Minister for National Development Desmond Lee recently gave a good explainer on the issue of land cost and HDB BTO Valuation in parliament. His explanation also covers why the HDB runs at a deficit of a couple or three billion dollars a year.
Unfortunately, the parliament is a poor avenue for the treatment of an important subject, one that concerns many Singaporeans. We think the issue deserves a more comprehensive explainer than what the minister could provide within the constraints of parliament.
As Minister Lee explained,
“Land forms part of the past reserves, hence when HDB uses the land for development, the money that HDB will need to pay for the land must be paid back into the past reserves, which are invested and grown for future generations and are protected,”
He also said that HDB does not price new flats based on cost.
The Importance Of Paying Attention, And Reading Beyond The Headlines
A number of arm chair critics and social media experts pointed out that because the dollar cost of the land acquisition to the Government was far lower back then, the Goernment should just use the dollar cost of land instead of the current book value for the determination of BTO prices.
The problem with some smart people is that very often, they think themselves to be cleverer than the legion of others who have masticated on a particular issue long before they did, and like to think that their easy, binary proposals would promptly resolve things that were there for a long, long time.
If only policy making and running the government were that easy.
Firstly, there is a reason why teachers have always stressed the importance of READING CAREFULLY.
There’s one easter egg straight from Minister Desmond himself that we have already repeated above.
Did you catch it ?
Here’s what Min Desmond stated, for the record, once again.
“He also said that HDB does NOT price new flats based on cost.”
“HDB first establishes their market value by considering the prices of comparable resale flats nearby as well as the individual attributes of the flats and prevailing market conditions,” said Mr Lee.
“To derive the selling prices, HDB applies a significant subsidy to the assessed market values to ensure that new flats are affordable to those buying their first home.”
*drops mic ….
Past Reseves And The PAP Government’s Fiscal Philosophy
Most other governments use current income, including proceeds from land sales to fund current fiscal expenditures. That is say, they sell land to raise money to pay for running of the government. A good example of this is Hong Kong, with it’s sky high property prices and scarce public housing.
It does not take a genius to sense the inherent dangers of raising funds to run a government this way, especially a land scarce one. But thanks to the late Lee Kuan Yew however, the PAP government has taken a different approach from the very beginning.
In Singapore land also forms part of the past reserves. More importantly, proceeds from any land sale, as mandated by the law, cannot be used by the government for current spending, but must be transferred only into our reserves.
But with a fiscally prudent PAP government, land sale proceeds go back into the reserves, which, when invested, contribute returns to the government in the form of NIRC (Net Investment Returns Contributions), the government uses only the NIRCs for the cost of running the government, thus even though the land has been utilized, all Singaporeans would still enjoy the fruit from it’s value for generations to come.
False Equitability vs Real Equitability
This fiscal philosophy is why even the HDB has to account for the cost of land to the government, even though it does not take into account the cost of land when pricing new built BTO flats.
A piece of Singapore’s land, once written off the books, for whatever reason, is gone. To write off the value of the land from the book of past reserves, but not make good the loss, we are in effect, not only writing off the chance of future investment returns from that particular bit of value, but also losing our principal sum as well. We are in effect, chipping away at our 家底, our familial wealth.
But, isn’t the Government just doing a ‘left-pocket-to-right-pocket’ transfer then ?
Yes, but the important difference is that that subsidy offset is from current expenditures. By having the HDB offset the value of the land back to the reserves, the value of our past reserves does not change, the principal is untouched, where it has a chance to grow, the returns of which will be enjoyed by generations of Singaporeans to come.
No Easy, Binary Solutions
Let us be clear, we think HDB prices is a problem, and deserves attention from the government. (And they did !) But we also understand that the far-ranging complexity and ramifications of policy making is often not fully appreciated. Problems, and solutions, do not exist in a vacuum.
We have deliberately avoided going down the many rabbit holes of this issue, for we hold the answers to many to be quite self evident to the thinking reader. Cleverer readers would have caught onto a few of them already, like why land costs should be offset at current value, or the issues of negative equity for current property owners still servicing their mortgages should assets prices fall too dramatically. But these only highlights the knock on effect of any policies and proposed solutions and the complexities and nuances of this issue at hand.
We must all be wary of easy, binary solutions, and those that peddle them.