Wednesday, January 06, 2010

A new pricing formula for HDB flats

I will be stating what is obvious to most people - the Government is able to control the prices of public housing in Singapore.

As private housing (i.e. landed properties and condominiums) is very high relative to the income level, most people have to depend on public housing built by the Housing and Development Board (HDB), by buying a new flat directly from the HDB or from an existing owner on the resale market.

The HDB now uses the resale price on the market to set the prices for new flats. In turn, these prices will determine the prices on the resale market. This seems to be an incestious situation.

A market works well only if there is elastic supply, elastic demand and market competition. In the case of public housing, the supply is virtually in the hands of a monopoly, i.e. the HDB. The demand is also not elastic, as each person has to find a place to live in and is allowed to own only one HDB flat. In the resale market, the seller has to find another place to live in, before he can sell his HDB flat on the market. Hence, the demand cannot drop, even if the prices are too high.

By controlling the supply of new flats, HDB is able to control the prices in the resale market, and indirectly the prices of new flats.

There is also a large element of speculation. If the market perceive that HDB is restricting supply, the speculators (e.g. people renting flats) will buy the flats in the resale market and cause a panic that prices are rising. This causes prices to rise.

If we recognize that the resale market is not a true market (and is affected by supply control and speculation), it is better to adopt a different policy to price the new flats. I suggest that it should be priced relative to average national income - a benchmark price is computed on this principle and the actual price is adjusted to reflect relativities due to location, distance to MRT station  size of flat and standard of construction.

HDB should release a large supply of new flats (still under construction or ready for occupation) to be selected by the people on the waiting list, based on these pre-determined prices. If there are several buyers vying for the same flat, the flat can be allocated by a ballot - which can be efficiently managed using IT technology. The unsuccessful applicants will automatically be considered for the next flat of their choice.

The flats determined by HDB will be much higher than the cost of land and construction and will give a profit margin which is revenue to the state. It will stabilize the prices of new flats to be more reflective of the true market (rather than prices that are affected by speculation and lack of information). In turn, the market for resale flats will follow the prices of the new flats, on a relative basis.

As housing has become a large part of the cost of living in Singapore, it is time for the Government to review the pricing for HDB flats, and to find a better system that reflects the  true market and keeps the prices in line with the ability of the people, based on their income levels, to afford them. We may return to the good days of Singapore a few decades ago.

Tan Kin Lian


Anonymous said...

I'm just a simple person.

Building and selling "affordable" flats in Singapore is not rocket science. I would suggest that it's probably easier than making Singapore a R&D Hub or any another type of hub that you can think of. (I've lost track of all the hubs).

It's only complicated when we don't want the buyers (citizens) to make extraordinary profits from reselling the flats again 5 years later.

It's just like our system of buying cars. It's the most complex in the world. Why? Because there is another agenda besides the free market of buying and selling at work.

The question is what is the real agenda behind the complicated HDB flat buying policies?

Anonymous said...

Do the Unimaginable Mr Tan !

Write a book (like your financial planning book ) on HDB flat prices ( new, resale, BTO )

Do extensive research and then have a website exclusive dedicated to it

Something never done before in Singapore

You may need to spend around $ 20 - $ 30 K to get all the information you need and then you can clarify issues that have never DARED to be published ever in Singapore

The real estate agents and HDB may never want to see your face again

DO IT MR Tan.You can do it

Wayne K said...

I don't see why HDB would want to change its pricing formula. From the likes of your proposal, it seems like prices will revise downwards, in turn reducing profit.

This is the key here, as is the case for most policies. Singapore Inc is unlikely to reduce its margin for the sake of being viewed as kind and benevolent.

The official solution will probably turn out to be in the form of grants to reduce purchase price -- thus making it slightly less profitable to the HDB, and/or rebates in maintenance (e.g. utilities, servicing and conservancy).

Such grants/rebates do not require the actual handing over of cash, and thus are very popular with the powers than be.

Anonymous said...

I believe price of HDB should be controlled, that includes both new or resale. For those HDB resale flates, prices should be allowed to appreciate/depreciate, however in a more controlled manner, eg. taking into account inflation rate, condition of the flat eg. renovation, plus a percentage of increase/decrease in land prices. This way, we could avoid wide fluctuations currently occurring even if private property prices should swing widely, and at the same time, dissuade speculators from taking advantage of the situation. The government should use HDB prices to manage the overall property prices in Spore and prevent any asset bubble forming. In addition, incentives could also be used to encourage people from keeping their HDB flats rather than selling it immediately after 5 years.

I believe the current surge in property prices is due to (i) imbalance in demand and supply and (ii) speculation. Given that land is so scarce, the government should only allow Sporeans and Spore PRs to own private property, both landed or condominium. Our current policy which allows any person with money to buy private properties will only perpetuate the demand/supply imbalance issue, unfortunately at the expense of Spore residents. So unless we plug this hole, we will continue to be at the mercy of ‘undesirable market forces’.

Anonymous said...

There is plenty of land in Singapore.
Do not be fooled.
The supply is strictly regulated and therefore creates a false indicator.

We do not hear complaints from people who have sold or are going to sell. They benefit from the high resale prices!

I live in public housing and I would have gained 300% if I sell now. Yet I choose to remain where I am. Many choose to sell just to make a gain of 50% or more, and with the gains, spend it on a car!


Anonymous said...

It is really quite simple economics that we learnt in school isn't it.

First of all, public housing as its name implies is a public goods for the benefit of the society. No one citizen should be denied the enjoyment of the public goods. But this is not the case here.

If it is a public goods, how can the pricing be subject to the market forces as Mr Tan has correctly pointed out. It is never meant to be an instrument to create wealth for the citizen. By treating it as an instrument of wealth creation, our government has efficient created a vicious upward spiral cycle.

It will always be the next generation paying for current generation. Never ending.

LWL said...

The gradual de-linking of using CPF savings with the purchase of a property, is in my view, the way forward in preventing prices from appreciating at such a rapid pace.

The purpose of the HDB is to provide affordable housing to the general population. The present regulations allows the CPF savings, which essentially is for retirement, to be used to finance the purchase of a HDB flat. The greater the amount utilised for housing, the less savings there will be for retirement.

It is in the interest of the government to help Singpaporeans own a home. It is also important to ensure that buyers do not over commit when purchasing a property as this will be detrimental to their retirement.

The present situation allows CPF funds to be utilised, not only for first-time home owners, but also for upgraders.

This has led to an unhealthy situation, whereby home owners that have built up some CPF savings over the years after purchasing their first flat, start to contemplate buying a bigger unit to 'utilise' or 'invest' their 'idle' CPF funds.

There is no benefit in leaving the money 'idle' in the account, especially if property prices keep rising by the day.

So long as individuals are allowed to use their CPF funds to buy a second or subsequent flat, this excess demand will continue to push prices upwards.

A possible change would be to restrict the use of CPF funds for the payment of housing to only first-time homeowners. Upgraders would not be allowed to use the CPF funds for subsequent purchases, save what would ordinarily have been used to service the loan of the first time purchased.

This would mean that the upgrader must have sufficient cash savings and/or disposable monthly income before contemplating on upgrading to a bigger flat.

This approach tackles the problem of high property prices, with the high valuations and high COV. It also tackles the other important issue of adequate retirement savings.

For this suggestion to work, it is necessary for the government to put in place safeguards such that the terms and conditions for the withdrawal of CPF funds cannot be arbitrarily changed as is the present situation - eg changes possible only by way of referendum.

Anonymous said...

I do not agree with para 4 on the unelasticity of demand for HDB flats; I think that some of the old policies/rules could be revisited to reduce demand e.g.:

1. Do not allow anyone to own a HDB flat if they have a private property.
2. Do not allow renting of entire HDB flats; only rooms can be sublet.

Prices have also gone up as a whole because of the ability of people to use their CPF savings to finance the whole flat; some further restrictions on the usage of CPF (which should primarily for retirement) could also help to curb prices at a more realistic and sustainable level.

Anonymous said...

Mr. Tan,

Your proposal is worth exploring. However, do you think Singaporean and/or Govt have made the whole HDB into a conundrum. People want their hdb asset value to keep rising (false sense of money?), yet at the same time want to buy it cheap.

In a private company, you profit maximize, but since its gov, where do you draw the line? I believe they are trying to push the profit to a higher %.

Unknown said...

I hope to think that our AOs have proposed something along that line before, which will make HDB prices closer to free market.

It's probably shot down because HDBs are used as a political and social tool, and needs to be controllable by the Government.

Anonymous said...

First of all, our economy may sound really fantastic. But all these years, the people, the citizens have not earned enough to relax. The money has gone to infrastructure and reserves.
Real Income in Singapore has not increased very much. The way to allow a sense of wealth would be to increase property values. This is done intentionally so that all owners of public housing will have the sensation of wealth and it can then be said that our country has achieved a high standard of living etc.
This false sense of well being will now need to be perpetuated.
Otherwise we will have riots on the streets.

I say, go ahead and buy property. its a sure thing.

Property said...

MM says HDB prices cannot be cheap because if you want to maintain standards, it has to keep going up.

That ignores the issue of what HDB was initially designed for. Affordable housing for most Singaporeans.

There is even worse things to come, Mr. Mah has suggested that in order to regulate Supply of land and avoid a mad rush and panic, supply must be easily triggered for sale.

Since Mr. Mah is a good civil servant, he judiciously made sure that land was sold at or above the Government's reserve price.

Since election must be held in 2011, there must be lots of land sales in 2010 to ensure that the current government's 5 year term runs a surplus.

So there were some considerations to reduce the deposit required by Property developers for land.

The intention to reduce downpayment for land is to regulate and smoothen supply of land, but we're afraid the end result is that it makes credit more easily available and as a result more developers will bid for land raising the prices.

If these developers are the big ones, they have cash and holding power, this will lead to long term higher property prices for all Singaporeans. Since affordability is limited due to limited income, the units will get smaller.

If these developers are smaller ones or a mix of big and small ones, these will lead to an over-supply problem down the road.

These oversupply of property must then be absorbed by population growth.

Since SIngapore population grows only at 1.1%, then the bulk of these over-supply must be absorbed by immigration.

Anonymous said...

1st Thing 1st, get the agenda right! What was the original and what is the new?
Commercialisation is to make more money from it's customers.
Ask yourself whether you are in the customer or the supplier side.
If you are the customer, can you switch supplier?
Think about it, this opportunity comes once in 4-5 years timeframe.
The system is squeezing you all the time.

Anonymous said...

HDB Resales prices is keep going up, I believe part of the reason is due to the way the house is valued, as one seller ask for $30k COV today, and sold, the valuer will base on the sold price to value the other house to be sold, and the value of it will increase, the "part of the COV" +value thus become the value of the house, the next seller of course will also want to have the COV of say, $30k, irregardless of how much the value is, and as the value of the house can be paid by CPF, it become not so much of concern as compare to the COV, and buyer would have to pay the COV irreguardless of the valuation. - rs8188

Anonymous said...

Yes, it is economics, but contridictary..

HDB flats are suppose to be public good but have lost the qualities of one. Thanks to whoever came up with the idea of pegging the price of new flats to resale flats price, acting against the concept of economics.

HDB allows demand to continue to rise while curbing supply so that prices will rise. This is acting for the concept basic economics.

Putting economics aside, I fail to understand the govt's intention.

On one hand, couples are encouraged to get married and have kids. On the other hand, an average waiting time of 4yrs is required for a new flat which is more affordable since the asking COV for resale flat is just insane.

The only conclusion I can arrive at is our nation just want more children, it is up to individuals to house themselves. Govt is helping by providing the supply of flats, pricing need to be profitable not affordable.

One may argue that pricing of flats increases due to improvement to standard of living, inflation, and what have you... But are they in direct proportion..

Salary may have increased 5 folds compared to 20-30yrs ago, but flat prices has increased by easily 8-10 folds.. So is this justifiable?

Judging from the median income of getting a new flat, a couple, if both diploma holder had better settle for a 3 room flat since they would fall under the catergory of high income family (HHI<5K), but the cap for a 3 room flat is HHI<=3K. If HHI>8K, not eligible for HDB loan. Would anyone care to advise if a range of $3K is a good gauge for differentiating high and low income?

Anw, if govt is not taking care of the basic needs of the people, it is time to start thinking if it is a worthy govt.

Andrew said...

it is fine for gov to do anything now to increase price now like a commercial corporation. BUT the issue is also is it at the expense of our next generation in terms of debt and population aging??.. Whether they can afford a 4 room flat..., easily 300 over k...

Of course the laughing part of the argument is that because the new couples dont give birth that much, they dont need so big house some may claim... Imagine next few years a hdb 2 bedroom unit cost 300 over k. And 4bedroom easily 400 over k...

So it will be vicious cycle which is irrevesible, birth rate keeps on falling, property raises too fast too furious and at wrong time where economy is down(it is fine to increase, but not at the crazy rate)..

my wife and i could not get ballot of punggol 5rm 3 times, we bought tampines 7XX which is 200over k in 2008(check the caveat for pricing and you know what I mean) and we bought at 388k(370k valuation plus 18k cov)... I must thank hdb appointed valuators also for using comparative pricing for resales market... I have 10 more years to repay the government due to additional 100k increase in debt.

Blog Archive