28 Oct 2005

A Sense of False Safety in Numbers

A sense of false safety in numbers
Zooming in on home equity may not give an accurate picture of lower-income households' finances
Friday • October 28, 2005

THE Department of Statistics recently released a paper on home ownership and equity of HDB households. It makes for impressive reading, and rightly shines the spotlight on the overall success of Singapore's public housing policy.

In particular, many have cited the impressive statistic that the lowest 20 per cent by income of households in owner-occupied HDB flats have an average home equity (that is, the value of the flat less the outstanding loan) of $138,000.

That is no small sum. But as I delved into the details, I wondered if the report's findings — seen in proper perspective — are as wonderful as some have made them out to be. In the first place, home equity is not an appropriate indicator of wealth in Singapore, given the limited alternatives to home ownership here.

Yes, people can rent. But renting is not a perfect alternative to housing in Singapore, because CPF funds can be used to buy homes but cannot be used to pay rentals.

With the employees' CPF contribution being a hefty 20 per cent of gross salary, this is a major consideration. It can therefore be difficult, if not impracticable, to convert home equity into actual cash.

If a family sells their HDB flat, they may gain some cash, but will lose the ability to use 20 per cent of their combined salaries to pay for housing. This is aggravated by the fact that rentals in Singapore are not cheap, while direct rentals from HDB are stringently controlled and far from guaranteed.

Let's say that the market monthly rental for a 3-room HDB flat is $800. If an average household in the bottom 20 per cent sells its HDB flat and rents a 3-room flat instead, the home equity realised would cover only about 15 years' rentals.

This is assuming the full $138,000 is realised as free cash — unlikely given costs such as stamp duties and legal fees. It may also be necessary to repay any CPF funds used to buy the flat, plus the CPF interest foregone. It is of course possible to monetise part of the home equity by subletting a room or the whole flat. But subletting a room comes with difficulties, especially for big families.

And while the HDB has liberalised the eligibility requirements for subletting the whole flat, that still leaves the question of alternative accommodation, which will reduce the amount of cash from renting out the flat. We must also remember the 13 per cent of the bottom 20 per cent households who do not own their flats.

This 13 per cent translates into a sizeable 23,000 households living in HDB rental flats. They can benefit from the many assistance schemes available.

Still, we need to always remember this under-class with low incomes and without any home equity, who continue to need extra help. In this regard, the recent NTUC proposal to eliminate employees' CPF contributions for those earning less than $1,000, with the Government contributing to their CPF accounts, is noteworthy. But the Government's aversion to welfarism may make this a difficult proposition. The paper raised a couple of other questions that deserve closer attention. 52.2 per cent of the bottom 20 per cent households live in four and five-room flats. This calls into doubt the strategy of tying goodies such as CPF top-ups to housing type, as they may not reach those who would benefit the most.

Furthermore, the income figures in the paper appear inconsistent with those stated in the 2003 Household Expenditure Survey (HES) released earlier this year.

The DOS paper cited an average annual income of $14,100 for the bottom 20 per cent households in owner-occupied HDB flats. But the 2003 survey had reported an average monthly household income of $795 (or $9,540 per year) for the bottom 20 per cent households, taking into account possible annual bonuses.

So which figure is right? Yes, the HES figure covered all households, whether in owner-occupied HDB flats or otherwise.

But when I tried to work back from the figures in the paper for home ownership rates and average annual household income, I could not come close to reconciling the figures. Hopefully, the DOS could shed some light on this.

The DOS paper concluded with some fairly upbeat remarks about the success of the Government's home ownership policies. Yes, the Government has done amazingly well in this regard. But I would urge against drawing conclusions, based simply on this paper, about the wealth of the low-income.

The Government has noted the risks of the growing "asset rich, cash poor" phenomenon. It would be a pity if the illusory asset of home equity is allowed to obscure the needs of low-income households.

The writer is a lawyer commenting in his personal capacity.

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