133rd Henry George Commemorative Dinner Address by Professor Sock-Yong Phang, Singapore Management University, Kelvin Club, Melbourne, 15 August 2024 

 

Value capture and affordable housing: insights from Singapore 

Good evening, everyone. Thank you, Dr Tim Helm for the kind introduction. And a big thank you to the Executive Committee members of Prosper Australia. I am a huge fan of Henry George and I am very honoured to be invited to deliver this 133rd Henry George Commemorative Address.

The topic of my talk will be on the role of value capture in Singapore’s affordable housing policies, and also about how Singapore’s land and housing policies align with the ideas of Henry George. 

Let me first summarise George’s main economic ideas. 

In 1879, Henry George, an American political economist, published his seminal book Progress and Poverty – setting out the rationale for a tax on land rent. George was also a strong advocate for free trade, and for no taxes on wages and capital. He believed in provision of utilities and transport with “rights of way” for free, or at marginal costs. He endorsed taxes on negative externalities, and advocated for competition and taxes on monopoly rents, including mineral resources. His best-known proposal was the single tax on the value of land. The single tax on rent was the secret, he believed, that would “transform the little village into the great city” (George, 1879: 433). This “secret” – value capture – has contributed in no small measure to the transformation of Singapore from a colonial city to the global city that it is today. 

To explain the role of value capture in Singapore’s progress, I will first provide some background information on Singapore and its housing sector. I will then take you on a journey back to the 1960s to show how we established our present institutional arrangements for land and housing. I will next describe how housing policies have evolved over the past six decades in response to changing contexts. Finally, I will conclude with the fiscal implications of successful value capture. Where relevant, I will indicate how Singapore’s policies align with George’s views. I will use Singapore dollars in my talk and the exchange rate is currently about S$1 to A$1.15. 

Background 

Singapore’s unusual housing policies must be understood in the context of its small land area. It is both a city and an independent republic of 6 million, with a land area of only 730 square km. Besides housing, it must also find space for all the requirements of a normal functioning country, which includes commercial and industrial areas, ports, airports, military installations and training grounds, water catchment, and parks. 

To put this in perspective, Singapore’s population is comparable to Melbourne’s and Sydney’s. Melbourne’s land area is about 14 times larger, and Sydney’s land area is 17 times larger. Singapore’s land scarcity explains land and housing solutions that will appear drastic for other countries. 

Despite its small size, Singapore has thrived economically. The US Heritage Foundation ranks Singapore as the world’s freest economy: there are no trade tariffs and capital markets are open. The IMD World Competitiveness Centre ranks Singapore as the most competitive economy in the world. It is often described as “a small and efficient state, with light taxes, simple regulations and open doors” (Sharma, 2024, viii). However, this description does not quite capture the reality of its land and housing sectors where there is extensive government intervention and regulation. 

It is these policies that have resulted in affordable homeownership for 90% of resident households. The dominant housing type are high density flats built by the Housing and Development Board (the HDB). HDB housing comprises 71% of the housing stock; private condominiums comprise 24% and landed housing only 5%. 94% of HDB’s housing has been sold to households on a 99-year leasehold basis. In Singapore, the most common house type is a 4-room HDB flat, about 970 sq ft. 

The median house price to annual median household income ratio is widely used as a housing affordability indicator. The median market price of a HDB 4-room flat is about S$600,000, which is about 4.7 times the median annual income of resident households. First time homeowners can purchase a new HDB flat at a much lower price. How did Singapore achieve these affordable housing outcomes despite its land scarcity? 

Historical context 

To answer this question, we need to take a journey back to the 1960s. Singapore was founded as a British trading post in 1819 and was granted internal self-government in 1959. The People’s Action Party (PAP), led by Mr Lee Kuan Yew, won a landslide victory with an election manifesto to deliver improvements in housing, education and jobs and to merge with Malaya. The PAP has remained in power since, through multiple elections. In 1960, the new government established the HDB to clear slums and build housing. Within the first 5 years, HDB built over 50,000 units. HDB eventually became the largest housing developer in Singapore. There are more than 1 million HDB flats, housing 78% of the resident population. 

The new government expected the city to be transformed rapidly and land prices to rise correspondingly. In 1964, it introduced the Development Charge – a form of betterment tax. In the reading of the bill in the legislative assembly, the then Minister for National Development, Mr Lim Kim San, justified the new charge thus – “With a view to securing for the state the increase in value of land brought about by community development and not through the efforts of the landowner… any written permission granted which allows development over what is normally permitted in the present Master Plan will attract a development charge.” The betterment tax is in line with George’s argument that to take land values for public purposes is not really to impose a tax, but to take for public purposes a value created by the community. 

In the 1960s, the HDB was faced with the major challenge of acquiring land for building public housing. Without land, there would be no housing. The land problem was solved in a rather unexpected way. 

In 1963, the government had led Singapore into a merger with Malaya, forming the Federation of Malaysia. The merger was short-lived due to disagreements over the future direction of the Federation. On 9 August 1965, Singapore was expelled from the Federation. To describe Independence Day as not a happy occasion would be an understatement. 

The crisis did however afford the government the opportunity to change the rules on land acquisition. In the words of Mr Lee Kuan Yew: “We therefore took overriding powers to acquire land at low cost, which was in breach of one of the fundamentals of British constitutional law – the sanctity of property. But that had to be overcome, because the sanctity of the society to preserve itself was greater. So we acquired at sub-economic rates.” (speech in Parliament, March 1985).

By December 1965, the new Constitution was ready. Parliament adopted all the provisions of the Malaysian Constitution except for Article 13 concerning the rights to property and to adequate compensation in the event of compulsory acquisition. The government then took the bold step of passing the Land Acquisition Act in 1966, which gave the state and its agencies broad powers to acquire land not just for public purposes, but also for any residential, commercial or industrial purposes and without recourse to the courts. Landowners cannot object to decisions. Appeals on compensation can be made to an Appeals Board and not to the courts.

Although most people would have a problem with the justice of such a draconian land law, it is consistent with George’s view that “the recognition of individual proprietorship of land is the denial of the natural rights of other individuals – it is a wrong which must show itself in the inequitable division of wealth.” (George, 1879: 341). And George’s often quoted line: “We must make land common property.” (George, 1879: 328). 

A crucial aspect of land acquisition was fixing the price of acquired land. In earlier debates prior to independence, the PM had made his views clear – that the price paid on the acquisition for public purposes should not be higher than what the land would have been worth had the Government not contemplated development generally in the area. However, even after independence and after the enactment of the new Land Acquisition Act, the issue of compensation for acquired land continued to be contentious. 

Finally, to resolve the gridlock regarding compensation, in 1973, the government amended the law to acquire land at its value as of November 30, 1973, or its market value, whichever was lower. This was based on the principle that “private landowners should not stand to profit from an increase in land value brought about by economic development and the infrastructure paid for with public funds” (Lee, 2000: 118-119). 

George’s views on compensation of land rents were even more severe. To quote George, “If the land belongs to the people, why continue to permit landowners to take the rent, or compensate them in any manner for the loss of rent? Now what does the law allow to the innocent possessor when the land for which he paid his money is adjudged rightfully to belong to another? Nothing at all.” (George, 1879: 365-6). 

As property ownership increased over time, and after much land had already been acquired by the state, the statutory date to determine price was amended on three occasions after 1973: in 1986, 1992 and 1996. Eventually in 2007, the government shifted to market-rate compensation for land acquisition, recognizing the changing economic landscape. The Land Acquisition Act, together with land reclamation, had resulted in state ownership of land increasing from 44% of total land in 1960 to over 90% of land in Singapore by 2005. 

Beyond state land ownership, housing policy and urban development have been complemented by land use planning. Plans are created by a single planning authority – the Urban Redevelopment Board – for the entire city-state rather than by local compartmentalised municipalities. The Concept Plan guides long term land use planning to align with socioeconomic-environmental plans and is reviewed every 10 years. The Master Plan is reviewed every 5 years, and each review is forward-looking and reflects land use intentions. The plan guides private property owners and developers as to permissible land use and densities. The betterment charge, first introduced in 1964, is levied at the point of planning approval. The tax is 70% of the land value increment arising from the grant in planning permission or variation of development control for land development. The table of applicable rates is reviewed by the Chief Valuer every six months to reflect market values. 

Singapore’s housing finance system

I will now describe the Singapore housing finance system. Homeownership was considered superior to a rental public housing model as it would give citizens a stake in the country. This was particularly important in the context of nation building in post-independence Singapore. In 1964, the HDB had started its homeownership programme. However, initial demand was not strong. 

In 1968, the government transformed the Central Provident Fund (CPF) meant for retirement financing, into a Housing Provident Fund. Employees and employers had to make substantial compulsory contributions to the employee’s account. The current contribution rates are 17% of the wage for employers and 20% for employees, for a total of 37%: 6% is allocated for retirement, 8% for health-related expenses, and 23% can be used for housing down payments and mortgage payments. Most HDB households will service their mortgage payments entirely from their CPF savings, with no cash outlay. In 2022, contributions to the CPF amounted to 6.5% of GDP, while withdrawals for housing down payments and mortgage payments amounted to 3.2% of GDP. The CPF does not manage the funds but purchases government bonds. 

Hence by 1968, a sustainable framework for affordable homeownership had been put in place (Phang, 2018). The HDB became the largest real estate developer and housing finance bank. The government finances the deficits of the HDB which supply flats to citizens. The government also provides loans to HDB to make mortgage loans to homebuyers. The HDB mortgage interest rate is 2.6%. CPF savings can now be also used for private housing purchase, and commercial banks can also provide housing loans for HDB owners. As CPF savings cannot be used for rental payment, homeownership is the default choice for most households (Figure 1). 

The HDB completes on average about 20,000 flats a year. This corresponds closely to the number of first-time marriages each year. The HDB’s building program led to a rapid increase in homeownership rates in the 1970s and 1980s – a 60-percentage point increase over two decades – from 30% to 90% (Figure 2). 

In the 1990s, the HDB resale market was further deregulated. After a minimum occupation period of five years, the owner is permitted to sell the flat to citizens or permanent resident households who are not subject to income ceiling conditions. However, a household can own only one HDB flat at any point in time. The owner of a HDB flat may also choose to rent out the flat after the minimum occupancy period of 5 years. 

Adapting to changing contexts 

While the basic framework has remained in place, policies have continuously evolved over the decades with changing circumstances. HDB prices its new flats (known as Build-To- Order flats) at a large discount to resale market prices to eligible households. The household income ceiling to be eligible to buy a new flat directly from HDB is S$14,000 a month. Most first-time homeowners would have household incomes below the cap. 

There are three sets of prices for HDB flats in the same locality: the market or resale prices for existing flats, the sticker (or listed) prices for new flats, and the net prices for new flats after housing grants. The government provides housing grants for first-time homebuyers with the grant amount dependent on factors such as household income, new or resale flat purchase, and proximity to parents/child. 

On average, a first-time homebuyer household can enjoy a $300,000 discount from market 7 prices when buying a new flat from the HDB. This is 2.5 times the annual median household income. HDB’s pricing approach is to look at household incomes across different levels and establish affordable prices for flat buyers. Generally, HDB’s House Prices are 4 to 5 times the household incomes of buyers. With 80% of the resident population staying in HDB flats, there is no social stigma to staying in public housing. 

George understood the psychological effect of charity versus right. To quote George: “The truth is, that anything that injures self-respect, degrades, does harm; but if you give it as a right, as something to which every citizen is entitled to, it does not degrade.” George also believed that a part of “the wealth produced in every community would go to the community as a whole, to be distributed in public benefits to all its members” (George, 1879: 441). We can ask the question: “what is of public benefit to all members?” In Singapore, other than public and merit goods, public benefit has been defined broadly to include affordable housing, inclusive neighbourhoods, public amenities, and infrastructure. 

Singapore’s HDB model also promotes socially inclusive neighbourhoods. Singapore’s citizen population is multi-racial, comprising 76% Chinese, 15% Malays and 8% Indians. Racially segregated neighbourhoods were common up to the 1960s. In the 1970s, HDB mixed different races in the new housing estates when allocating flats. However, as a trend of regrouping through the resale market became evident by the 1980s, the government intervened with race quotas. For example, when the Chinese limit has been reached at 84% in a particular block or 87% in a particular neighbourhood, a Malay seller is required to sell to another Malay household, and an Indian seller is required to sell to another Indian household. With an active resale market and HDB rental market, quotas have also been introduced for Permanent Residents, and for non-citizen tenants. 

The HDB also integrates different income groups in its estates and towns. Integration is achieved through a mix of flat sizes within blocks and neighbourhoods. Recently, with increasing instances of million-dollar resale HDB flats in prime locations, the government introduced a 3-tier classification system. For flats in prime and plus locations, higher subsidies come with tighter resale conditions: minimum stay of 10 years instead of 5, a subsidy clawback upon resale, and the buyer of the resale flat must also meet the same income eligibility conditions as households applying for new HDB flats.

The public benefits of value capture extend beyond housing. The 360-hectare Marina Bay development provides an excellent example. Most of you will be familiar with the iconic Marina Bay Sands development that now defines Singapore’s downtown skyline. Land reclamation and public investment in utilities and transport infrastructure at Marina Bay cost the state S$7.5 billion by 2009. This amount has been more than recouped from government land sales proceeds of just a few strategic sites such as Marina Bay Sands and the Marina Bay Financial Centre. 

Value capture has helped finance the extensive MRT network with cumulative capital costs of over S$100 billion. Rail infrastructure enables higher density developments thus expanding the capacity of the country to increase its population. In turn, land sales near or integrated with stations have provided opportunities of value capture. 

Price stability

I now turn to the issue of housing price stability. Housing markets are prone to cycles and bubbles. In 2009, the world experienced how failures in the US subprime mortgage market led to a global financial crisis. The US Fed’s quantitative easing and low interest rates had serious inflationary implications for other countries. 

The Singapore government has devised numerous policy tools to maintain stable housing prices since. Between 2000 to 2023, over a 24-year period, increases in HDB resale prices and private house prices have not exceeded increases in median household incomes (Figure 3). This has only been possible because of numerous rounds of housing market interventions by the government. There were 16 rounds of cooling measures between 2009 and 2023. Anti-speculation measures include tightening mortgage loan conditions and raising transaction taxes for foreign buyers and for investors for second and additional property purchases. 

George had observed that land speculation in response to population growth, increased densities, and productivity improvements led to bubbles and business cycles. He identified land speculation as the true cause of industrial depression. In my own lifetime, I have observed the property-related causes of Singapore’s first recession in the 1980s, the collapse of the Japanese real estate bubble, the Asian Financial Crisis, the Global Financial Crisis, and now China’s evolving real estate crisis. It is now accepted for macroprudential policies to be a part of the macroeconomic toolkit. Most central banks, the IMF and the Bank for International Settlements all have units monitoring house price developments closely.

To maintain price stability, the right volume of housing supply is critical. The HDB supplies flats to meet the demand of new households. The government is also the main supplier of land for private housing development through the Government Land Sales program. The sales program, announced every 6 months, is adjusted to align with market conditions. State land is sold on a long-term lease (of not more than 99 years) mostly through a tender process to private developers. 

Land sales also include land for a middle-income housing scheme, known as the Executive Condominium Scheme. To be eligible for EC, the household monthly income must be below S$16,000, compared to the HDB’s income ceiling of S$14,000. Land is sold via competitive tendering. The private developer designs, prices and markets the development to eligible buyers. The development becomes private housing in phases. After 5 years of occupancy, the housing can be sold to Singaporeans and Permanent Residents. After 10 years, it can be sold to foreigners as well and becomes the equivalent of private sector condominiums. Exec Condos comprise about 2% of total housing stock. 

On the matter of government land acquisition and sale, George had also considered “…formally confiscating all the land and formally letting it out to the highest bidders” as an option for value capture. However, he felt that doing so would involve a “needless shock to present customs and habits of thought”, and “a needless extension of government machinery” – which should be avoided. He felt that “…it is not necessary to confiscate land; it is only necessary to confiscate rent” (George, 1879: 405). Singapore, a newly independent nation in the 1960s, was not constrained by entrenched customs and habits of thought and saw land acquisition as a more efficient way to achieve desired social and economic goals (Phang, 2023).

Fiscal implications 

How should value capture policies be designed? George’s single tax on land as a solution to inequality is insufficient and will be difficult to implement in most jurisdictions. 

The question of increasing inequality, of which George was greatly concerned about, has been much discussed since the 2014 publication of Thomas Piketty’s book “Capital in the 21st Century”. In response to Piketty’s findings on wealth inequality, Rognlie (2015) and others have shown that housing wealth has been the main driver of wealth inequality since the mid-20th century. The main beneficiaries of recent increases in returns have been homeowners. If housing is primarily responsible, it follows that policy action should centre on redesigning land and housing policies. 

A recent article by a group of French economists (Bonnet et al., 2021), shows that a uniform land tax is the first best tax to reduce inequalities of welfare between capitalists and workers/tenants. As taxing land raises implementation issues, the authors proposed considering richer tax schemes, such as combining distortive instruments to mimic the impact of a non-distortive instrument. For example, a rent tax supplemented by a structure subsidy does almost as well as a land tax in improving social welfare. 

There is a wide array of instruments for value capture. The OECD together with the Lincoln Institute have recently prepared a global compendium of land capture policies. In a lecture I delivered in 2015, I showed how Singapore’s housing policies have led to a more equitable distribution of housing wealth (Phang, 2015). 

Singapore has used a cocktail of instruments for value capture and for value distribution. The government plays a strategic role as a land use planner and place maker – creating the conditions for value increase. It is dominant on the supply side in both supplying housing as well as land for private housing development. On the demand side sits a large pension housing scheme, and generous housing subsidies for households to buy their first property. Progressive transaction taxes and progressive property taxes are used both to discourage speculation, to stabilise the housing market, and to tax wealth. The system is not perfect – wipeouts and windfalls from land and housing policies can be inequitable. But overall, the system has allowed for value capture and distribution. 

What is the cost of housing subsidies for the government? In 2023, the government provided grants of S$5.4 billion to the HDB which is about 1% of GDP. However, if we dive deeper into the HDB’s financial statements, the HDB paid an equivalent amount of S$5.4 billion to the Singapore Land Authority to purchase land for its developments. What is collected by the government in land sales receipts from the HDB is given as housing subsidies for affordable housing.

In the estimated FY2024 budget, about 50% of government revenue can be associated with land value capture and Pigouvian taxes – of which taxes from motor vehicles are significant (Figure 4). Land sales revenues, estimated to be above $30 billion, comprise 19% of total revenue; will be channelled into government reserves, and investment incomes from reserves contribute to the operating revenue. 

Concluding observations 

Singapore’s policymakers from the time of independence recognized the huge importance of value capture to jump-start the economy and to provide housing. Their observations on the need to capture unearned land value increments, the negative impacts of land speculation, and the need for the state to make land common property paralleled George’s views. 

The actual policies that were implemented differed for good reasons. To quote PM Lee, “If there was one formula for our success, it was that we were constantly studying how to make things work, or how to make them work better. I was never a prisoner of any theory. What guided me were reason and reality” (Lee, 2000: 758). This pragmatic mechanism design approach to solving problems allowed Singapore to adapt its policies as challenges evolved. 

Land and housing policies and their market prices play an important role in determining a country’s wealth and income distributions. Singapore’s experience is a demonstration of how strategic land value capture, government supply of housing, integrating housing with retirement savings, and careful regulation of the property market, can lead to a system that provides affordable housing, enabling growth with equity. This is a significant achievement given its severe land constraints. 

Thank you for your attention. I have omitted many details in my presentation, but I hope I have given you a broad overview of how value capture has contributed to affordable housing and the successful economic development of Singapore. I’m now happy to take any questions you might have.

References 

Bonnet, Odran, Guillaume Chapelle, Alain Trannoy, Etienne Wasmer (2021). Land is back, it should be taxed, it can be taxed. European Economic Review, 134, pp.102696. 

George (1879). Progress and Poverty: An inquiry into the causes of industrial depressions and of increase of want with increase of wealth — the remedy. References are to a 1971 Reprint. New York: Robert Schalkenbach Foundation. 

Lee, Kuan Yew (2000). From Third World to First. Singapore: Marshall Cavendish and The Straits Times Press. 

Phang, Rachel (2023). “Takings” and “Givings” in Singapore: Land law and policy in the search for justice. Fordham Urban Law Journal, 51(2), pp. 403-454. https://ir.lawnet.fordham.edu/ulj/vol51/iss2/3/ 

Phang, Sock Yong (2015). Home prices and inequality: Singapore versus other ‘global superstar cities’. The Straits Times. 3 April. 

Phang, Sock Yong (2018). Policy innovations for affordable housing in Singapore: From colony to global city. Cham: Palgrave Macmillan. 

Piketty, Thomas (2014). Capital in the 21st century. Cambridge: Harvard University Press. Ronglie, Matthew (2016). “Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity?” Brookings Papers on Economic Activity. 

Sharma, Ruchir (2024). What went wrong with capitalism. UK: Allen Lane.