Housing minister’s frustratingly incomplete sales job, part 1

Some articles are difficult to write. I have been wanting to respond to Minister for National Development Mah Bow Tan’s two commentary pieces in Today newspaper wherein he explained key policies with regard to pricing of public housing. After going through several drafts, none of which satisfied myself, I finally realised what the root problem was. While Mah’s articles contained some important details,

• he still spoke largely on the basis of the “average” household;
• the details were ultimately incomplete.

The result is that try as I might, I cannot get a grip on it — there are just too many gaps.

On the other hand, there is enough detail for us to get a glimpse of the underlying pricing philosophy, and the way the ministry frames affordability issues. On both issues, his articles provide a good starting point for a more informed discussion. Yet once again, we can’t go very far without more information.

To compound matters, I tried to verify some of  the figures that Mah cited in his two pieces. The more I checked, the more I found the figures to be flawed! My short sharp rebuttal grew and grew as I felt compelled to explain why his figures are unreliable — that’s to be found in my part 2.

If you have not read Mah’s articles, may I suggest you first read them in these archived pages: Part 1 — Pricing flats according to their value and Part 2 — Are HDB flats affordable?

* * * * *

In Part 1, he wrote about the policy decision to proceed on the ownership model rather than the tenancy model and the way selling prices for new flats are determined. He also defended the factoring in of land cost in total development cost. I know a lot of people want the HDB to factor land cost out. I disagree, I think it is bad accounting to omit it. Where I think the ministry is remiss is in not disclosing the details.

Although Mah did not explicitly say so, he suggests that those who think that factoring out the land cost would lower selling prices are mistaken. This is because selling prices are no longer determined by development cost, but by prevailing market value less a discount.

It struck me that this is a significant departure from previous statements from about 5 – 10 years back, wherein the ministry kept assuring  people that the ministry makes no profit on the sales of flats because they were sold at cost. More recently, they’ve been saying there’s a subsidy involved (without detailing how much), which left the impression that selling prices were based on a cost-minus formula.

The latest statement, however, says cost has nothing to do with it!

The following statements in Mah’s first article (29 October 2010) would illustrate:

New flats are now priced based on what professional valuers assess similar flats would fetch in the open market, but discounted with a substantial subsidy.

Further down he poses the question:

If market-based pricing is fairer, why do some people argue for cost-based pricing?

This confirms what the first quote said — selling prices are not cost-based. Naturally I had a follow-up question, which the article did not answer. When he said that the starting point for arriving at selling prices would be what professional valuers assess as fair market value, wouldn’t that mean resale prices? So if resale prices increase markedly, wouldn’t the starting point for HDB’s pricing for new flats also escalate? Then wouldn’t we have a dog-chasing-its-own-tail scenario?

But of course, as Mah said, the final selling prices are discounted from that starting point — and therein lies what he calls a subsidy.

For example, for Punggol Spectra and Fernvale Crest – two recent Build-To-Order (BTO) projects – the average development cost per flat was $220,000 to $240,000, while the average selling price was $160,000 to $200,000, or $40,000 to $60,000 below cost.

HDB flats are generally priced below their development costs. Over the last three years, the average annual loss on the sale and development of HDB flats was around $600 million. If we include other housing subsidies, such as the Additional Housing Grant and the CPF Housing Grant, HDB’s total annual deficit would be about $1 billion.

Frankly, far from being reassured by the above, I was flabbergasted. Not only did it beg the question, “So what is the formula for determining selling prices?”, the above connoted the following:

• The HDB’s net selling prices for new flats are largely determined by what the government considers politically feasible prices — they have no relation to costs nor very much to market value;
• In fact, the HDB is unable to build within politically feasible prices;
• We have a public housing cost/pricing model that is essentially unsustainable.

Analogy: a manufacturer knows that the product it makes cannot command a price beyond $10,000. Yet it cannot make that product for anything less than $12,000. How sustainable is this business?

I have argued before: The HDB needs to think creatively and come up with a way of construction that is simpler and cheaper per unit floor area. Our architects may be coasting along doing things the way they have always done instead of thinking out of the box. We may also need to shift aspirations to simpler flats with less fancy fittings.

Then again, others might argue that while incurring a loss for every unit of product sold may not be a sustainable model for a private enterprise, it can be sustainable for a government. The loss per unit can be seen as a form of wealth transfer from the rich (who are taxed) to the less well-off (who receive the subsidy). Mah himself alludes to this by saying:

We must price new HDB flats such that the public subsidies that can be realised on resale are fairly distributed across buyers.

Alternatively, some might argue that the subsidy is just a paper subsidy; that it is not far off from the notional cost of land that had been incorporated into total development costs.

The frustrating thing about both explanations is: We don’t know.

If we want to see it as a wealth transfer, we need to ask what percentage of the population benefit from the wealth transfer. Generally, if the bottom 20 – 30 percent of the population benefit, then one may say it is sustainable from a governmental budgetting point of view. But if 60 – 70 percent benefit from something taxed out of 20 percent of the population, then it is hard to believe that it is sustainable. Without the details of costing and pricing, we just simply don’t know and cannot come to any judgement.

If we want to argue that the subsidy is just a paper subsidy mostly a result of the inclusion of notional land cost, once again, where are the details to support this belief?

Mah does not provide.

(And we don’t seem to have members of parliament interested in pursuing this question to a necessary level of detail.)

In Part 2, I will deal with the minister’s discussion of affordability.