Free market or government intervention? It depends on your priorities.

Despite the strong stance of the Washington Consensus against government intervention, it is not a logical inevitability that governments will mess up the distribution of goods and services. It is merely a tendency that governments generate a degree of inefficiency. Inefficiency is not in itself a condemnation, while efficiency should be seen as an advantage rather than a definitive end, as there are inevitably other social goals that must be considered. Similarly, the efficiency of the free market is not proof that it is the “correct” method of economic distribution.

One good example of this principle is the Singaporean housing system. In most countries, the housing market is dominated by the free market. The government usually acts to supplement the market by providing for low-income households, or to promote home-ownership through legislation or housing subsidy. Unlike most other countries, Singapore does not emphasise the role of the free market in the provision and distribution of flats. For new flats, the Housing and Development Board (HDB) has relied on queuing, and, since 2002, the Built-To-Order ballot system. This is highly reminiscent of the heyday of central planning. The rationale for indulging in central planning in this case is to avoid price volatility in the housing market and to make sure low-income households are not left out. This is an attempt to “legitimise” the market by making the prices more palatable to low income groups. The high degree of control the government wields also allows it to use housing policy for social ends; the government incentivises marriage by making new HDB flats eligible only for married couples or two or more singles above 35. Similarly, HDB flats have to abide by an ethnic integration policy and maintain a certain ethnic ratio, all in the name of maintaining racial integration.

This can't be public housing: My Waterway@Punggol (HDB)

Try as you will, there are precious few arguments you can throw against the Singaporean model. The housing is affordable, despite qualms about a lengthy mortgage period. The flats are well-built and well-furnished, neighbourhoods are convenient, and the aesthetic presentation agreeable. The housing system also does surprisingly well at differentiating between high-income and low-income home owners by providing varying degrees of luxury. One major initiative in recent years is the provision of upscale HDB flats which are completely dissimilar to the austere flats of old. The flagship project Pinnacle@Duxton is a good example: well out of reach of most Singaporeans and offering material comfort comparable to that in a private condominium. Recently, the HDB is “remaking the heartlands”, introducing Waterfront@Punggol, and revitalising Yishun as an “exciting place to live”. Hence, the Singaporean housing system does manage to offer choice, and manages, for the most part, to avoid the grey lack of character that plagues most other public housing.

Despite the significant expenditure necessary to sustain the carefully controlled housing market, Singapore only spends roughly 4% of its budget on housing issues, almost twice that of the Nordic countries, but less than Hong Kong. Singapore invests less per capita on housing than most other countries, possibly because of highly developed economies of scale. Ownership rates, at about 90% overall, are higher than almost any other country. Singapore’s model seems to match the results free housing markets achieve, with the additional benefit of stability in the housing market.

Yet, the Singaporean public housing system is also a good illustration of how a policy approach necessarily comes with its own set of disadvantages. One major issue is how finely tuned the system is. The government has to let house prices rise with inflation to protect the home owners’ investment, yet has to make it rise in line with wages so to keep it affordable. Furthermore, as the resident population rises, with limited land supply, demand growth will outstrip the government’s ability to supply flats. Prices will rise, forcing the government to increase its subsidy to maintain affordability. As it faces these difficulties, the government is also not excused from the need to pay attention to consumers’ demands, or to respond to rising demand for housing, even if it does not adopt a free market system.

Sunshine Court, Choa Chu Kang (HDB)

Another issue is the inflexibility of the system. Each policy introduces complications within a contained system, and can cause unintended distortions. For example, most young people, who have just graduated from university and earn rather average wages, are forced by prohibitive rents to live with their parents. The government’s restrictions on public rental, mainly introduced to enforce owner-occupation of HDB flats, inflate the rent by depressing supply. Median rent per month for a 3-room HDB flat is about $1600. Assuming that you earn the median wage of about $3000 a month, the cost of rent would be over half your budget.

This has repercussions that extend beyond housing, and the consequences need to be taken into consideration as well. It reinforces the cultural norm of children staying with their parents until marriage. The lack of privacy at home may be a deterrent to dating, marriage rates, and hence fertility rates. More importantly, it is an indirect restriction on personal freedom. Either way, the point is that the mass of regulation the government imposes necessarily has unintended side effects, which may be socially undesirable.

It is highly misleading to think that there can be absolutely better policy. Rather, there are some policies which offer advantages that are more generally prized. Hence, most arguments against government citing inefficiency compared to the free market miss the point. Instead, what critics of housing policy or government intervention in general should be concerned with is whether the policy offers the “right” advantages, and this depends on understanding the context and goals we hope to achieve. The only important question that remains is hence the normative question of what we want, and if we accept that different markets have different desired social outcomes, we can no longer insist on dogmatic free market hegemony.

In the specific context of housing, is there an economic case for government intervention? In a small market like Singapore’s, low minimum efficient scale in the housing market makes it highly possible that monopolies may occur. Singapore’s current approach avoids the possibility of deadweight loss to private monopoly. More rigid house prices also serve as a buffer against volatility, providing stability in housing investments. To the extent that we prize stability and low prices in our housing markets, it is likely that government involvement in the housing market offers advantages that outweigh the flaws.

This article was republished in the Review section of The Straits Times on 21st February 2011.