Back to the future: we need more Public Housing – and more Singapores

Speaking at the ULI Asia conference in Hong Kong 6 June , Dr Tim Williams , Arup’s head of cities for Australasia said:-

Housing is a crisis issue for most global cities. With the dramatic shift of population we have seen from rural areas to the cities a clear majority of the world’s population live in cities. This trend will carry on for most of the 21sr century and that by 2050 as much as 70% of our population will be in cities. The economic attractor of cities lies behind this trend as economies re-urbanise in the knowledge era. Technology means fewer and fewer workers are needed for agriculture while at the same time knowledge jobs agglomerate more in more in our cities. The urban opportunity is clear but so is the challenge: the challenge of housing our populations. Globally our cities’ housing systems are under pressure both in terms of supply but also in terms of demand. In most cities housing has become more unaffordable than ever and in some cities, little housing of any kind is available to those on average salaries. Such cities are becoming limited to the wealthy and those who already own property who are using their assets to buy multiple homes whilst others cannot get on the housing ladder. In Sydney, firs time buyers have collapsed in the last generation to about 10% of the market, the average age of home-purchase has gone to late thirties and it takes 13 times median salary to buy a home. While such numbers put Sydney at N0 2 in the global unaffordability league table, the same forces are operating in most world cities.

While the crisis is being recognised , there is in my view a misunderstanding of its nature. It is being depicted as solely a supply problem. If only we could magically produce a larger number of homes, faster , house prices would drop and all would be well in the housing markets of our cities. This is a shallow and impractical response. The problem of housing has a financial origin and the solution requires government intervention both in terms of reforming demand pressures and in terms of supply.

On demand, it is now obvious that the financial reforms of the 80s and 90s globally , liberalising banks to invest in property and property-based derivatives – and to lower the lending requirements for those seeking mortgages – led to an explosion of liquidity in the world economy which inflated house prices and subsequently led to the crash of 2008. What caused the inflation was not too few homes but too much cash. Unfortunately, in reflating the world economy through cheap money since 2008, we have repeated the error. The world has been awash with cheap money for housing and house prices have again skyrocketed no matter how many homes are built. Sydney’s housing delivery has trebled since 2011 and the price has gone up 80% . Prices are now softening at the time Sydney’s population is growing faster than ever. Sydney’s housing delivery is about the same as London’s on a population that is just over half of London’s – and you can buy a home in London for 8 times median salary . By the way, it’s 19 times in Hong Kong and for the same reason: hot money being invested in property by investors seeking a return not people seeking shelter.

So 1) we need to suppress the financialisation of property and redirect scare capital into productive investment not speculation. German banks invest over 50% of their lending into industry and SMEs. In Sydney, 80% of bank lending is for mortgages. Germany, where 50% of homes are rented, which also takes some heat out of the market, has no housing inflation crisis and has one of the healthiest economies in the world. In cities like Sydney there are too many tax incentives for investing in housing. This has to be reformed. It is the main mechanism by which housing ownership and wealth are being concentrated in fewer and fewer hands.

But surely , such financialisation leads to more supply? That is wrong. Cheap money and tax incentives have not increased the number of homes; just their price. Why? Because in market societies, where housing is developed by the private sector and sold as assets not shelter to individuals, there is of course a market limit on supply. It is not to demonise the private sector but to recognise its own limitations and risks, that I stress that relying on the private sector to solve housing shortages or reduce home price inflation is misconceived. The homes for sale model is a return on capital employed (ROCE)model. Developers taking the full land risk do not build a brick if they cannot be guaranteed 22% return on capital employed. They will build only the number of homes in a period and in a place where they can be guaranteed such a return. When the conditions are not met they restrict supply. Where they are, they increase. This means they put more homes onto the market when prices go up and retrench when they soften. Housing supply is moderating in Sydney today because of these market forces. This is also obvious: why would a private developer put more on the market when prices are going down? This model is international by the way, or rather, it operates where homes are supplied for sale in a market. We saw it in the US, in Ireland, in the UK and Australia.

So 2) we need other entrants to the housing market with less exposure to land risk and the ROCE model. This means we need governments to incentivise and regulate markets to attract different business models and providers from the private and not for profit sectors. This means build to rent models and more opportunity for not for profit housing providers. Build to rent can only work if tax incentives are redsigned. Sub market rental via NFPs can be incentivised via governments and councils mandating in the planning system that a proportion of all private developments is allocated to such housing. Governments should require high proportions of sub market rental when selling or leasing their own public land to developers. In both cases the developers will be able to accommodate these requirements by paying less for the land to the land owners: itself a mechanism for suppressing land inflation in the public interest.

But 3) most urgently, I call for a global return to governments being direct providers and enablers of housing. If we need more business models in the housing market – and we do – I cannot see why governments cannot get back into delivering public housing at scale. They can produce housing counter-cyclically and without regard for market demand. They also will if done at scale put some downward pressure on house price inflation as demand for privately delivered homes will decline. More crucially, this source of housing will help suppress the market for speculation in housing. It is very clear that house price inflation and the collapse of public housing supply at the same time as bank lending was deregulated led to our housing crisis. We need to go back to go forward. Or maybe we just need to look at Singapore.

I’ve just got back from Singapore where I went to give talks on a) smarter cities and b) better cities. You have to have a certain chutzpah in this business as by comparison with almost all other cities in the world Singapore is definitely already smarter and in many ways better. This is largely because as my lectures pointed out there can be no ‘smart city’ (in the digital, data-driven sense) without smart governance of the city. As a city-state Singapore has huge advantages in terms of smart governance – it has the full toolbox of metro scale government, taxation powers , institutional strength and cross government coordination around land use and transport in particular – so it’s not surprising it leads the way towards the data-driven digitally enabled city. It could do with engaging local business leadership more I suspect in shaping creative answers to urban challenges and promote the walkability of the city but these are quibbles set against the big picture of perhaps the greatest and most enviable of Singapore achievements.

That is the despite now being in the top six of world cities in most league tables – coming from a very low position at the time of independence with few natural resources – it remains a city for all.

Whilst most other cities are struggling with housing affordability crises and becoming ever more hostile to those on even average incomes, Singapore lies at a lowly 32nd in the Demographia housing unaffordability table for 2017. Sydney is at number 2 whilst not being yet in the top 10 of world cities by most calculations. The result is that in Singapore is now takes 4.8 times median salary to buy a home but in Sydney it’s almost 13 times. And just before you ask, GDP per head is higher Singapore than in Sydney and the social wage provided by government is also higher. But then housing in Singapore is about shelter for citizens not about speculation and land deals. The knock on impact of this value proposition is that housing is less of a commodity in Singapore than in Sydney – 80% of housing is essentially public and though ultimately tradeable is not as much available for the kind of crazy and anti-social financialisation of property we see in Sydney. The animal spirits of the land and housing markets have been suppressed to obvious public benefit. This also means banks lend to business in Singapore much more than in Sydney where 80% of lending is for mortgages and asset backed securities. So the economy does better while house price inflation gets suppressed.

Housing in Singapore is the bedrock of the social contract between people and state. Imagine: every inhabitant as of birth right has a right to housing. The units are not just rented however. Compulsory saving means that rent is effectively a mortgage so over time the unit becomes acquired. Singaporeans are then allowed to sell that unit into the market and acquire one more on the same basis but no more after that. There is no first time buyer crisis in Singapore and everyone gets a home and indeed access to housing wealth albeit on a lesser basis though it is a less dangerous model than we see in the casino capitalism of places like Sydney. What is not to like ? 

I know that such models are not translatable. But they do make you think of the limitations – moral and economic - of our own models. Our cities are becoming the playgrounds of the wealthy who own multiple homes which they then rent out to those squeezed out of ownership. Where homes are affordable they are on the fringes of cities where there are few jobs and less amenity. Poverty is now rife in the suburbs not the inner city, long gentrified. And of course while we may think Singapore’s is unique we forget that we too used to have governments who provided non market housing and it had a similar impact around affordability. How? When the UK built public housing at the scale we did between the end of the 40s and the start of the 70s – for 20 years half of housing stock each year was non-market rental – house prices rose around 3% a year. When we stopped, roughly at the time we saw banking de-regulation lead to cheap cash pour into bricks and mortar, prices started going up, 5, then 10 then 15% a year til the crash. Back to the future anyone? We have to do something to disrupt the current housing market in our cities with its one model – homes for sale – which can never deliver the socially required amount of housing. And we definitely have to suppress the over financialisation of property which is destroying our cities. We need a bit more Singapore and a bit less Las Vegas, or Sydney, or Hong Kong.