Just a thought: Economists; argumentative and combative

I am in no position to debate the finer economics in Dr Lim Chong Yah’s ‘drastic’ proposal. But I do resonate with his desire in combating and arguing for the greater cause, a common trait among economists I dare say. In case you missed the article on Dr Lim’s rebuttal of those who claimed his proposal as ‘unfeasible’:

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SINGAPORE: Former chairman of the National Wages Council Professor Lim Chong Yah has issued another statement to clear up what he describes as “fallacies” over his wage restructuring proposal.

He said the “Shock Therapy” between 1979 and 1981 in fact, resulted in a higher GDP growth rate for Singapore.

“Official statistics show Singapore had an average of 6.4 per cent real growth rate per year from 1974 through 1978, the quinquennium before Shock Therapy I. They also show that the quinquennium that followed, covering the three years of Shock Therapy I and the two years following it, the average real GDP growth rate was 9.2 per cent per annum, a figure which is much higher than the preceding five years of 6.4 per cent per annum,” said Prof Lim.

“Do not the comparative figures indicate the overall economic success of ER I or Shock Therapy I? No doubt about it.”

He added it is also wrong to say that the 1985 – 86 recession was triggered off by the Shock Therapy of 1979 – 81.

Prof Lim said his research showed that “the recession was regional, not national, Singaporean only”.

He said his hope is that “future discussion on Singapore’s recent economic history will not repeat the above two fallacies now used to oppose the wage adjustment advocacy” of his wage restructuring proposal.

Prof Lim had proposed that the pay of low income workers be raised by 50 per cent over the next three years and that the pay of high income earners be frozen during the same time.

He had explained that this will narrow the income gap and force companies to raise productivity.

Several government leaders have raised concerns over his proposal, saying that wage increases should be in tandem with productivity gains.

- CNA/cc

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When the past old guards of Singapore like Dr Lim and even the former Permanent Secretary Lim Siong Guan (read up his book “A Mandarin and the making of Public Policy” if you have time) speaks against the current policies helm by the PAP government, it speaks great volume.

On one hand, we have a government who don’t have the vision and courage to implement ‘drastic’ moves to help those who were left behind. On the other hand, the government has no qualms allowing the cost of living in basic needs like housing and transportation to rocket and to deteriorate. How does the government expects to yield better results if they are always doing things the same way?

How much can assisting the lower income cost? Let’s say 10% of the Singaporean population (excluding PRs, if you will) belongs to the poor category, that would translate to an estimated 300,000 people, and they earn $800 a month. A 50% increase would mean increasing $400 to $1,200 over 3 years. Even if the government is to pick up the tab, it’ll only cost $120 million over 3 years to help those in need—-a fraction of the $1,100 million (and I am not even adding on the ‘shared $900 million tab to repair and maintain the railways’) given away to SBS and SMRT. While I do not advocate freely giving away money, I don’t understand why are the government ministers so stingy on small expenditures like these while they are gambling hundreds of millions upon billions away in Temasek and GIC.

The productivity argument by the government is fine. I have argued for pushing up productivity in my other post. However, we need to be realistic on low-skilled work like drivers or labor workers (thus my support for minimum wage in my other post). There are certain jobs that productivity is contained by the nature of the job.  Take for example, bus drivers. How on earth do you expect bus drivers to be more productive? Drive longer hours and risk death? How about creating auto driving bus or robots that drives?

The fact that SBS pays such a low wage of $1100-1300 basic for their bus captains for 12-13 hour work days for the past few decades is a joke. In typical PAP fashion, they push the blame on Singaporeans saying they are unwilling to work for that wage in order to justify hiring from China (why China of all places??? are the wage so low that even Malaysians are avoiding them?). After the government shamelessly used tax payer’s money to buy new buses and trains, hire new bus/train captains from some country side in China where the natives can hardly spell ‘Singapore’, and even throw in more cash to repair and maintain the railways, SMRT has the cheek to announce dividends. Doesn’t dividends signify the well-being of the company? If so, why are tax payers’ money used again and again to bail these government controlled ‘private’ companies? If they are able to generate profits and dividends, I don’t understand why is the PAP government so bent on transferring national wealth to these companies without consultation with the citizens. Can this be considered abuse of power?

Improving living standards

Current Economic model

The government raved about the country’s phenomenal economic growth. But why are Singaporeans not satisfied? Many point to the ever increasing Gini coefficient and the seemingly absence of increase in economic well being (real income growth). While Singapore could boost to have the most number of millionaires per capita, the sad fact is, while the rich becomes richer (and faster), the rest of the society is not. Why is that so?

The key ingredient to drive improvement to quality of life

Not surprisingly, the key reason why many people don’t feel better off even with economic growth is simply the P word – productivity. A study by McKinsey Global Institute concluded that productivity coupled with free competition drives higher real wages and improves quality of life even among developing countries with incomplete infrastructure. While Singapore’s economic growth had been impressive for the past few decades, the ranking of Singapore workers’ productivity level has been dismal. For those without basic economics background, let me explain using an over-simplified illustration:

Let’s say Company A hires 10 workers and pays each worker $1 a month. Each worker can produce 2 goods maximum monthly that can sell for $1.50 each. For simplicity, assume no capital cost or any other cost. So input is $1 x 10 workers = $10 and output is $1.50 x 10 workers  x 2 goods = $30. The owner of Company A earns $20 as gross profit per month.

Now the economy is booming and there are more demand for Company A’s products. Demand for the goods increase from 20 to 40 per month (100% increment). The owner expanded production and hires 20 workers. As each worker continues to produce 2 goods monthly, the marginal increase in input is the same as the marginal increase in output. Company now pays $1 x 20 workers = $20 as input in order to earn $1.50 x 20 workers x 2 goods = $60. Input increased by 100% and output increased by 100% because demand increased by 100%. The owner of Company A thus now earns 100% more at $40 as gross profit per month.

We see that just because demand increase does not mean the company will pay more to each worker. The ones most proficient in using resources and capital (ie the ower of Company A/ business owners/ capitalists) are the ones that stand to benefit the most from economic growth. On the other hand, the typical workers are not paid a much higher wage since the owner of the company can simply hire more workers to increase output.

When we factor in labor mobility and demand-led inflation, we can see how the picture starts to get real ugly. Higher inflation erodes real wage (or purchasing power) of the workers. The influx of cheaper labor supply from another region adds downward pressure on real wages and contributes to higher displacement rate of local workers. In fact, cheaper labor supply would only benefit Company A more. Business owners and companies don’t discriminate workers. If they can only pay $0.50 per worker to get the same amount of output, they will only get to gain more.

In order to be better off, each worker must produce more than 2 goods a month. Let’s say each worker can now produce 4 goods a month, Company A can continue to hire just 10 workers and can also afford to pay each worker more. In fact, the company can now pay up to $2 per worker each month. Input would be the same as hiring 20 workers whose productivity is only 2 goods a month and output will still increase from 20 goods to 40 goods. The owner will still enjoy an increase in gross profit. The only difference is workers now also enjoy a higher wage. Even if the owner is to increase the wage from $1 to $1.50 instead of $2, output would be the same and the workers will still be better off. The rise in real wages will also increase new demand for goods, giving rise to consumption led demand increment rather than population led demand increment.

One might argue that there are many other complex factors but it is not difficult to see how productivity is the key agent behind a higher quality of life. The fundamental idea is very simple. With more output at a given level of input, there is more to go around. One produce more means one can now consume more.

The current economic model in Singapore that still prioritizes labor input rather than improving productivity will only create a country that distorts social harmony. Having attracted so many MNCs to set up operations in the island with low tax and political stability, the government is compelled to let in foreign labor to anchor those good companies in Singapore. But without a corresponding increase in productivity, it creates a cycle of self-feeding system of labor demand.

More companies mean more demand for labor. The authorities are unwilling to see a tight labor market for fear of companies deciding to uproot to other cheaper countries. So they yield to the request of increasing labor directly through allowing more foreign workers into the country. Having allowed a large population of foreign labor to the local population creates more demand for other companies’ products and country resources. Capital and resource owners enjoyed a windfall and wanted to hire more because productivity did not improve. So they demand the government to let in even more foreign workers. End result? More inflation, more stress on country infrastructure and resources, more social divide, stagnating of real wages among the lower and middle income, increasing disparity between the rich and the poor, and ultimately, unhappy citizens who do not feel that they are not better off even with all that hyped up media announcements of a fantastic economic growth in the country. It is no wonder Singaporeans are an angry lot in recent years.

Productivity can be improved in many ways. Technology is one. Education or training is another. Let’s not forget about creativity as well. But productivity may also be expensive and time consuming to generate and it can be easily replaced by additional inputs of labor and/or capital. Allowing more labor does not give the companies any incentive to improve productivity. In my opinion, it is better to swallow the bitter pill while the country is still relatively rich and stable. Restricting the option of labor would force companies to improve productivity in order to make business sense in such an environment.

Of course, this is an opinion of someone with limited economic training and I am not expecting many business owners to welcome such an idea. I would actually expect business owners to haul vulgarities into my face and reasoned that operating a business is a much more complex process. I am no business guru but I do believe having to do with less labor and improve productivity is quite possible. Productivity does not have to be high-tech. Good training and hiring the right people often pays much more dividend. How many times have you seen workers dilly-dallying away in shops waiting for business to come in instead of actively approaching customers or create more compelling marketing tactic? A perfect example of productivity as witnessed from my previous travel in France is a single waiter serving a café of 10 tables while it would usually require 3-4 workers in a café of similar size in Singapore. In the United States, you won’t see a legion of workers working on the construction sites, unlike Singapore where we compensate productivity with thousands of foreign labor workers.

PM Lee needs to be less narrow minded and look further into the future (as what he always claim)

Yahoo News: PM Lee draws lessons from Qantas fiasco

Once again, PM Lee is telling the entire Singapore that limiting foreign workers equates to lower economic growth. It’s akin to saying ‘hey, you guys want less foreigners, so it’s not my fault that you are going to suffer slower economic growth.’

After being paid millions and receiving an elite education, and as someone who always claim that the government is always looking far, it’s such an insult to the profession of economics to depend so much on the sole factor of labor for economic growth. Economic growth can be created via 3 factors, labor, capital and productivity (or technology). This over-emphasize on labor seems to insinuate that the government does not think much of the other 2 factors.

Increasing capital investment is as important as labor, and admittedly, the PAP government had done a relatively good job in building infrastructure, hubs like Biopolis and invest R&D expenditure, even though more can be done. A quick wiki-check shows that Singapore stands at 26th position in world ranking in terms of expenditure of R&D as a percentage of GDP (source from www.battelle.org).

Productivity, or technology is the one important factor that Singapore is truly lacking; if the reports of how unproductive Singapore workers are compared to other advanced economies are any indication. As an economy approaches maturity as in any advanced country, this factor becomes the most important factor in improving GDP growth since there is only so much labor and capital you can invest.

With their pay scale and bonuses tagged to GDP growth, it makes rational sense that the ruling government and civil service would tend to chose the easier way out by increasing labor input instead of increasing productivity. Moreover, the results of productivity takes some years to show. PM Lee himself mention about productivity (http://www.channelnewsasia.com/stories/singaporelocalnews/view/1037480/1/.html) but the importance is somehow not communicated clearly relative to the importance of bringing in external labor.

Increasing labor is the easiest and the fastest way to increase GDP, but not entirely the best option especially in land scarce Singapore with limited breathing space. A pretty obvious decision to make for our highly educated ministers isn’t it? As it turns out, it seems that the government preferred this option, going by how they love to advocate the link between foreign workers and economic growth. It’s almost like Singaporeans don’t deserve any credit for the country’s stellar GDP records.

I am voicing this out because in too many forums have I seen foreigners using the exact same logic the ruling party advocates (that foreign workers contribute to Singapore’s impressive growth) to rebut so-called-xenophobic views of the locals. Such perpetual self-belief among the foreigner community in their ‘superior’ contribution as the main reason why Singapore is progressing so well is worrying, made worse by the (whether deliberate or not) unofficial endorsement from the PAP government.

Of course, I am not saying all foreign workers think the same way. However, I feel that the government could do some good in encouraging their own demoralized citizens instead of overplaying the importance of foreigners in their own country. It’s no wonder that Singaporeans are feeling that their own government is taking care of foreigners more than their own citizens.

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Post-note:

Just when I posted a post on foreign workers, the local media finally broadcasted something we knew all long–the blatant discriminatory hiring practices most notably in the banking and IT sector. It’s a joke it has taken so many years for the local media to pick up this news. I won’t be surprised if the ruling party won’t intervene, even after this report. The frustration of Singaporeans is true, going by the comments posted.

I am not going to be coy in pointing out that the India Indian race tend to be heavily hired in fields I mentioned. Logically, there’s no link between Banking skills and IT proficiency and being born as an Indian in India, although the perception may be so. For certain companies that assert Indian professionals are better, it’s just a convenient sweeping statement to hide behind the vile of discriminatory hiring practices. I am not stereotyping but if my sample size is any measure, my own experience with Indian banking/ IT professionals (whether in Singapore or in India) have almost always include a major factor of frustration. Maybe it’s cultural difference, maybe it’s different working styles. But I would expect professionalism to be universal. All that hype about them being really good throws up too much promise on their ability which doesn’t quite measure up in the final results at the end of the day.

Local media self-promoting the goodness of the government

Median income of S’poreans increased over past 10 years
By Saifulbahri Ismail | Posted: 11 October 2011 1935 hrs

SINGAPORE: Singapore has one of the highest employment rates internationally and the median income of workers also increased 11 per cent in real terms, over the past 10 years.

These were some key findings in a paper released by the Manpower Ministry on Tuesday.

Singapore faced three recessions in the past 10 years, yet Singaporean workers are earning more.

But almost all of the income growth occurred in the later half of the decade.

From 2001 to 2010, the median monthly income grew 11 per cent in real terms, or 29 per cent in nominal terms.

However, income for households at the bottom 20th percentile grew only 8.1 per cent in real terms, or 34 per cent in nominal terms.

The government has pledged to raise average Singaporeans’ median incomes by 30 per cent in real terms over the next 10 years. To achieve this, the median income must grow by threefold from the current level. Analysts said this is not something that is impossible.

“What we need to do is to try and aim for growth of between 5 to 10 per cent over the coming decade before we can actually achieve the aspiration that has been set. Singapore’s economic condition is actually determined to a large extent by circumstances beyond our control. So, this really has to depend on the global economic climate that would allow such an ambitious growth performance,” said Associate Professor Randolph Tan, head of the Business Programme at SIM University.

There were also more Singaporeans working over the decade. The number grew by 1.8 per cent per annum.

There were 1,712,600 Singapore citizens in the labour force in June 2010, making up the majority or 58.3 per cent of the labour force.

This is faster than the growth in citizen population aged 15 & over of 1.6 per cent per annum over the same period.

Government transfers had a redistributive effect on household income.

In addition, Singapore has one of the highest employment rates internationally – with nearly eight in ten Singaporeans (aged 25 to 64) employed in 2010.

This employment rate surpassed economies such as Hong Kong, Taiwan, South Korea, Japan, the US, Canada and the UK.

The ministry explained that although Singapore’s labour force participation rate is not higher than in many advanced economies, the unemployment rate amongst those in the labour force is low.

With the strong economic recovery, the unemployment rate declined to 3.1 per cent in June 2011, down from a high of 4.5 per cent in 2009 during the recession.

The unemployment rate was lower among better educated citizens, as well as older citizens.

However, once out of work, older Singaporeans were more likely to stay unemployed longer.

The long-term unemployment rate of older citizens aged 50 & over was 0.8 per cent, compared with 0.7 per cent for all citizens in 2010.

With continued emphasis and investment in education and training, more Singaporeans are also holding higher skilled jobs.

In 2010, 23 per cent were degree holders, up from 14 per cent in 2001.

Including those with diploma & professional qualifications, the share was 41 per cent compared with 28 per cent in 2001.

Forty-nine per cent of citizens employed in 2010 were in professional, managerial, executive & technical (PMET) jobs, up from 42 per cent in 2001.

- CNA/cc

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Sometimes I laugh at how the local media loves to self-congratulate their masters on how well they have done and tried to propagandize the community. I would like to point out some technicalities in this report:

First question some of you who have taken basic statistics might ask: Why use Median and not Mean? The simple answer is, it depends on the distribution. If the distribution is symmetrical, using mean would be better. But if the distribution is skewed, using mean would be meaningless as large outlier, such as a relatively larger increase in wealth in the top 10% of the population would artificially push the average beyond the rest of the distribution. The average figure therefore does not truly reflect the entire population.  Using median would be more meaningful in a skewed distribution as it solely reflects the ‘middle value’ of the entire range.

In this case, we clearly knows that wealth distribution is highly skewed in Singapore going by the extremely high Gini coefficient we have in the country. Thus, the median method is employed in this article, confirming that the country is indeed divided along uneven economic distribution. I am not saying that there should be highly equal distribution. In any capitalistic model and just to quote the grossly over-used explanation of globalization (seriously, i think we are giving too much credit to this argument of globalization. But that’s for another post), there are bound to have people who can’t catch up as fast as certain groups. However, I believe that there is a line, a limit, to how much we should allow this uneven distribution to grow in order to rein in social order.

Then we know from this article that the growth in the median wage grew by 11% in real terms and 29% in nominal term, giving us an estimated inflation rate of 18% over the past 10 years. 18%? Over the past 10 years? Really? Look at the food you paid for 10 years ago and how much you are paying now. Look at the items that make up major spending decisions in life– flats and cars you paid 10 years ago and look at how much you need to pay now. While I don’t have the figures to back my argument, I definitely don’t feel that my expenses had only went up by 18% on average. Congratulations to those who don’t feel that way, you must be privileged. One thing is for sure though; the population in Singapore has definitely increase more than 18% over the past decade. On the sideline, and just to throw in some figures, according to DoS, the entire population grew by more than 22% from 2001 to 2011 while the Singaporean population only increase by close to 14% (and it includes new citizens).

We also know from this article that the government is ‘a genius’ to generate so much jobs that unemployment rate is consistently low. I would like to bring up the facts that while unemployment rate continues to be low, the labor force participation did not increase significantly. How do I know that? Well, the report stated that the figure is not higher than most developed economies. Being developed economies, the labor participation rate is usually pretty stable. In addition, I have looked up at statistical figures from DoS and it confirms that. So what does all that mean?

Let’s throw up some boring connotations and simple mathematics. I apologize to those who are new to economics but please bear with me:

Labor force participation rate (LFPR) = Labor force (LF) / Labor force population (LFP) (generally referred to all healthy males and females within legally working age range)

Labor force (LF) = Employed (E) + Unemployed (U)

Unemployment rate (UR) = Unemployed (U) / Labor Force (LF) = U / (E + U)

Given the government’s stance on the need to bring in foreign talents to help the country’s economic growth, supported by population growth figures, it is obvious the labor force population (LFP) and Labor force entering the market (LF) must increase. A relatively unchanged LFPR would mean that the change in LF and LFP must be positive and similar in magnitude. This in turn means that E and U must have increased at very similar rates to LFP. Since the UR is consistently low, U and E must have also increased at similar rates. In other words, while we have more people getting employed in absolute terms, there are also more people being unemployed in absolute terms.

Another point to take note is when a person is out of job for a long period of time, he or she can be classified as ‘not actively looking for a job’ and excluded entirely from the LFPR computation. The actual unemployment rate could jolly well be much higher.

To put it even more simply, the scenario goes like this: The government creates a lot of jobs to drive the economy so they use this excuse to bring in more foreign workers. More foreigners come into Singapore to work. At the same time, there is an increase in people being unemployed as well, probably due to frictional or structural unemployment. Rationally, foreigners who cannot find a job will have no choice but to return to their country. Staying on serves no purpose and being out of work means he or she can’t possibly support himself or herself in a foreign land. Singaporeans, on the other hand, who did not benefit and was retrenched (either due to structural changes in industry or under-priced by the cheaper foreigner workers), will get kicked out of the labor force and has no where to go unless they cross a bridge to nearby Malaysia so that their savings might last them a bit longer. Guess what? The older workers are exactly the group most susceptible to get retrenched or fired. To rub in more salt on the wound, older workers will find it harder to get re-employed, as what was stated in the report.

In a nutshell, this report has cleverly boasted all the ‘good things’ the PAP government had done but skillfully avert the real issue that matters. There are only 58.3% of working adults who are Singaporeans even though the article used a misleading word ‘majority’. A sad majority, I would like to add. And most importantly, more people are getting unemployed and those unemployed Singaporeans, usually older ones, are the ones that suffer the brunt of the nation’s economic growth strategy.

P.S. To make my point clearer: I illustrate how the segment of employed gets larger and larger fueled by foreign ‘talents’ and some young, educated Singaporeans benefiting from it, but at the same time the segment of unemployed gets larger and larger and would largely consist of old Singaporean workers who are usually not highly educated. Non-singaporeans that belongs to this segment of unemployed should rationally leave the workforce (or rather, the country) due to the lack of means to continue living in the island city. Therefore, the unemployment segment will make up of mainly Singaporeans.

More money lost via Temasek

Temasek Holdings has once again taken huge money losing positions (via many sub-hedge funds) in ‘they think it’s stable stocks to ride on China’s economic growth’:

Source: Bloomberg

Temasek Holdings Pte, the Singapore state-owned investment company, is seeking to raise about HK$28 billion ($3.6 billion) by selling stakes in China Construction Bank Corp. (939) and Bank of China Ltd. (3988), two of the country’s three biggest banks.

The Singapore-based investment company is selling about HK$18.7 billion of shares in Bank of China and about HK$9.3 billion in an offering of China Construction Bank stock, according to term sheets obtained by Bloomberg News.

Shares of China’s four biggest banks fell in Hong Kong trading today after Moody’s Investors Service said banks’ loans to local governments may exceed official estimates by more than 3.5 trillion yuan ($540 billion) more than official estimates and the credit outlook for the industry could decline.

The extra liabilities, coming on top of the national audit office’s findings last week of 10.7 trillion yuan in local government debt, may fuel concern that banks will be unable to absorb losses on defaults should property prices drop.

Bank of China shares slid 0.3 percent to HK$3.86 in Hong Kong today while China Construction Bank dropped 1.2 percent to HK$6.48. Industrial & Commercial Bank of China (1398) Ltd., the world’s most profitable bank, fell 0.5 percent to HK$5.93.

Morgan Stanley (MS) is managing both sales, the terms show. Jeffrey Fang, a spokesman for Temasek, declined to comment.

2006 Investment

Temasek’s Fullerton Financial Holdings Pte. Ltd. unit is offering about 5.2 billion shares in Bank of China for HK$3.60 to HK$3.67 each, according to a term sheet. That’s as much as 6.7 percent less than today’s closing price.

Temasek owned about 10.5 billion shares, or 12.5 percent, of Hong Kong-listed Bank of China, according to a Dec. 31 filing. The fund paid about $1.5 billion for a five percent stake in the lender in 2006.

Cairnhill Investments (Mauritius) Pte. Ltd. and Crescent Investments (Mauritius) Pte. Ltd., both controlled by Temasek, are also selling about 1.5 billion shares in China Construction Bank for HK$6.22 to HK$6.35 each. The Singapore fund holds seven percent, or 16.9 billion shares, of China Construction Bank, according to company filings.

Temasek, set up in 1974, bought $1 billion of stock in China Construction Bank’s initial public offering in 2005. It also purchased an undisclosed stake in the Chinese lender from China SAFE Investment Ltd. the same year.

To contact the reporter on this story: Zijing Wu in London at zwu17@bloomberg.net Cathy Chan in Hong Kong at kchan14@bloomberg.net.

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This is obviously a desperate move to dispose off questionable chinese national banks with high links with a corrupt chinese government. It’s appalling how the Financial Crisis had not taught the two megamoths GIC and Temasek that bank stocks are not exactly the best stocks to own. And they obviously takes up very risky positions (looking at how Temasek can be purchasing the same stocks via 2 other hedge funds). So who are the management of Temasek accountable to at the end of the day? The citizens deserve a clear answer and some responsibilities taken.

Just some interesting posts netizens had countered PAP’s claims

Talk about the power of the internet and social media. As I am personally interested in the housing policy (my undergraduate econometrics project actually shows that government policies have the greatest impact on housing prices), I am quite intrigued by this post on facebook that rebutted Minister Mah Bow Tan’s claims that Hougang resale flats are not as valuable in comparison to the ones in Aljunied. To be fair, I can’t judge on the article without thorough analysis of the data set. After all, statistics modeling is prone to abuse. Simply changing the denominator of the base year can have a great impact on GDP growth figures. Still, it’s an interesting read for statistics geeks out there. For those who are not familiar with statistical techniques, please bear with me on this post:

The link: Click here.

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No evidence that flats in Opposition-held wards are worth less

by Giam Xingli on Thursday, May 5, 2011 at 11:10pm

We refer to the report “Aljunied flats ‘fetched higher resale prices’ than those in Hougang: Mah Bow Tan” (TODAY, May 4), where the Minister for National Development gave figures to show that 5-room resale flat prices in the Hougang Town part of Aljunied GRC were 16% higher than those of Hougang SMC. These figures are misleading about the values of PAP versus Opposition-held wards for two reasons.

The first flaw in the argument is that Mr Mah looked selectively only at flats completed between 1980 to 1985, i.e. flats 25 to 30 years old. Using the same “public info” from the HDB website that Mr Mah referred to, we can see that flats 15 to 20 years old show the opposite picture of what Mr Mah attempted to paint: prices for these flats in Hougang SMC were nearly 4% higher in value than the same type of flats in Aljunied!

Choosing specific groups of flats is a poor way of controlling for “flats with similar attributes”. We use commonplace statistical techniques to control for age of flat, size of flat, type of flat, and number of stories, which are all factors that co-vary strongly with the value of a flat. We find that there is no significant difference: a resale flat in Aljunied-Hougang can be sold on average between $22.6k more to $3.6k less than Hougang SMC.

The second fatal flaw in Mr Mah’s attempt is that he only compared Aljunied GRC with Hougang SMC. Using our same methodology, a resale flat in the Hougang Town portion of Ang Mo Kio GRC is worth on average $26.5k less than a flat from Hougang SMC. Similarly, a resale flat in the Hougang Town part of Pasir Ris-Punggol is worth $18.8k less than a flat from Hougang SMC, which supports the conclusions of Mr Low Thia Khiang in his rally speech! Does this then say anything about values of flats in the Prime Minister’s and Deputy Prime Minister’s wards compared to Workers’ Party’s sole ward?

Our point is that Mr Mah’s figures and comparison portrays a biased picture of values of HDB flats in Opposition versus non-Opposition wards. In this age of higher education and free information flow, the PAP needs to be careful about the data that they pull from their hats. Note that our whole dataset uses 356 flats transacted between 1 May 2010 and 30 April 2011, which is even larger than Mr Mah’s “fairly large number of transactions”.

Please see attached figures and detailed methodology.

 

Methodology

 

We modelled flat resale prices in Hougang Town (as defined on the HDB database website; n=356 from May 2010 to Apr 2011) as a function of 1)size of flat, 2)level, 3)age, 4)type of flat (i.e., A, I, S, various Maisonette etc), and lastly 5)constituency (i.e., Hougang SMC, Pasir Ris-Punggol GRC, Aljunied GRC). Our generalised linear model (with Gaussian errors and identity link) explained 51% of the variation in the data. The variation not explained may be due to other factors such as interior design, quality of furnishing, flooring, as individual differences in seller and buyer behavior.

Next we performed a multiple comparisons test (Hothorn et al. 2008) which tested the hypotheses if resale flat prices in Hougang SMC are different from the prices in 1) Aljunied GRC, 2) Ang Mo Kio GRC, and 3) Pasir Ris-Punggol GRC, after controlling for size of flat, level of flat, age of flat, and type of flat. We report 95% confidence intervals for differences in flat value after controlling for the above-mentioned variables.

All statistical analyses were conducting using R (R Development Core Team 2011). R is an open source statistical environment which is used in academic as well as industrial research and modelling.

References

Hothorn T., Bretz F.,Westfall P. 2008. Simultaneous Inference in General Parametric Models. Biometrical Journal, 50, 346–363.

R Development Core Team. 2011. R: A language and environment for statistical computing. Vienna: R Foundation for Statistical Computing.

Authors: Chong Kwek Yan & Giam Xingli

Feel free to repost. Statistical code and dataset (publicly available anyway) are available upon request.

Figure 1

Figure 2

A Doctor don’t understand the meaning of Minimum wage

A minimum wage policy does not seek to raise real income across the entire industry. It does not seek to increase cost across all companies. Companies in high-valued industries of a knowledge-based economy should have already paid above the minimum wage. It is a confusing ploy to illustrate how jobs will be lost if minimum wage is introduced.

Minimum wage is only introduced to help the LOWEST wage income earners. Minister Vivian Balakrishnan, as a highly educated minister earning millions, I would expect you to know this very basic mechanism of a minimum wage policy.

In addition, the opposition are also not advocating for a complete shut down in foreigners. They are not promoting populist agendas. It is popular because it is a FACT that there are simply too much foreigners in Singapore. It is ground FEEDBACK! When will PAP ever learn to listen? They are calling out to slow down this influx. They are calling a stop to introduce a ridiculous further 1 million foreigners to our economy when our infrastructure is already under strain and Singaporeans making up less than 70% of the population.

Relying on foreign labor is only kowtowing to foreign enterprises. It creates no pressure to improve productivity. According to Wikipedia (quoted with supporting documents), an extensive UK study reveals that there is no evidence of job loss with the introduction of minimum wage. For the PDF format of the report, click here.

Does the PAP wants to create a scenario where an overwhelming population of foreigners only create more demands with increased bargaining power on their part at Singaporeans’ expense? Mexico allows foreigners from the United States into their territory at current day California by leasing out land to them. Soon after, these foreigners demand that the territory of the Mexicans became the United States’s. Do you want this to happen?

Minimum wage: My reason for advocating it

Before we go into why I advocate minimum wage, let us first ask, what is the aim of minimum wage? The concept of a minimum wage is to assist the lowest income group of people that had struggled to keep up with the rest of the economy. Before a minimum wage can be introduced, there must be recognition that there is a group of workers that needs assistance to enjoy a predetermined-minimum standard of living. In every growing economy, there is bound to be such a group of workers. The government will then need to ask themselves whether they want to assist this particular group to achieve a better standard of living. Does the government only wants to achieve the lowest unemployment rate possible? Or does the government prefers to create a more equitable society? Then the next question to ask is: How do we determine the minimum standard of living? In my opinion, I think a fair answer would be for the lowest income group to tag minimum wage to the change in cost of living. Although a rough gauge, the CPI index would suffice.

Most college economics teach their students the standard textbook answer–that minimum wage is a bad thing. The reasons are simple. Minimum wage is hard to determine. If a minimum wage is set too low, given a typical labor supply and demand curve, low wage workers do not benefit from the scheme while employers benefit instead. Employees lose, employers gain. If minimum wage is set too high, employers will not hire the equilibrium number of workers and unemployment rate will rise. While some low income workers might benefit from the higher wage, some low income workers became worse off because instead of a low income to be earned, they are now jobless. Some employees and all employers lose. In addition, a higher minimum wage increases inflationary pressure which will hit the lowest income earners more.

The term ‘job losses’ is a frightening thought, going by how much more risk averse human psychology has towards losing what one already possess versus what one can potentially gain. This is the reason the PAP advocates creating more jobs supplemented by increase in productivity, levies on foreign workers, rebates and subsidizes as the better way to help low income workers. Productivity is a big word. And the PAP has been promoting this concept in recent months. Just how has the ruling party influence the productivity of Singaporean workers? I’ll go into detail later.

However, we must note some of the shortcomings of this textbook answer to minimum wage. For the above illustration to happen, we assume that:

1. Wage information is easily available without asymmetrical information
2. Labor market behaves like the Laissez-faire market , where the ‘invisible hand’ clears out labor supply and demand changes to reach market equilibrium on it’s own. As such, wages must have been flexible.
3.  There is no inclusion of the effects of a larger mobile foreign labor force that can easily enter the market

Let’s look at each point one by one:

1. Do you think wage information is readily available? While it might be for fresh graduates due to the salary surveys done by the local universities every year, it is not so for low income workers. How much do you pay for a dish washer? A dish washer at a hawker center might be paid $600 a month while a similarly skilled dish washer at a restaurant might be paid $800. In fact, for low income jobs that only advertise through word-of-mouth or through small articles on newspapers hardly give us as much information on pay scale than other higher-paying jobs such as accountants or financial analysts.
2. As a Keynesian, it is to my opinion that wage, like price, is sticky. Wages in general only goes up, and it does not changes frequently. Even during the financial crisis, very small number of companies offered lowering wages to survive, with most opting to retrench their workers instead. Wages is not simply a matter of labor supply and demand. It also consists of years of working experience, expertise skills and sometimes, even something intangible like luck (very apparent in the case of property and insurance agents. Agent A might be more aggressive than agent B in selling but somehow agent B just seems to close more cases). An analysis using supply and demand curves is too simplistic.
3. When we include the presence of a mobile foreign labor force, it distorts the domestic market equilibrium. A local worker with a family to feed and a house loan to repay has a much higher financial burden as compared to a foreign worker that only spends on himself and repatriate most of his income earned in Singapore back to his home country, which is usually a much higher amount compared to what he can earn back home. As such, foreign workers are willing to take on jobs at a lower wage rate in Singapore as he will still be better off working here than working back home. This creates downward pressure on the lowest wages.

The main question we need to ask is: Has the lowest income earners encountered financial problem? The current fact that we see in Singapore is there is an increasing number of foreign workers (including talents) as the government continues to attract more foreign investment and foreign entities to set up branches in Singapore. This is all out economic growth policy. With a growing economy, a low median income of S$2,500 and a growing Gini coefficient, it is obvious that the lowest income earners are being left out in the cold. So is this a problem? I think it is. We see polarizing of the society with the rich getting richer while the poor faces increased deterioration in their standard of living (especially if you include the effects of inflation pressure brought about by a higher population growth via foreigners).

I would like to think that wage determination is not just due to labor supply and demand, but also due to the bargaining power between the employers and employees, or monopsonistic competition in economics speech. Take for example the case of MacDonald’s in Singapore. We all know that MacDonald’s pays one of the lowest wage rate in Singapore. Back in the 90s, I remember that the hourly rate is a pathetic S$2.50. Even in recent months, when MacDonald’s announced an increment in hourly rate, it is still a measly S$3.40. While the set meals had increased from S$5.50 to S$8.00 (or almost 44% increase) on average over the last 4 years, wage rate had only increased by 42% in nominal terms over the last 10 years.

Why could MacDonald’s pay such low wages? Because most of the staff are either old and retired or students. This is a group of workers who have low bargaining power, imperfect mobility of labor (a student can’t simply fly to Australia to earn higher hourly wage at MacDonald’s), and inelastic labor demand. In simple terms, it means this group of workers have no other choice. While they may be performing similar job scope as waiters in restaurants (we equate their marginal product of labor, or simply how much output per worker), they are paid much lower. In today’s society, such a worker would only earn a gross amount of S$1060.80 a month for working a punishing 12 hour work day, 6 days a week, and without medical benefits. A foreign worker who could only earn S$500 a month at most back in his home country would have no qualms about coming to work in Singapore. A Singaporean would be able to survive on this wage if he is single. If he has a family, it becomes harder. To rub salt to the wound, the increasingly large foreign population adds inflationary pressure to the economy and the man suffers more.

As an employer, when you have the choice to hire cheaper foreign workers (despite the levies), you would choose to hire them. Why would you bother to invest in improving productivity when you can get the same returns simply by hiring lower cost foreign workers? In fact, granting the choice of foreign labor only increases the bargaining power of employers. One of the benefits in introducing a minimum wage is it forces companies who are willing to stay in Singapore to enjoy the low corporate tax and business-friendly environment to look for alternatives to improve profit returns via investing in technologies and training to improve productivity. The PAP laments that they could not directly improve productivity of different companies, but they can certainly compel companies to do so. It is only a matter of whether you want to kowtow to foreign enterprises.

“We have put in place levies for foreign labor!”, the PAP would argue again. But the burgeoning number of foreign workers only goes to show that the levies are set too low. I would propose a bias levy system where foreign labor levies in industries such as construction or maids to be set low as these are jobs Singaporeans shun. For industries such as tourism and financial services, where Singaporeans sought after, levies should be set high. This is to prevent employers from employing foreign workers to take advantage of the lower cost of hiring. Hiring foreign workers should be a last resort.

“What about companies that could just pack up and leave Singapore leaving some Singaporeans to be unemployed?”, the PAP might argue. Please remember that we are talking about minimum wage here. Any increase in minimum wage shouldn’t be drastic. It’s absurd to ask for a minimum wage of $3000 a month when the initial wage is $800 a month. But if the predetermined minimum standard of living calls for $900, a minimum wage should be set accordingly. As such, we see that the impact should be small for the company but could spell a huge difference for low wage earners.

If a company can pack up and leave Singapore simply because of a slight adjustment in the minimum wage, I don’t see why should the company continue their operations in Singapore. The company could have easily change their operations into lower cost countries such as Vietnam or Thailand. It is only a matter of time before such companies relocate in an increasingly expensive place like Singapore. For a company to pay such low wages, it is most likely a low-value added industry. As the country progresses up the value chain, there is no point to retain such low-value added industries. My mom used to work in a brush manufacturing plant. Do we still see such plants in Singapore? Of course not. It doesn’t make any economical sense to retain low paying low-value added industries in the country, only to be subsidized by stagnant wages of low income domestic workers and population pressures on inflation rate and infrastructure. Yes, some Singaporeans would lose their job. But they will find other positions in other fields or in companies which are willing to stay. I think it’s better for the country to down this medicine as soon as possible. It is futile effort to compete on cost and yet move up the value chain.

I admit that it is not easy to determine what is the minimum standard of living. A national study can be carried out to study this figure. In any case, a minimum wage rate is not cast in stone. It can be changed accordingly using statistical research to best align real wage to the market equilibrium level. It should also be reviewed every 2-3 years so that minimum wage can be adjusted accordingly to CPI and the period allows for higher wage predictability which most businesses values. Is it troublesome? Yes. Will the results be accurate? I offer no guarantees. But is it worth to look into this scheme. Looking back to the main question I asked earlier, I believe the lowest income earners requires help and it is a resounding yes.

Looking at statistical data, if minimum wage is such a bad thing, why do so many countries have them including the United States and United Kingdom? Dare the Singapore Economists Service say they are better than the economists in those first world countries?

Wise words from a former Civil servant

This post is on facebook, and it really brought out the main issues with PAP’s policies. My comments are in red :

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On Social Fabric and Economic growth:

“When Mr Lim Siong Guan was Permanent Secretary for Defense, he came to see me one day to discuss the concept of total defense. We both agreed that total defense would be to embrace economic defense, social defense, psychological defense, and from MINDEF’s point of view, the bedrock of military defense. Having spent most of my career in the economic ministries, I thought that a strong economy is the bedrock of everything else, including miltary defense. We agreed to disagree.

I would just end by paraphrasing Lord Keynes, who said that even the wisest statesmen is often the slave of some defunct philosopher. In plain English, the politician is often misled by the economist. So, for those of us who profess to be professional economists, heavy is our responsibility. In the spirit, I urge my fellow economists in government to accept that sometimes we can grievously wrong.”

In all, it’s simply what I had mentioned in my previous post. Managing a nation does not solely means growing the economy.

On Public Housing:

“MR Howe Yoon Chong, the first CEO of HDB, once said to ministerial colleagues by proposing we close down the HDB as it had then housed some 80 per cent of the people. He thought that we should leave it to the private sector to build for the other 20 per cent.

But old habits, particularly success, die hard, and the HDB was not shut down.

So from providing a first home for a family, we went on to give them a second bite of the cherry by giving a second loan to upgrade from a 3- to a 4- or 5-room flat.

As property prices were rising in the 1980s, there was a good cheer all round. The HDB thought that had an endless queue for new flats and went into overdrive. But the party had to end.

The Asian financial crisis in the mid-1990s led to a sharp and sudden fall in demand, particularly those who were hoping to make money by upgrading. The queue disappeared, and the HDB was left with unsold flats, some 17,000 units. HDB would have gone bankrupt years ago if it had been a private company. But as a statutory board, it was kept afloat by MOF, which paid up the tab.”

MOF helped HDB survived using taxpayers’ money. A senior civil servant also agreed with me that our public housing policy had lost it’s initial mission and became overly complicated. After the Asian Financial Crisis, we noted that Mah Bow Tan stopped building too many flats for fear of oversupply. Then the floodgate for foreigners opened and the suddenly the million dollar paid and self-praised-highly-capable government surprised itself by the spike in housing demand pushing up house prices. To be on the safe side, Mah Bow Tan introduced the BTO system where only committed buyers can justify a building of a new flat. But because the highly intelligent Mah Bow Tan did not understand that there are so many foreigners flooding into the country and he does not understand the simple logic that build-to-order building system takes 4-5 years to build, supply and demand is always off by 4-5 years, creating constant pressure on high prices.  

On Land prices:

“Relying on the concept of opportunity cost, the Chief Valuer, at the behest of either the Ministry of National Development or Ministry of Trade and Industry (I am not sure which), has valued land in Singapore using Raffles Place land as the benchmark. The assumption was that every square meter of land in any part of Singapore has the potential of Raffles Place.

I was in the Ministry of Finance and had no inkling of what was happening when the Ministry of Community Development and Sports (MCDS) came running to us to give them a supplementary budget to help voluntary bodies and charity bodies to pay their substantially increased rentals on premises going to the Land Office. Similarly, EDB asked for more funds to help cope the higher cost of MNCs setting up water fabrication plants in Singapore. We kidded ourselves into thinking that we are the only intelligent people in the world and ignored the fact that other countries would offer their land to such companies.

As a result, PSA priced itself out of the market for transhipment. Unwittingly, we gave its Malaysian rival, Tanjong Pelepas, the window of opportunity.

One of the main causes of Singapore’s loss of competitiveness in recent years is our perverse land pricing policy. What did it achieve to send prices of land valuations so high? It was no more than a muddle headed book keeping practice. MOF paid out subsidies to MCDS and EDB, which were returned to MOF as land revenue. In one mistaken manoeuvre, overall land prices shot up and Singapore lost part of its competitiveness.”

Again, this statement agrees with my previous statement that land prices for public good should not be allowed to priced itself upwards due to market forces. And again, this proves that this land pricing policy had contribute to our high rising HDB flat prices.

On GST and handouts:

“We should concentrate on helping the poorest 5 to 10 per cent of the population, instead of handing out a general largesse. Forget about asset enhancement, Singapore shares and utility rebates. You’re dancing to the tune of the gorrilla.

I don’t understand the urgency of raising the GST which increases the tax on the lower income people. Why tax the lowly paid then return to them in an aid package? It demeans him and creates a growing supplicant class who habitually hold out palms. This is not the way to treat people. Despite the fact that we are not a welfare state, we act like one of the most welfarish in the world. You should instead appeal to their sense of pride on reliance.

I think political courage is needed here. And my instinct is the Singaporeans will respect you for that. Even if the PAP’s percentage win dropped from 75 per cent to 55 per cent, it is still worth it for the sake of Singaporeans.”

Let’s face it. The introduction of GST is to create additional tax revenue so that the government can be allowed to keep income and corporate tax low so as to attract foreign investments and ‘foreign talents’. Hong Kong, the closest comparison to Singapore offers a lower tax system and has no GST (as a true democracy, the citizens refusal to endorse HK’s GST plan is heard). Yet, we don’t see the HK administration suffering from fiscal deficit. Where does all that tax revenue goes to anyway? Who really profits from this GST? It’s the government, the rich and (mostly foreign) MNC.

On different voices and education:

“Singapore is like Sparta, where the top students are taken away from their parents as children and educated. Then, from each cohort, they each select their own leadership, ultimately electing their Philosopher King. When I first read Plato’s Republic, I was totally dazzled by the great logic of this organizational model where the best selects the best.

But when I reached the end of the book, it dawned on me that while the starting point was meritocracy, the end result was dictatorship and elitism. Once selected, only God can remove the Philosopher King. If he is a good dictator, then all is fine and good. But if he’s bad, the whole state collapsed. In the end, Sparta, a martial state known for being disciplined and elitism, crumbled.

On the other hand, there was Athens, a city of philosophers known for diversity and different school of thoughts. Most people consider philosophers bloody useless fellows but at least they dare to argue and think. At the end of the day, Athens survived. Sparta is long forgotten. What does this tell us about OB markers?

So SM Lee has to think very hard what legacy he wants to leave for Singapore and the type of society he wants to leave behind. It is to be a Sparta, a martial, well-organized, efficient society but in the end, very brittle; or an Athens, untidy, chaotic and argumentative, but which survived because of its diversity of thinking?

Personally, I believe that Singaporeans are not so “kuai” (Hokkien for docile) to become a Sparta: This is our saving grace. As a young senior citizen, I very much hope that Singapore will survive for a long time, but as an Athens. It is more interesting and worth living and dying for.”

Highlights how dangerous it is for us to have only one ruling party with group think and refusal to listen to the people as elitism crept in. Singaporeans reading this blog, are you sure you want your future descendants to suffer due to narrow-mindedness and conservative thinking? 

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Excerpts from the book Mandarin And The Making Of Public Policy, A: Reflections By Ngiam Tong Dow

by Tay, S. C. Simon

About This Book

Ngiam Tong Dow served in the elite Singapore Administrative Service for more than 40 years. His vision, foresight and leadership in economics and finance have helped transform Singapore into a text-book case in development economics. As a senior civil servant and “mandarin”, he has worked closely with the founding political leaders of Singapore including Goh Keng Swee, the late Hon Sui Sen, and served under two Prime Ministers, Lee Kuan Yew and Goh Chok Tong. In this book, he reflects on his experiences and shares personal anecdotes and perceptive insights of the early decades of Singapore. He also boldly questions some of the policies of government and emerging trends in the country to suggest how Singapore must change to survive and thrive in the future.

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My takeaway from this book:

If a book on a senior civil servant SEVEN YEARS ago still resonates and remains relevant today, has Singapore made any real progress (other than economic and population growth)?

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I urge you readers to read up this book, be it buy it or borrow from the local library. 

The many hats HDB flats need to wear

Our public housing, one of the most unique programs in the world, is being utilized in so many ways, it’s becoming contradictory to it’s many purposes. How does the government explains how a single policy seek to fulfill so many aims? I have been thinking through this messy policy that admittedly is not an easy issue. While I am no housing expert, I would like to offer some (naive it may be) views.

Question 1: The aim of public housing is affordable housing for the mass public. As such, should it be looked upon as an asset?

The problem with treating public housing as an asset is the public part becomes privatized. When the government offers public housing, they are essentially subsidizing apartments for people who can’t afford. In many countries, only the poor lives in public housing that looks like slums. But when you subject public housing to market forces (such as in the resale market), the ‘subsidized’ price will rise to the highest point bearable in the market (if you believe the market is efficient, which seems like it). What you end up with is no longer ‘subsidized pricing’. The public housing essentially behaves like the private housing market. Volatility went up and speculative activities becomes encouraged. Many studies have been done to prove the high correlation between public housing market and private housing market in Singapore. How then does the HDB continues to fulfill it’s aim of offering ‘affordable’ public housing?

Affordable is a relative term. Flats cost more than double what it used to be 20 years ago. With property prices (both resale and new launches) rising much higher than the country’s medium income (of around S$2500), has the term ‘affordable’ deteriorate? Increasing inflation, increasing cost of living and a low medium income exacerbated by a high Gini deficient can only mean one thing: Singaporean’s disposable income is getting lesser, at least according to the medium salary. With lower purchasing power, how can there be an increase in the quality of life?

If the government truly and sincerely wish to offer affordable flats, shouldn’t the more rational approach be selling at cost price without all that speculative market forces so as to keep prices stable? The youtube interview above is misleading in suggesting those people with flats are happy with rising value HDB flats and only those seeking to buy one would be unhappy. It is not between the haves and have-nots. The entire issue is between the speculators — people who seek to profit from housing as an asset class, and those who really need a roof over their head.

Question 2: Should HDB flats be viewed as a retirement tool that can be monetized for retirement?

Singapore has the unique feature of having more than 85% of the population living in public housing because of historical reasons. When the country first gain independence, there is an urgent need to house an otherwise unhygienic and crowded population. The policy then is to create ownership of houses, with the aim of instilling a sense of belonging and feeling invested in the country’s growth. Before you know it, the majority of the population is already living in public housing.

However nice the word ‘ownership’ sounds, we need to bear in mind that we are merely leasing HDB flats from the government, subject to a 99 year lease and HDB regulations. Breaking those HDB laws such as renting out to undesirable people could mean a purchase you spent half your life savings on to be force taken back by the government. Where then is this ‘ownership’?

Most of us, minus speculators does not shift houses frequently, at least within the public housing spectrum (upgraders is another issue altogether). We stay in our flats for a very long time, often building up emotion links and retiring in them. It is more than just a house. It is home. Why then would we want to sell our flats when we got old? I don’t agree that HDB flats can be used as a monetizing tool. There are 2 main reasons:

“Selling a larger flat for a smaller one when one gets old because the children should have grown up and either have the financial ability to sustain the flat and your retirement, or you no longer need that much space” may sounds totally rational. But with the ever smaller family size in Singapore’s demographics, we see a huge financial burden on caretakers. Retiring into a smaller house would also mean a downgrade in life quality.

Secondly, if HDB flats are to be used as a retirement tool, that would mean for every batch of retirees, there would be an exodus of 3-5 room flats for sale, creating downward pressures on bigger flat prices. And since these retirees need somewhere to live, they would need to purchase smaller 1-2 room flats. This in turn creates upward pressures on smaller flat prices. With an aging population, if HDB flats are really monetized for retirement, we end up with a scenario whereby the retirees are selling at a lower price for their bigger flats and buying at a higher price for their smaller flats. The benefit for moving into a smaller flat, while still positive, would be smaller. Moreover, it is a fact that there are not that many 1-2 room flats available at the moment, and we are already starting to see the babyboomers generation retiring. It is also an obvious fact that people are not selling their houses for retirement if they could.

Question 3: Lee Kwan Yew commented that houses are expensive because they are nicer and elegantly built. Are houses actually getting better?

I disagree with this statement. Everyone knows that in the attempt to house more people, flats nowadays are shrinking at an impossible rate. A 3 room flat in the 80s can have the same space area as a 4 room flat today. I see how a typically long and wide kitchen of older flats got sliced into half in flats built in the 90s and then got sliced again into half in new flats in the Sengkang and Ponggol area. Bed rooms are now so small a King size bed can hardly go through the door of the master bedroom. In fact, for my brother’s bedroom, there isn’t even enough space to put in a proper bed. We ended up with a sofa bed instead. How then are these much more expensive new flats ‘nicer and more elegant’? Flats are now so dense and compact there isn’t much greenery and breathing space to speak of. I see that we are marching towards the path of Hong Kong and Tokyo, and I can’t bear to imagine how flats would look like in the future should the population be allowed to increase exponentially further (at last count, Lee Kwan Yew said we need more than 900,000 foreigners not counting S and E pass foreigners. That means adding more than 1 million or 20% of the current population; and already 1/3 of the current population are foreigners.)

Question 4: This is a more draconian statement that not many people, especially non-citizen might like – HDB flats should only be sold to Singaporeans, period.

When you introduce more than 1.5 million foreigners into the country with an increasing number of PRs given out, you are obviously increasing demand for public housing in the resale (and rental) market. Being foreigners, and some rich ones such as expatriates, demand for housing is extremely inelastic as unlike young Singaporeans who can continue to stay with their parents, PRs need a house more urgently and is willing to pay more to secure one.

If HDB flats are subsidized to begin with, why should non-citizens be allowed to benefit from this ‘low-cost’ housing? Higher demand for rental increases rental rate which in turn increases attractiveness in investing in public housing that can be used to generate rental income. Demand for public housing would then rise expectantly, asserting upward pressure on prices from direct demand (need for a house) and indirect demand (want a house as an investment tool).

Mah Bow Tan recently rebutted WP’s Low Thia Kiang’s proposal to sell new flat launches at near cost price, giving the reason that the ‘large supply’ of new flats will cause general housing prices to fall, thereby hurting current flat owners. Going by the same logic, an increasing large group of new citizens and PRs would generate a significant pressure on general housing prices to rise. We have already seen the effects taking place with resale flat prices going into the range of $1 million. All the news published on such high COV only creates higher price expectation, distorting the market equilibrium prices further.

What Singapore lacks, is a private housing market. A market that serves housing priced between a public housing and a private housing such as condominiums. Public housing should only be offered to Singaporeans and the private housing market can be catered to non-Singaporeans. We see an obvious market given the large disparity in price between a HDB flat (~S$3-400,ooo) and a condominium (S$700k-S$2 million) in the heartlands. The recent DBSS scheme seems to act as a component to fill in this gap but is yet to be seen if the resale market for DBSS (since it’s only launched a year ago) would lie towards HDB flat pricing or condominium pricing.

The reason for having this thought is because I think public housing prices should be kept as stable as possible keeping external market forces out of the picture (internal market forces is entirely fine). Foreigners should not be allowed to influence and distort a public housing scheme. This is dangerous because should Singapore’s economy weaken and foreigners start to leave the island for greener pastures, we will experience the entire opposite of today’s increasing housing prices. With such a large foreigner population, the movement of this particular group should not be ignored.

And we all know a deflationary economy is an even nastier evil than an inflationary one.

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I will continue to add on to this rather long post.