“The reality we face is that interest rates are extraordinarily low, globally and in Singapore, and continue to add fuel to our property market. We have to take this further round of measures now, to check recent market trends and avoid a more serious correction in prices further down the road.” Minister for Finance Tharman Shanmugaratnam

a) Explain the need for government intervention in the above market. [10m]

b) Discuss whether public housing should be subsidised. [15m]

 

a)

There are two types of housing in Singapore, private and public. The housing property market as discussed in the preamble is referring to both the private and public housing. For public housing, Government through the housing development board (HDB) has provided heavily subsidized housing for the masses. The government builds a range of flats that cater to lower income middle income and higher income groups. Whereas private housing prices are usually left to market forces.  In this essay we will explain why there is an need for the government to intervene in the above both markets by introducing cooling measures to ensure the prices does not increase and buyers do no over commit.

Why intervene in public housing?

The government intervenes in the public housing because runaway prices contradicts the objectives of HDB which is to ensure equity and that affordable housing for the masses.

The reasons for government provision of public housing are as follows:

– if left to the free market, the market will likely to be dominated by a few large firms because of high cost of production and inadequate supply of housing and high prices likely to occur. i.e. only the rich can afford

– housing is a basic necessity and on equity grounds, the government will step in to ensure adequate provision.

In light of the low interest rate environment and historic massive profiteering, citizens of all income groups have taken to property invest as a means to increase wealth. As such, the government has used property cooling measures to keep prices in check. This will ensure equity as well as ensure subsidized housing is utilised as a basic need and not a means of rapid wealth creation. This ensures that the objectives of HDB are met.

Why intervene in private housing?

The reason for intervening in the private housing market is to ensure buyers do not overcommit and prevent serious repurcussions to other sectors of the economy should prices correct. There are 2 factors that are explained in the preamble one – low interest rate environment and two – prevent a more serious price correction.

Interest rate is at historic lows due to recent global recession and economic events. Singapore does not control its interest rates and rely on external sources i.e. if USA increases its interest rate, our rates will rise. As a result of such low interest rates, buyers may be misinformed and thinks that houses are affordable when they are actually not. For example, for a $1million property, the instalment may be around $4000 at current low rates. However if the interest rates were to increase, the instalment will balloon to $500o or $6000. Such increases are normal and fluctuates according to external market forces. Buyers may over commit thinking that it will forever be at a low level and be unable to pay instalment should interest rates rises. Defaults on loans has serious repercussions to the bank and subsequently to the economy on a whole.

The other reason for intervening in the housing market is to prevent a more serious price correction. This suggest that current prices are increasing at an unsustainable rate. Due to herd mentality, Singaporeans may be buying and causing prices to surge unrealistically. The increase in demand may be due to speculation and investment and not real demand for housing as a necessity. This creates unnecessary price bubbles which will also cause serious repercussions should the bubble burst. For e.g. in 2008, USA suffered a financial crises due to the build up and subsequent busting of property bubbles. This resulted in massive unemployment and recession not only in the country but also globally. The effects of which are still felt today.

Lastly, the reason why the government wants to intervene in the housing market is to prevent an inflation. Housing and cars traditionally takes up the highest portion in the CPI which means that should housing prices increases, inflation rises. The ill effects of inflation includes an erosion of the value of money, decrease in our trade due to increase in prices and widening income gaps.

In conclusion, based on the above explained 3 points, it will do no good for the government to allow property prices to continue to increase. As such the government will have to intervene to prevent runaway property prices and subsequent crashes from causing upheaval to it’s economy.

 

 

b)

This essay will need you to provide thesis and anti-thesis for government subsidy of housing flats. Since there is a subsidy, we can conclude that public houses generates positive externalities and can proceed to use our MSB>MPB argument to justify. The key is to identify what is the EMB for public housing.

Consider the positive economic impacts of government provision of public housing.

  • A more efficient allocation of resources is achieved as provision of public housing as a form of merit good allows the government to realise the external benefits
  • Heavily subsidized public housing allows home ownership and creates wealth for the masses as their houses appreciate in value. It gives the citizens asset in the country a means of financial security and to hedge against inflation as it protects against rising rents.
  • With one of the very important basic needs being taken care of people can concentrate on production contributing to the economy.
  • Achieving equity allow a more cohesive society which also contributes to a more conducive investment climate attracting foreign investment in the country
  • In times of recession, government can speed up some housing projects or increase expenditure on public housing upgrading to boost AD and stimulate production, output, employment and income in the country.

 

Negative impacts of government provision of public housing

  • Problems of financing. However Singapore can draw on the surpluses that they have accumulated in good times and also use the rising tax revenue from a growing economy to finance these expenditure.
  • Distortion in the market due to heavy subsidy can lead to inefficient allocation of resources
  • Opportunity costs of subsidizing housing is $1billion a year. This $1billion could be spent elsewhere.
  • Difficulty in getting the subsidy amount correct. Current subsidy is around $30k per new flat. Why $30k?
  • HDB being used as a source of income. As HDB prices are really affordable, i.e. it’s been mentioned by minister that you only need an income of $2k a month to afford HDB flat, richer citizens will make use of HDB flat to earn extra rental income.
  • Free loader problem. Buyers will not be motivate to work harder since housing is cheap and heavily subsidized.