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Saturday, January 30, 2010

Low cost housing - a model for economic development

The Singapore experience is a useful lesson for developing countries in their economic development.

During the initial two decades, the Government built low cost housing for the people. It creates employment and gives the people a chance to work hard to own a property. The economic growth generated by the housing sector flowed to other sectors of the economy. The Government enforced a high savings rate to generate funds for this sector. It even implemented land acquisition to facilities the development. These were tough policies, but they produced a good outcome. This was leadership at its best - to set the priority for the country and to mobilize the people towards the priority goal.

The next two decades is a lesson on what to avoid. The Government decided to free up the property market under the "asset enhancement" policy, which created a bubble in housing prices. The ordinary people, who own only one property did not benefit from the appreciation, as they still need a place to live in. Only the few who emigrated or downgraded to a smaller property were able to enjoy the appreciation. Young people have to pay a higher price for a property which take away a larger share of their earnings.

The parties which benefited are the property developers and owners of land and capital. They enjoyed the  appreciation in property prices and become billionaires on the debt burden carried by the rest of the population.

Life would have been much better for Singaporeans, if the property prices had been kept stable, rather than be allowed to appreciate in the "free" market. Actually, there is no free market, as the supply of land is held by a few parties, properties are too costly to be transacted freely, and consumers have insufficient information  (leading to speculation caused by greed and fear). This is the worst case of a "free" market that is not controlled and exploited by certain parties.

Tan Kin Lian

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