodic land auctions for private housing and for upper middle-income housing developments. It also amended legislation to remove gridlock over redevelopment of properties held by multiple owners. Differentiated buyer stamp duties (up to 24 per cent of price) are used to curb foreign, speculative and investor demand.

Today, Singapore faces new challenges of an ageing and more diverse population. The HDB housing stock is also ageing and the values of flats will depreciate to zero at the end of their 99-year leases. In response, the government has designed various schemes for housing equity withdrawal and put in place voting mechanisms to allow for early en-bloc redevelopment.

Singapore shows it is possible for a global city to achieve affordable and inclusive housing with extensive and multipronged interventions appropriate to its circumstances. Its policies and practices have been ‘exported’ to several developing countries, but housing markets are incredibly complex. Outcomes have varied and depend on specifics of policy design, and local political and social contexts.

Sock-Yong Phang is Celia Moh Chair Professor of Economics at the Singapore Management University.

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