Public housing woes

Concerns over escalating HDB flat prices are spurring an increase in supply. But tackling the issue may require some strategic changes.

Born into a family that ran a business building homes in Singapore and Malaysia between the 1960s and the 1980s, Tan Boon Gim developed an affinity for real estate at a young age. While the business folded following Black Monday in October 1987, when stock markets worldwide plummeted in response to a crash on Wall Street, Tan's interest in property never abated.

These days, Tan, who turns 40 next month, is busy working with a couple of friends on a property web portal, which he hopes to launch next year. The intention is to offer information to help those in Singapore's real estate market — home buyers, sellers, agents and even developers — make more-informed decisions and, in so doing, "reduce hysteria in the market", he lets on.

Notably, public housing in Singapore has become a grave concern for citizens as far as affordability goes, according to Tan, who writes about housing matters in his blog. "Everybody is nervous about not being able to buy a property they can afford. It should not get to a point where the general citizenry cannot afford to buy a flat," he tells The Edge Singapore.

Tan is one of a growing number of voices lamenting runaway public home prices and what they deem is a deviation by the HDB from its original mission of providing affordable housing to citizens. Recent news reports of some HDB flats being sold for $1 million in the resale market, and hefty cash-over-valuation (COV) premiums sought by sellers, have further stoked sentiment among potential buyers against escalating prices. Including 3Q2012, prices of HDB resale flats have increased for 14 consecutive quarters.

Even brand-new build-to-order (BTO) flats are not going cheap. Prices of new BTO flats are usually pegged to the market value of existing homes in the same locale but sold at a discount. So, while the government maintains that new flats are subsidised, prices may still not be palatable given that resale home prices are high. In some popular estates, new five-room BTO units can go for no less than $500,000. In 1980, prices of new five-room HDB flats started from $47,200.

Higher-income earners who exceed the household monthly income ceiling of $10,000 for BTO flats have not had it easy too. Households making more than $10,000 a month but are unwilling to go for private property can buy a HDB flat only from the resale market. Those earning up to $12,000 a month can opt for an executive condominium (EC) — a product the government introduced in 1995 to Singaporeans aspiring to own private property. Buyers of ECs are eligible for a government housing grant.

Yet, the minister in charge of housing, Khaw Boon Wan, recently had to remind EC developers through his blog to keep such properties affordable after some new units were sold for more than $1.7 million. ECs are generally 20% to 25% cheaper than similar-sized 99-year leasehold mass-market private condos.

Prices of HDB flats and ECs have been going up, outpacing income growth, for various reasons. These include a jump in the number of permanent residents, who are entitled to buy resale HDB units; a slew of en bloc sales of private property in recent years, enabling beneficiaries who opted for public housing after selling their homes to pay for HDB flats upfront, which drove up prices in the process; and supply generally not catching up with demand. The mismatch between demand and the supply of new flats in turn pushed up prices of resale units.

Addressing affordability
The government has responded by attempting to address both the demand and supply sides of the equation. Monthly household income ceilings for BTO flats and ECs were raised last year, by $2,000, to allow more of those in the so-called sandwich class, with household wages of between $8,000 and $12,000, to buy public homes. On the supply side, HDB has announced that it would build a record 27,084 BTO flats this year and at least 20,000 flats in 2013.

The government has also not let up reminding Singaporeans to spend within their means. According to findings released last month of a study commissioned by the Ministry of Manpower on the adequacy of CPF funds for retirement, lower-middle income households with a monthly income of $5,100 will do well to buy a three-room flat. Households making $7,100 a month can go for a four-room unit, while a five-room flat is appropriate for those earning $9,200.

Despite these efforts, many still lament that HDB prices remain out of reach. Some commentators, including Yeoh Lam Keong, former chief economist of the Government of Singapore Investment Corp, have said that for BTO flats to be truly affordable, they should be priced at two to three times of low to median annual incomes in Singapore, instead of between five and six times currently.

And, if recent COV premiums are any indication, prices of resale flats are unlikely to ease any time soon. According to the Singapore Real Estate Exchange, the median COV premium nationwide is expected to reach a new five-year high in 2012. In popular estates such as Marine Parade, the median COV has risen by more than 45% over the past 12 months to $55,000 currently; that for Bukit Merah has increased by 31% to $42,000.

Back to basics?
According to Tan, the government needs to rethink its public housing strategy. "We need to go back to our roots. What is public housing? It's about value. We don't want to deprive people of enjoyment, but we need to be pragmatic." The government's push for public home ownership worked well in the 1970s and 1980s, but is no longer appropriate today, he says. "To keep expanding the old model to meet the needs of the new generation is very disenchanting."

With more than 80% of the population living in HDB flats, the effects of runaway property prices are far-reaching. As Tan points out, this has produced an investment mind-set among those in the HDB market, with many believing that their property will only appreciate in value, allowing them to ultimately sell it for a tidy profit.

One way to reduce the fixation with public home ownership is to offer more HDB flats for rental and make them available to all, instead of just the low-income group, says Tan. To make renting attractive, the government can offer meaningful rental subsidies to citizens.

At the same time, HDB flats built for sale should come without frills, such as expensive lighting, and fanciful surrounding amenities as these often add to their overall costs, he figures. Those who want more than a basic flat can turn to the EC market, he adds. In some cases, flats built for sale can also be offered on leases shorter than 99 years so that those who do not foresee themselves staying long in these apartments can pay less.

The government can also do a better job of anticipating demand for homes, Tan says. "We need to be better at projecting our population growth. That is predictable in Singapore because we are not counting babies; we are counting foreigners."

Removing land costs
The Singapore Democratic Party (SDP) has also come up with a plan to make public housing more affordable. In essence, the proposal entails building what the party calls non-open market (NOM) flats. The prices of these units, unlike those of existing flats, will exclude the cost of land and consist of only construction and administration costs.

"Because the HDB pays less for the land than a private developer, this is touted as a 'subsidy' for HDB flat buyers. Every year, over and above the cost of building HDB flats and running the HDB, a few billion dollars in 'land costs' are paid by HDB buyers to the government. As a result, the sale of public housing, just like the sale of land for private residential use or commercial purposes, is a huge profit-generating enterprise," SDP says in its housing proposal report, released in November.

Under SDP's plan, owners of NOM flats who intend to sell their property after a minimum occupation period can only sell it back to HDB at the current price of an equivalent new NOM apartment excluding the value of its consumed lease. The idea behind this is to keep prices low and discourage property speculation.

In effect, SDP claims, prices of NOM flats will be substantially lower than those of current new HDB units, at an average of $70,000 for a two-room apartment and $240,000 for a five-room flat. The number of years homeowners require to repay their housing loans will also be reduced.

Additional ideas tossed up by commentators to make HDB prices affordable include bigger housing grants and interest-free government loans. More are expected to surface as the debate on housing affordability continues.

By providing value-for-money public housing in its early days, the HDB succeeded in settling people displaced when Singapore separated from Malaysia. While it should be lauded for moving on to improve living conditions after relieving the country of an acute housing shortage in the 1960s and 1970s, the HDB should now take stock and recalibrate its strategy given the growing concerns being flagged over affordability.


This story first appeared in The Edge Singapore weekly edition of Dec 31, 2012-Jan 4, 2013.


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