Why peg prices of new HDB flats to market rates?
September 30th, 2009 | 
Author: By Ng Kok Lim
I refer to your letter “Why we peg to market rates” to Today dated 25 Sept 2009. (read letter here)
You wrote that the HDB incurred an average deficit of $1,045 million a year on home ownership programmes. However, if we refer to Page120 of HDB’s 2008 annual report, $625,102 was spent on “upgrading, improvements and demolition”.
Surely upgrading doesn’t count as home ownership but perhaps home improvement instead? It gives the false impression that the HDB is subsidising new homes at a cost of $1,045 million when in actual fact the amount is much less.
On the same page is another $783,757 item called “provision for loss for properties under development / for sale”.
Presumably, HDB foresees the price of unsold HDB flats to fall short of construction costs by $783,757. But by claiming to price HDB flats at market levels, its hard to imagine how HDB can foresee prices of unsold HDB flats to dip below costs by so much.
If we put these two items aside, HDB actually made a profit of $363,859 instead.
Instead of repeating its market pricing rationale yet again, it would be more helpful if HDB can address the issue of positive feedback between resale flat price and new flat price.
As market price of resale flats soar, so too does the price of new HDB flats since the latter are pegged to market prices. But the increasing price of new flats makes them less attractive to buyers and does nothing to abate the demand for resale flats and so demand for resale flats continues and the whole cycle repeats itself.
The price of many resale flats have jumped by $100,000 in a matter of one, two years.
Can HDB explain why the $30,000 government subsidy is considered ’significant’ compared to a typical $100,000 rise in flat prices? HDB claims that market pricing allows all to receive similar subsidies regardless of market movements. But the $30,000 subsidy is not even enough to make up for the loss incurred by a would be buyer when the market goes up by $100,000.
HDB claims it is illogical for Mr See to attribute property price increases to the HDB because the recent asset appreciation is not unique to Singapore.
This is like saying that the banks in Singapore are not responsible for losses arising out of the recent Lehmann Brothers collapse since similar losses have occurred elsewhere too. But banks here are being ordered to put their houses in order. Surely there is something that the HDB can do as well?
HDB should explain what being below the international benchmark of 30% means in terms of how much one gets to keep in one’s pockets. For example, HDB has demonstrated that a 3-room flat costing $150,000 and sold to a household with income of $2,000 only requires a monthly instalment of $460 and a resulting ratio of 23%.
But for a typical family of four with a monthly sustenance need of $500 each perhaps, the total cash required is already $2,000. Where is the family going to find money for the $460 monthly instalment? So the 23% ratio is meaningless as far as one’s own pockets is concerned.
Posted in 28 Responses to “Why peg prices of new HDB flats to market rates?”
Loading ...
Alex Tan Allan Ooi AWARE Chee Soon Juan Chiam See Tong Claire Lee David Widjaja DBS Dr Allan Ooi Dr Silviu Ionescu Dr Vivian Balakrishnan Foyce Le Xuan highnote5 Hong Lim Park Jack Lin Xinli Jack Neo Jack Neo affair Jack Neo scandal Josie Lau Josie Lau Meng Lee Lee Kuan Yew Lehman brothers Lighthouse Evangelism MAS minibonds Miss Singapore World NTU stabbing PAP Pastor Rony Tan Ris Low Romanian diplomat in hit-and-run Rony Tan S-League silviu ionescu Singapore Singapore 2010 Youth Olympic Games Tan Kin Lian Thio Su Mien Tiger Woods affair Tong Kok Wai Top 8 Vivian Balakrishnan Wendy Chong Y O G Youth Olympic Games
WP Cumulus Flash tag cloud by Roy Tanck and Luke Morton requires Flash Player 9 or better.
good digging into hdb figures. this is what we call 自相矛盾
it’s true that asian countries house bubble is blowing at the moment but i agree with mr ng that to blame the situation and not taking corrective action yourself is tantamount to suicide.
Just because someone gave you a rope to hang yourself doesn’t mean you need to follow suit.
The HDB will either repeat “HDB flat is affordable” crap or too lazy to answer these difficult questions.
True. For fairness to present and future buyers, the bare first-timer CPF grant should not be a fixed component and should be pegged to the market rate.
Hope that HDB will do something fast to really help the native Singaporean first-timers.
Sorry, but are your figures correct Kok Lim? HDB’s is actually $1,045 million, or $1.045 billion whilst your’s is $625,102 and $783,757 which add up to only $1.5 million?
Cherios
It will be more simple and convincing to us if HDB have the guts to release the actual facts and figures to us instead using some benchmark figures which nobody can really understand how these figures was arrived at in the first place.
So HDB or Mah Bow Tan, can you please stop beating the bush and just give us the facts if you do not have anything to hide !
What we know is that HDB’s pricing based on resale will create 2 spirals chasing after each other…
Not linking HDB flats to the market is a WORSE IDEA.
If the resale market goes up $100K, and the new flats go up only $10K, it means the person buying the new flat can later sell it on the resale market and pocket $90K in risk free profits. It does not make sense to give such handouts. You don’t see Singaporeans happily selling their flats at the resale market for a high price return the profits to HDB, do you?
As for spiral feeding each other, it does not make sense at all. Flats price is based on demand supply curve with the person’s income and willingness to service loan. Imagine if HDB sell at $100K discount to the market but the construction capacity is limited to 8000 flats, you think this will make the market drop by $100k? Definitely not! It will just make HDB’s queue grow and waiting times for new flats increase by years. HDB cannot meet all demand on its own because there is a large base of resale flats on the market which overwhelms the amount of flat HDB can build.
Anyone suggesting HDB lower its new flat price is not making sense at all, HDB cannot flood the market to forced down prices given construction capacity and land is limited. It is like saying the Bedok Hawker center roti prata man can cause the roti prata price in Singapore to drop by selling his prata at 30cents. It is not possible because he cannot supply the entire market and meet all the demand.
HDB, together with government, can control the price of resale flat and new flat. Based on basic understanding of economics, the price level is determined based on the demand for and supply of a good. On the demand side, the government controls the population and by increasing the number of foreigners in the country, they can create excessive demand for the flat. On the supply side, HDB is the monopoly in supplying public housing. So who can we blame when the HDB flat is exceptionally high ???? The answer is obvious!!!!
Nice one. Your explanation makes a lot of sense.
To add on, the clamour for increasing the 8k income ceiling to enjoy the grant for resale flat or to buy new flat also does not solve the problem. Instead it aggravate the problem as this will cause even more demand for resale and new flats which will further accelerate the market price.
The bud of the problem is as follows:
Without unnatural intervention in COV and market forces,
how to help Singaporean native first-timers own their first home without overstraining their retirement needs.
A couple, for survival purpose(3 meals a day, no Europe honeymood, no cars, basic public transport, no branded clothes), need 1k. Factoring in household maintenance bills like electricity, gas, water, future savings for education for 2 children and upgrading purpose, add another 1k.
For retirement needs, add another 1k.
Without any outstanding loan, a normal couple need only 3k per month.
Flat prices have increased at an astronomical rate. A typical 10 year old 4-room flat at the fringes of Singapore already cost at least 350k. For monthly loan that stretch 25 years, it is around 1k.
In total, this childless couple need to have a combined income of at least 4k for basic survival and a roof over the head. With the birth of each child, need to add another 500, which will increase with each growing year.
The point is that the cost of living is high in Singapore.
Thinking left right up down, the only possible way that would not impact too much on natural market forces and yet help native Singaporean first-timer, is for HDB to increase the first-timer grant. This can be done by pegging it to market rate with year 2007 as the benchmark.
Otherwise, I don’t see any other way that would not cause further problems.
Resale flat and new flat price are interrelated. If the new flat price go down, likewise for resale price. Someone is assuming these two market are independent and don’t understand consumer behaviour at all.
If our land is limited, why are we importing so many foreigners ????
To TopSage
You missed something.
If the new flats are kept low, then resale price won’t go too high.
Hence HDB plays an important role in setting not just new flat prices, but the entire property market, as new < resale < EC < condo < landed.
One Chinese saying: 水涨船高。 As the water (new HDB) raises, all the vessels got elevated.
Two words to describe HDB, GIC and Temasek Holding’s accounting and reporting standards. Uniquely Singapore!
//sgcynic.
if the report card is really rosy, does gic/th/hdb need to resort to these creative presentation of accounts?
//TopSage
After you sell your flat, to pocket the risk free profit, where do you live?
JB? your parents?
After pocketing 100k, you think you want to live with your parents?
How come Malaysia doesn’t have this kind of rising property prices problem?
“Not linking HDB flats to the market is a WORSE IDEA.
If the resale market goes up $100K, and the new flats go up only $10K, it means the person buying the new flat can later sell it on the resale market and pocket $90K in risk free profits. It does not make sense to give such handouts. You don’t see Singaporeans happily selling their flats at the resale market for a high price return the profits to HDB, do you?’
Nonsense! HDB can limit such REAL subsidy to ONE-TIME per lifetime. Assuming that guy sells the house to make 90k profit, then where is he going to stay? if he buys a resale flat, the profit will be used to pay for the higher resale price (which contributed to his profit). alternatively, he can buy a private flat, price of which is also linked to resale price.
only when Singaporeans are given subsidies based on REAL COST rather than market costs, are we really given REAL subsidy.
Look at it this way. Pap created the demand more than supply market by building less flats and increasing immigrants.Once the price of resale flats soars, the price of new flats increases as well as it is peg to the market price. This translates to increase in profits from new flat sales for hdb and at the same time allow pap to tell the current flat owners that “Hey, your flat was worth 200k now its 300k all thanks to us!” Giving the false impression that they have succeeded in creating wealth for the nation instead of artificially inflating the market.
I refer to the comment by Check figures?:
The figures in the annual report are all in terms of S$’000. So $625,102 is actually $625 million while $783,757 is actually $784 million. When you add these two up, you get $1.5 billion which exceeds the $1.045 billion loss HDB purportedly made.
Excuse me but I don’t understand one factor:
We welcomed about 80000 permanent residents this year to date, according to the latest population statistics, right? And this figure is less than the year before that, and the year before that year also. So it’s the lowest of 3 years already.
In these 3 years, I didn’t notice HDB building some flats to house them.
Where can they live?
I refer to the post by TopSage,
I don’t agree with him. Like what most people have pointed out here already, if the govt builds enough new flats that go up by $10k only, there is no reason why the resale market should go up by $100K. Imagine a situation where everyone is allowed to buy new flats at a price of +$10k only, who would go for a +$100k resale flat? Surely, the $100k will plummet to become closer to $10k.
TopSage’s entire argument centres around construction limit of 8,000 flats. Why should there be a construction limit of 8,000 flats in the first place when there does not seem to be any limit on the number of immigrants we are admitting?
But he is right to say that if we limit the construction of new flats to 8,000 while the number of new households keep increasing and increasing, HDB’s queue will continue to grow and waiting times continue to increase. All this goes to show that HDB is simply not building enough over the past few years for the massive influx of people that came in. 8,000 per year is simply not enough.
So rather than us not making sense, it is TopSage himself who isn’t making any sense at all. Mah Bow Tan has said many times before that they have the land to accomodate more people unless TopSage is saying that Mah Bow Tan is bull shitting.
The roti prata analogy TopSage used clearly shows that he doesn’t appreciate the delicated nuances of the real situation. Imagine there is only one importer of flour to Singapore, a sole monopoly of flour. If the flour importer decides to withhold the flour to the Singapore market, that will constrict the supply and cause demand to far outstrip supply. What will happen? All the roti prata sellers in Singapore will be bidding top dollar for more flour. That will cause the price of roti prata to automatically go up.
In this analogy, the HDB is the sole importer while the roti prata sellers are individual home owners. Notice that ultimately, the one deciding the price is actually the sole importer which is HDB, not individual roti prata sellers or home owners.
And that is the myth behind “willing buyer, willing seller”. It is not the willing seller of roti prata that determines price across Singapore. It is the flour supplier who is ultimately a monopoly.
I refer to Wee Soon Khai’s comments,
Our property markets are all interelated, private and public. For example a PR buys over an HDB. The Singaporean who sold the HDB now has the money to go and buy condo. So that contributes to increase in condo prices. So the demand spills over to the condo side.
Or, the Singaporean rents out his entire flat to foreigners and uses the cash flow to buy a new condo. Again demand spills over to the condo side.
Or, the PR directly buys a condo, or rents condo.
How many HDB flats are needed to house the 80000 P.R.s this year? 8000?
And last year, there were even more P.R.s right? And the year before that, also a lot right?
Were there 8000 flats the last two years to house them too?
P.R.s need housing too.
How about HDB sell the flats at cost of building only. If you want to sell, you can sell it only sell it back to HDB.
All who want to buy resale flats will need to buy from HDB. HDB can put in all the conditions for these resale flats to achieve the required national objectives. Bottomline – to take as little money away from the citizens as possible while not losing any money in building the flats.
Then HDB really becomes public flats. This was the original intent. To house the masses – not to make it a asset inflation exercise.
I think MBT actually let the 30% number slip out. This tells you that the top HDB apartment is meant to cost 8k*0.3*12*30=864k.
//abc
yeah, the amount you paid to 5 room flat including interest is 800K++
i dun see how HDB can make a lost of any kind with the amount of interest they earn from it..
I’m so sick of it all.. better to work hard and earn more…
The current government is quickly changing Singapore into a very costly and congested place to live in just 5 years. It took 39 years to build the nation but just 5 years to destroy!
My divination say that I can’t keep running in fear of hurting someone I have to do what I want.
My current address is:
http://qilegege.blogspot.com/
Here I release my current blog address.
I want the World to know what kind of person is Wee Soon Khai, and his wife, Lim Wei Chean, a reporter with The Straits Times, and how is Lim Wei Chean’s Father, Lim Ah Ngiaw. I want thw world to know that being able to “cover” with a wife in the news networks is very good. So everyone canmarry a reporter from The Straits Times, and most important of all, have good networkings with people who can “cover” the mistakes.