Wednesday, February 07, 2007

Singapore - En bloc sales show tyranny of minority over the majority

The Straits Times ran an excerpt from a speech by Ngiam Tong Dow, a former senior civil servant, on February 5. The article was entitled "Maximising the lie of the land", and it was a pretty smug affair.

Ngiam makes the claim that Singapore's rules governing en bloc sales of private property are innovative and that the "happy outcome is that both the individual and public interest are served"

Most governments reserve the right to "eminent domain", or the inherent power of the state to expropriate private property, or rights in private property, without the owner's consent. This is done supposedly in the interests of the larger society, permitting the clearing of slums, or the large-scale development of new towns for example.

Abrogating private property rights is a very slippery slope. As cases around the world have demonstrated, once governments get a taste for the power of eminent domain, it becomes increasingly addictive. Want to increase tax revenues? Force private home owners off their land so that a shopping mall or casino can be built. Want to attract a new factory to your area? Again, force the existing land owners to vacate. Mr. Ngiam doesn't even think it is necessary to pay a commercial price for the expropriation.

Singapore's en bloc rules have led to people being forced from their homes and neighbourhoods, and to rampant speculation in the property market. Rather than maintain their buildings, owners are incentivized to suspend maintenance in order to maximize profit, at the expense of those who truly want a home instead of just an investment. Why use the sinking fund to repair the building when you can just wait until things deteriorate and you can persuade your neighbour to give up and sell out?

Mr. Ngiam says he is "glad to see that the invisible hand of pricing has often worked its wonders." In fact, it is the distorting hand of government that has permitted the abrogation of property rights and the distortion of pricing. If the market was truly efficient, the price of flats would fully reflect the value of the building and the land they stand on.

With construction costs running at approximately S$200 per square feet, how does one explain the sudden jump in value of a property from $1000/sq foot to $2400/sq foot simply by destroying the existing building? It is because the prospect of an en bloc sale encourages short term thinking and treats buildings as tradable assets instead of homes.

If one takes the example of Ardmore Park, it is hard to understand any reason for the destruction of pretty much every building on the street and the surrounding neighbourhood. These were sound, desirable residences. What exists now looks like a war zone. In most other economies, these buildings would increase in value, given their location and quality. If an owner wanted to profit from the increase in valuation, he would sell to a new buyer, not vote for the destruction of the property.

When a building does go en bloc, it is not a triumph of the majority over the individual as Mr. Ngiam asserts, but rather the triumph of the developer, the estate agent, and a few speculators. The environmental cost of destroying perfectly sound buildings because of this price distortion is inexcusable.

The real cost is borne by those forced to live through the destruction of the existing building and eventual construction of a replacement. With Singapore's lack of meaningful noise and hours of work rules, the impact on those living nearby is 7 days a week, around the clock. As any medical practitioner will tell you, noise is one of the largest causes of stress and heart problems.

The reality on the ground is quite different than the idyllic picture painted by Mr. Ngiam. Rather than an efficient market in which willing buyer and willing seller set prices, the en bloc rules have had the unintended consequence of distorting the market, disincentivizing building maintenance and upkeep, raising housing costs, and destroying the quality of life for tens of thousands of residents of Singapore.

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Updated 070219
Managed to find a copy of the original speech by Ngiam Tong Dow.

In my 40 years of service, I conclude that what works is what counts. The embedded rhetorical question is — works for whom and counts for whom?

Looking back, one of the most satisfying pieces of work that I did for Dr Goh Keng Swee, my first Minister for Finance, was helping to draft the Cabinet paper setting out the economic and social rationale for the introduction of the Land Acquisition Act.

A news item titled, "In China, land seizures fuel unrest in rural areas", in The Wall Street Journal (Asia) of Nov 10-12, 2006, reported that hundreds of enraged farmers in Guangdong province's Sanzhou village surrounded a granary during its inauguration ceremony, and for almost 24 hours refused to allow the departure of dozens of officials and investors inside the encircled building. The farmers complained that the money paid by the investors for the seized land was significantly higher than the compensation paid to them, and alleged that corrupt local officials pocketed at least part of the difference.

I would now dissect this Chinese episode from the viewpoint of a Singapore administrator. At the outset, I would state that, in principle, the larger interest of the community must take precedence over the rights of the individual. If property rights are absolute, then HDB towns could not have been built to house 85 per cent of our population. The modern city we now call home would have remained a town of slums and swamps.

The core principle of the Land Acquisition Act is that private land can only be acquired for a clear public purpose. In Singapore, private land is compulsorily acquired for infrastructure, such as roads and expressways, low-cost HDB housing, the Jurong industrial estate, schools, hospitals, and public parks.

The process is open and transparent. No Singapore Cabinet would have approved the acquisition of the granary in the report cited above as a granary built by private investors is clearly for commercial gain and not for a public purpose. A Land Acquisition Act is a very powerful tool, and in the wrong hands, it can be easily abused. Acquisition can easily degenerate into expropriation, where corrupt officials in the name of the State turf out peasants and resell the land for a huge premium.

When the Singapore Government acquires private land for public purposes, it pays — from public revenue — compensation to the landlord. Land is priced at its market value in its original undeveloped state. The Chief Valuer does not take into account the potential commercial value of the land. It is the State that builds the infrastructure. The community pays for public infrastructure out of tax revenue. Hence, any increase in value of the land from public investment should rightly accrue to the State. The individual landlord is entitled to the value of the raw land, not the incremental value created by public investments.

The large landlords in Singapore appreciate that it is in their larger long-term interest for the Government to invest in public housing and infrastructure. As Singapore grows economically, all land in Singapore appreciates in value, sustaining the value of homes and offices, including their own.

A more difficult problem in land administration is the resettlement of tenants and squatters who do not own the land. The Singapore Government pays what is called ex-gratia compensation. Unlike the landlord, the squatter is not entitled to any legal compensation. The State, out of the goodness of its heart, compensates on the basis of fixed assets, such as his hut and pig-pens. He is offered priority in the allocation flats by the Housing Board, sometimes offered taxi licences or market stalls, so that he can find alternative means of livelihood.

By being fair to resettled families, public infrastructure has been built for the good of the larger community without public discontent.

Purist economists are for an individual's absolute freedom to choose and against any form of state intervention in the economy's functioning. As a former practising administrator, I would think that the second part of the equation is just as important. The state can and should intervene in the working of the marketplace when it is manifest that public interest will be better served.

The Land Acquisition Act enables the Government to acquire huge tracts of private land for the construction of low-cost housing. Individual rights were violated, but not trampled upon. Compensation was paid, but not at its full commercial potential.

Were any mistakes made? Yes, but they paled into insignificance compared to the larger national achievement of building a modern metropolis.

When the MRT system was being built, the Government adopted a policy of acquiring all private land and properties within a certain radius so that small lots can be consolidated and tendered publicly for comprehensive redevelopment. The intention was benign, but did such acquisition pass the test of manifestly being in the public interest? Could the free markets be used instead to achieve comprehensive redevelopment without state intervention?

Private capital and expertise could have been used to develop such strategic sites to reap better economic value for the community, instead of the Singapore Land Authority playing the unfamiliar role of developer. The happening Boat Quay redeveloped by the private sector contrasts sharply with the sterile atmosphere of renovated Chinatown shophouses. Of course, private enterprise is no guarantee of commercial success. The old Lau Pa Sat redevelopment is an example of private sector failure.

Take en bloc redevelopment sales of private property. There may be one or two individual owners who, for good reasons, are not willing to sell their properties. Should a minority of one be allowed to stop all the neighbours from unlocking the value of their aging condominiums in a buoyant market?

Should the economy miss out on the economic value-add of public infrastructural investment such as the MRT?

When en bloc redevelopment succeeds, the public revenue benefits from development charges paid for higher development intensity. The happy outcome is that both individual and public interest are served.

In the economic domain, there is no need for conflict of interest between the majority and the minority. Fair and transparent pricing serves the interest of both parties.

What is in the best public interest will ultimately have to prevail, provided the State does not allow the majority to oppress the minority. In a multi-racial country such as Singapore, the burden of leadership must fall on the majority.

This was adapted from former Permanent Secretary Mr Ngiam Tong Dow's speech at the Singapore Academy of Law's Professional Affairs Committee on Wednesday.





5 comments:

Dr Minority said...

I didn't know you (who posted that excellent ST Forum letter) have a blog. Kudos for a well-argued and timely letter about the enbloc madness that has swept the country. Feel free to drop by my blog, which in a rather boring way, is my own attempt at trying to understand enblocs from a minority's perspective.

Again, excellent post and, Forum letter!

Anonymous said...

I read your excellent post on ST Forum (heavily censored by ST) and was unaware you had a blog till now.
In the US, even the political left and right have different interpretations of eminent domain when deliberating individual rights versus community or government, so much so that there are no consensus views for the left or right. I was surprised that a few right-wing Supreme court judges ruled against eminent domain, as I had thought the right favoured businesses and their economic interests.
Unfortunately the SG govt for whatever reasons, are either unaware or blatantly ignoring the many downsides of en-bloc sales that you so succintly pointed out. I think the negative repercussions of this en-bloc mania will bite this country hard through the next property downturn.
I look forward to reading more excellent writings on your blog.

majulahsicc said...

I agree wholeheartedly! We have so dehumanised Singapore it is not true - all that matters is money. I have posted my views about this en bloc mania on REACH just today. Not that it will do much good! Keep up the good work.

Anonymous said...

This is my first-ever post to a blog,motivated on account of the quality its discourse.

I was one of those invited to make oral represenations to a select committee i think about 10 years ago, which led to the admendments to the Land Strata Act which opened the floodgates for today's en bloc madness.

Opposing such a change, I cited all the above points and stressed that the architects of the admendments either lacked the foresight or simply ignored it, to see the social cost of such a move.

Beyond the economic law of what goes up must come down, a unlocking the en bloc gates would breed a generation which puts a price tag on everything and knows the value of nothing.

How can one form an attachment to a country when the most obvious root, being one's home is constantly at risk-based on the greed of one neighbours?

The value which supports the premium of freehold vs leasehold also doen't exist in this new order.

And the long-term wisdom of 'build, grow and prosper' is overtaken by the short-term gain of 'flipping'.

My entire experience with the select committee was that:

1-The agenda was set way before the call to gather feedback was even made.
2-The session was created to explain the upcoming admendment, and not seek feedback which may derail or even adjust its execution.

The day will come when people like us will see the financial, human and social cost when this bubble eventually bursts. And 'I told you so' will be of little comfort for anyone.

Anonymous said...

Thank You for all the sound comments. I thought I was the insane one in this sea of enbloc madness.

I never realise there are sound arguments against enbloc and it is not just my sentiments!
I have to shift out of my home in which I have stayed for 28 years in 4 months'time.

Bitterness and misery are beyond words. Who wants the money and the work to throw away years of living and memories down the chute just to move to the next place?
May God give me some justice and peace since this insane place has no justice nor heart!