Home prices and inequality: Singapore versus other 'global superstar cities'

Home prices and inequality: Singapore versus other 'global superstar cities'

The topics "superstar cities", "inequality" and "housing policy" are often discussed separately.

I will focus on the area where they overlap - in particular, how housing policy has been used to mitigate inequality in the context of Singapore, a global superstar city.

The Global City concept originates from the work of sociologist Saskia Sassen, which dates back to the 1980s. In an age of globalisation, division of labour is international in scope and production activities are distributed across the world.

A global city is a significant point where the internationally oriented financial and producer services that make the global economy run choose to agglomerate.

In the Economist Intelligence Unit's Global City Competitiveness Index, Singapore is ranked third in global competitiveness after New York and London, and the most globally competitive in Asia. The fourth position is shared by Paris and Hong Kong, and Tokyo is ranked sixth.

Superstar cities

THE term "superstar cities" is a more recent concept and is the title of a study of United States cities by urban economists Joseph Gyourko, Christopher Mayer and Todd Sinai. Their paper notes the considerable differences in long- run house price appreciation rates across US metropolitan areas and towns after World War II.

These differences led to an ever-widening gap in housing prices between the most expensive metropolitan areas and the average ones. They define locations that experience persistently higher-than-average house price growth as "superstar cities".

From the housing price appreciation perspective, Tokyo is a global city but is not a superstar city.

Chart 1 shows the housing price trends in the top five global cities, namely, New York, London, Singapore, Paris and Hong Kong. The superstar prize goes to Paris, and Singapore comes in last among the top five global cities.

Besides having higher than average house price growth, global superstar cities also have higher levels of economic inequality. Income inequality has been increasing in most of the developed countries in the past few decades.

Singapore's Gini coefficient for resident households last year after taxes and transfers was 0.412, which is higher that most of the high-income OECD countries. But comparing Singapore's Gini coefficient with country-level Gini coefficients may not be entirely appropriate.

National inequality measures mask considerable variations across cities within the same country. Studies have shown that within the same country, income inequality can be expected to increase with the size of the city.

A larger city size increases productivity as more skilled people are attracted to the location, and higher urban productivity further incentivises migration from rural areas, smaller cities and across borders.

The global superstar cities New York and London have income Gini coefficients (after taxes and transfers) in the 0.4 to 0.5 range. Singapore's Gini coefficient is comparable to other cities of similar size and lower than the Gini coefficients of New York, London and Hong Kong (see Chart 2).

Thomas Piketty

POST-2014, it is impossible to discuss economic inequality without referring to Thomas Piketty's book, Capital In The Twenty- First Century, which won numerous awards last year. Piketty highlights rising income inequality as a major problem, focusing on the increasing share enjoyed by the top 1 per cent and top 10 per cent.

My estimates for income shares for the top five global cities show Singapore's income distribution to be less equal than Paris', but more equal than those of London, Hong Kong and New York City (see Chart 3).

Piketty's greater concern, however, is with the distribution of wealth - that capital or wealth ownership is much more concentrated than the distribution of income from work. His data for the US indicates that the top decile own 72 per cent of America's wealth, while the bottom half's claim is just 2 per cent.

In most European countries, the richest 10 per cent own around 60 per cent of national wealth, the poorest 50 per cent invariably own less than 5 per cent. In his view, it is this unequal ownership of capital that is a prime driver of income disparities.

Piketty also includes in his book his view of capital ownership distribution in an "ideal society".

To quote Piketty: "To my knowledge, no society has ever existed in which ownership of capital can reasonably be described as 'mildly' inegalitarian, by which I mean a distribution in which the poorest half of society would own a significant share (say one-fifth to one-quarter) of total wealth… Of course, how one might go about establishing such an 'ideal society' - assuming that such low inequality of wealth is indeed a desirable goal - remains to be seen."

Not only is present capital ownership very unequal, but Piketty also expects the inequality to increase over time as the rate of return on capital - generally 4 to 5 per cent - has throughout history been greater than the global growth rate, except during the second half of the 20th century.

This inequality results in redistribution of income towards holders of capital and increasing inequality of wealth. Adding to this force for divergence is the rise of super- salaries of corporate chief executive officers, which, according to Piketty, is determined more by social and political norms rather than economic forces.

To regain control of capitalism without giving up its benefits, he advocates more progressive income taxes with the top marginal tax rate of 80 per cent for incomes above US$500,000 (S$682,000) to US$1 million, and a utopian idea - a global capital tax ranging from 0.1 per cent to 10 per cent on the total wealth to restrain the growing power of inherited wealth.

From Piketty to George

PIKETTY adopts a very broad definition of capital and does not treat land or real estate assets differently from other forms of capital. As Singaporeans know only too

well, land does deserve special treatment, and should be treated as distinct from globally mobile capital for policy purposes - especially in a land-constrained global superstar city.

The ideas of another economist, Henry George, who proposed a quite different utopian idea over a century ago, are more relevant in the context of superstar cities. George's 1879 book, Progress And Poverty, was a bestseller on both sides of the Atlantic in the 1890s.

In his time, the rapid development of cities in 19th-century America caused substantial increases in land prices. This had large wealth and income redistribution effects as landowners and land speculators enjoyed huge windfalls. These windfalls, in turn, fuelled expectations for future price increases, resulting in speculative bubbles.

The crash that inevitably followed would wipe out vast amounts of asset values - creating another set of winners and losers which may not necessarily match the first set of winners and losers.

Unlike Marx, George held nothing against the capitalists. Instead, his remedy was that any increase in land rents should be shared by society rather than fall into private hands. ("We must make land common property").

To effect this, he advocated a 100 per cent land value tax on the annual value of unimproved land held as private property.

What this meant was that buildings and other improvements (the product of the efforts of capital and labour) would not be included in the tax base. The proposed tax was called the single tax as, in his view, it would be sufficient to support all levels of government, thus permitting all other taxes on labour, capital and production to be abolished.

Prominent fans of George have included personalities as diverse as Leo Tolstoy, Winston Churchill, Sun Yat Sen, Milton Friedman, and Joseph E. Stiglitz. Modern-day Georgists advocate partial land value capture taxes as a less extreme form of George's land tax.

The few jurisdictions that have implemented site value taxation separate the property tax base into an unimproved land value component and improvements, and tax property owners at a higher rate on the unimproved land value. In the urban transport sector, land value capture through a betterment tax is often proposed as a means of funding the cost of expensive transport infrastructure such as urban rail transit.

Singapore's housing wealth redistribution framework can be interpreted as containing elements of George's land value capture tax and Piketty's progressive wealth tax, in addition to other significant and innovative institutions and policies.

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