THE TEMASEK REVIEW

By Eugene Yeo and Jeremy Koh

Besides political considerations, it is in the economic interest of the government to keep HDB prices on the high side. Who will be so silly to kill the goose which lays golden eggs?

Increased profits from sale of new flats

Since the prices of new HDB flats are pegged to that of the resale flats in the vicinity, it naturally follows that rising prices of resale flats will enable HDB to price their new flats higher, thereby earning more profits from the sale.

It was announced lately that BBR Holdings has secured a S$104.2-million contract from the Housing & Development Board (HDB) to build seven blocks of flats in Yishun Neighbourhood 4. The work comprises 864 homes, a Child Care Centre, a roof garden, communal amenities and site works, as well as contingency works. (Channel News Asia, 17 August 2009)

Financial Consultant Mr Leong Sze Hian calculated that HDB may make a profit of more than $170,000 for each flat sold upon completion:

“Since there will be 864 HDB flats, the average cost per flat, inclusive of communal amenities, site works and contingency works, is about $120,602 ($104.2 million divided by 864 flats).

With the latest HDB new 4-room flats at Punggol (Punggol Residences BTO) selling at an average price of $293,000 (price range of $264,000 to $322,000 divided by 2), does it mean that the HDB stands to make a profit of about $172,398 per flat, or a profit margin of about 143 per cent?”

[Source: Hardwarezone]

The cost of building HDB flats remain a mystery known only to the government. Ominously, HDB only said that the flats are subisidized, but it never had never claimed that they are sold at cost price to Singaporeans.

Regardless of the real figures, the profit-margin of HDB is likely to increase in view of the record prices set by new and resale flats this year.

Property taxes and resale levies

These are indirect ways in which the government acquire additional revenue from rising prices of HDB flats.

All types of properties in Singapore, including HDB flats, factories and offices are subject to tax.

The amount of property tax payable a year is a 4% of the annual value of the property which is the estimated yearly rent the property can fetch if it were rented out.

If the flat is the seller’s first subsidised flat or a flat bought under the CPF Housing Grant Scheme, he is eligible to sell his flat to a buyer of his choice subject to HDB’s approval.

He will have to pay a resale levy if he buys or takes over the ownership of another subsidised flat or an Executive Condominium sold by a Developer, or an Executive Condominium with outstanding 5-year minimum occupation period. He need not pay the resale levy if the Executive Condominium project is launched after 20 Nov 2007.

The payment of the resale levy is based on the prevailing rules, policies and procedures as determined by HDB from time to time.

Where HDB is appointed by the seller and/or buyer to act in the resale, HDB’s conveyancing fees shall be calculated in accordance with the Housing and Development (Conveyancing Fees) Rules.

Needless to say, in a property boom when there are active transactions going on, HDB will see more “business” and therefore earn more from the resale levies and conveyancing fees.

Attracting foreign investors

The prices of HDB flats provide a support base to that of the private property sector.

Prices of new flats are linked intricably to that of resale flats which in turn will have an impact on that of mass market homes.

Rising prices of HDB flats will exert an upward pressure on the prices of condominiums in the suburbs giving developers the excuse and incentive to mark up their prices at launch since it is inconceivable that prices of private projects will fall below that of public housing.

This in turn will pop up prices in the central and prime districts of Singapore creating a mini-property boom which will make it attractive for wealthy foreigners to invest in Singapore’s property.

A vibrant and active property market will increase the government’s revenue through higher stamp duties which are levied on every property purchased.

Conclusion

HDB flats are cash cows of the government which enjoys a total monopoly over the public housing market in Singapore. In the absence of any competitor, it is free to set and manipulate the prices as it wish.

Though the government can easily bring down the prices of HDB flats, it is in their economic and political interest to continue to leave the prices entirely to market forces.

Unlike in 1996 when the property market was allowed to crash suddenly without warning, the government will be more calibrated in its approach this time to pre-empt wild fluctuations in the prices due to the potential repercussions.

According to London-headquartered Royal Institution of Chartered Surveyors (Rics), which represents and regulates property professionals and surveyors, Singapore’s residential market rebound may fizzle out by 2010 due to economic uncertainty and the spectre of higher unemployment. (read article: http://temasekreview.com/?p=12848)

Should this scenario occur, the prices of HDB flats will probably stagnate and decline by a little, but will still remain above the levels of 2007. Home-buyers who are waiting for the prices to drop or crash will be disappointed.

Given the narrowing gap between the prices of HDB resale flats and that of mass market condominiums, it may be more prudent and worthwhile for those who can afford forking out an additional $100K or so to buy a private property instead.

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