With a new minister in charge of National Development, Singapore’s housing policy is currently in a state of flux. Thus, I am reluctant to discuss this issue too much; I’d rather wait till new policies are announced before I comment.
Nonetheless, there are times when it may be important to comment on any new data released. Today is one of those days. I see some discussion-worthy figures in the Straits Times and certain remarks in the accompanying article that badly need to be critiqued.
The news story in question was headlined ‘Strong demand drives up HDB prices’. It reported that
New figures show that HDB flat prices in the second quarter rose at their fastest clip since the third quarter of last year.
According to preliminary estimates, the Housing Board resale price index in the second quarter rose by 2.9 per cent to a fresh record from the previous quarter.
— Straits Times, 2 July 2011, Strong demand drives up HDB prices, by Dennis Chan
It presented the following price data from two major real estate agencies:
I am not discussing here the trend of rising prices because as the newspaper story explained, it could be a blip due to two key factors. The first is the large gap that has opened up in recent months (years?) between prices of private apartments and Housing and Development Board (HDB) resale apartments, putting private apartments out of many buyers’ reach. Thus demand has flowed into HDB resale flats. The second is that despite the HDB launching additional new projects to cater to rising demand, none of them are expected to be completed for at least a year or two more; hence supply remains tight.
This is not to dismiss the painful effect of such trends on buyers’ pockets, and indeed much criticism can be levelled at the HDB for poor forward planning, but my aim in this article is to focus on goals, not execution: What is HDB for?
Until we answer this question — and I mean finding a short answer, not a 50-page thesis that attempts to be all things to all people — the HDB will remain unclear about its mission and muddled about its priorities.
I think most people will say: The HDB is to be the provider of affordable public housing. However, this in turn raises two more questions: (1) what constitutes affordability? (2) what portion of the population should be served by public housing?
We brag that HDB houses 85 percent of the population as if the higher the percentage the greater the achievement. Is it? One could argue that by trying to serve so many, the HDB ends up muddling its priorities. Is it a builder of comfortable homes for the middle class, or of truly affordable homes for the less well-off?
Minister Khaw Boon Wan needs to put his mind to this question.
This is where the table above needs a closer look. Based on ERA’s figures, the resale prices of three-room flats including Cash-over-valuation (COV) are now around $370,000. These are generally the smallest flats available in significant numbers. That of five-room flats including COV are now around $510,000, which is only 38 percent higher than three-room flats.
Wait a minute, if one cannot afford resale flats, then one should buy new flats from the HDB and wait longer, you might say. OK, then, let’s look at the prices of new flats.
Using the example of the Costa Ris project in Pasir Ris, located at the end of the East-West metro line (go any further and one would tumble into the sea), I see from the HDB’s website that three-room flats are priced at about S$210,000, while five-room flats average S$400,000, which is 90 percent higher than new three-room flats.
Comparing new three-room flats with resale five-room flats, the latter command prices about 143 percent higher than the former. This represents the price spread between the cheapest realistic housing option for a small family and the dearest under our public housing policy.
Why did I ignore executive condominiums? Because the income ceiling applied by the HDB for eligibility to buy these is higher, at household income of S$10,000 a month. Three-room to five-room flats have an income ceiling of $8,000 a month (there’s a lower ceiling of $5,000 per month for new three-room flats in “non-mature” estates) and I am trying to compare like with like here.
Yet, within the income ceiling of S$8,000, families can have quite a wide spread of incomes. I can imagine some families with only $2,000 a month, while others are pushing at the ceiling of $8,000. That is to say, the highest is 300 percent higher than the lowest. But even at today’s high resale prices, the most expensive type of flat is only 143 percent more expensive than the cheapest.
What does this mean? Either the five-room resale flats are really cheap for middle-class earners or the new three-room flats are horribly expensive for the less well-off. I suspect it’s the latter. A simple computation of annual income and flat price will show you that.
Yet, the Straits Times had a source telling them:
Analysts noted that HDB flats remain affordable despite public housing prices showing a sharper rise compared with private housing.
‘This is because private property prices, in particular mass market condo prices, have increased beyond the reach of many HDB dwellers who had intended to upgrade,’ said ERA Realty key executive Eugene Lim.
— ibid
HDB flats remain affordable? Even when they’re at record prices? What does “affordable” mean anymore?
The HDB needs to do some soul-searching as to its mission (and I assume providing housing for the bottom rungs of society must remain a key part of its mission) and review what affordability means, all this quite aside from execution efficiency, forward planning and other operational issues it has been accused of neglecting.
* * * * *
The problem of unclear mission is most acute with HDB’s Design, Build and Sell Scheme (DBSS). Under this scheme, a private developer is sold HDB land and is free to set its own prices for the flats the developer builds on it. The case of the Centrale 8 project being developed by Sim Lian Group Limited aroused huge controversy when its record-breaking “indicative” prices were announced:
Centrale 8 at Tampines comprises 708 units, including three- to five-room flats. The three-room flats range in size from 61 sq m to 62 sq m, the four-room flats from 83 sq m to 84 sq m and the five-room flats from 108 sq m to 109 sq m.
Three-room flats are available for between S$397,000 and S$510,000, four-room units between S$531,000 and S$683,000 and five-room flats between S$685,000 and S$880,000.
— Yahoo News, 16 June 2011. Link.
Within days of the outcry, Sim Lian reduced its maximum indicative price by $102,000 to $778,000, a 11.6 percent cut. Even so, public interest in how much profit Sim Lian was going to make out of “public housing” continued to simmer until minister Khaw himself had to wade in. In his most recent blog posting, he wrote:
I was startled when I read the front page article in the Business Times “Profit margins for DBSS developers ‘look high’ ” (Jun 30). It alleged that the DBSS developer’s profit margin for Centrale 8 was 76%, even after it had reduced its highest selling price by over $100,000.
I thought it could not be right and had it checked. Sure enough, the article was fraught with serious errors.
For example, it quoted a land price of $82,222,000 and a maximum GFA of 721,188 square feet for the project. Both figures were wrong. The correct figures were respectively $178,128,000 and 682,385 square feet. This was a huge difference of almost $100 million. The errors led to a gross over-estimation by BT of the developer’s profit and gross profit margin.
Based on these figures alone, the profit margin would have been 26%, not 76%.
But even the reduced figure was wrong, as the article had excluded key cost items such as financing, marketing and administrative costs. These are significant costs and when included, would have further lowered the profit margin for all the DBSS projects listed in the article.
— Khaw Boon Wan, 2 July 2011, http://mndsingapore.wordpress.com/2011/07/02/startling-but-false/
The Straits Times, checking with at least two developers (but not Sim Lian) reported that “The profitability of their projects should thus be measured by their net profit margins, the firms added, which range from 15 per cent to 18 per cent.” (Straits Times, 2 July 2011, DBSS profit margin: Developers clarify report, by Yasmine Yahya)
Whether Singaporeans believe it is another matter.
Khaw added:
I have been in MND for 5 weeks, and not sleeping well. I am working my guts out to try to calm the market, for the good of all Singaporeans.
But I can’t do it alone. I need all to help.
— ibid
The help I can give is one piece of advice for the HDB: Get out of middle-class housing. Focus on housing for the lower 50 or 60 percent of households and do it even more cheaply.
Let the Ministry of National Development run the Design, Build and Sell scheme under different rules to serve the 6th, 7th and 8th decile of households (the middle class), freed from the complex eligibility criteria of public housing. Realise what is the key flaw of DBSS and fix it. The key flaw is that the scheme was meant to offer the public greater variety of designs with no control over prices. But events are showing that the public in those deciles is more concerned with pricing than with fancy designs.
So how should DBSS be run? It should tender out land to developers with just one tender condition: Sell the bulk of the flats you build on it under a price cap (or a mix of price caps). The developer who is most efficient at controlling his costs will most likely be submitting the winning bid. Market forces therefore apply to the tender sale. Yet public interest is still served in that the buying public remains assured that resulting flats will be affordable to the target segment of the population.
How to work out the necessary price caps? First, the ministry needs to identify what an affordable price is for the each relevant decile of of citizen and Permanent Resident households. Figures as to their household incomes are easily available from the Statistics Department (see thumbnail at right), from which we can estimate the price level of homes these families can afford.
As you can see from the table, I derive annual income from monthly household income. Then going by the rule of thumb that an affordable home is about four times a family’s annual income — this translates to paying 20 percent of your income over a 20-year mortgage, before adding interest costs — I work out what should be the target prices of flats in a DBSS project.
Assuming that families need 100 to 120 square metres of living space, the price per square metre is estimated as you can see in the last column. The tender condition therefore can stipulate:
To devote 25 percent each of the Gross Floor Area (GFA) of this parcel of land to
(a) flats of 100 square metres (+/- 5%) priced no more than $3,368 per square metre;
(b) flats of 110 square metres (+/- 5%) priced no more than $3,647 per square metre;
(c) flats of 120 square metres (+/- 5%) priced no more than $4,038 per square metre;
with the remaining 25 percent of GFA devoted to common areas or to other flats with no price cap.
No doubt, developers will be compelled to get innovative about how to build within these price constraints, instead of going for ever fancier, ever pricier flats. But they should have been doing that from the beginning, and the government should have seen that as the trustee of the public interest, its job is precisely to constrain developers accordingly.
‘As a trustee of the public interest’ — is that a novel way of looking at the role of the HDB and the ministry? If it sounds novel to them, then all the more they should be re-examining their role and mission from first principles, the very point I wish to make in this article.
Yawning Bread 
The only indicator that is important to the Singapore government is GDP growth. Everything and anything that have been done and will be done by the government is to get the GDP growth going. The one thing that the government is afraid of is contented Singaporeans. Dreams of upgrading of homes combined with forever rising property prices will keep Singaporeans working harder and harder. The longer it takes for housing loans to be repaid means later retirement age for Singaporeans. More workers working harder and longer translate to GDP growth. When housing prices reach a level when Singaporeans start leaving in droves and foreigners stop coming in, that is when the government will do something concrete to cool the market.
Dear Tanky,
What you said seems compelling. The future is bleak indeed. Why do you think the Government is so fanatical about GDP growth?
Regards,
MS
ministerial salary is tied to GDP growth, thus the government will try to preserve the growth even if it is unhealthy for the country. Singapore has a mature economy, but our GDP growth is unnessescarily high for our country (considering we’re nowhere near the size of China, nor are we a developing country)
Considering the gulf between the lower-income groups and affluent class, a gini-coefficient index would be a better measurement for the country so as to work towards a large middle class prosperity.
Dear Alex
It’s blindingly obvious the current HDB mission is to sell its flats* at the highest possible price without any political backlash to THE political party.
(* Or to be more exact, to sell the 99 year rental leases to Singaporeans at the highest possible price.)
HDB has been highly successful in its mission.
And no, it’s not muddled about its priorities at all.
Economics 101 says that a monopoly will seek to maximize its profits.
The only thing that’s unclear is what the daft Singaporeans are going to do about it?
Please don’t confuse yourself or your readers by toying with the idea that the HDB organization is spending sleepless nights because it’s worried about housing Singaporeans. Why would a monopolist be worried for crying out loud?
Khaw Boon Wan is complaining of sleepless nights in his facebook blog. That’s because he has to face re-elections in GE 2016.
Not because he is unable to figure out what is affordable to Singaporeans.
Why talk only of Centrale 8 – what about the others? Why not come out in the open to rebut the BT report in entirety? The margins of the 7 projects listed by BT totalled $756 million. The $ went somewhere. If not the developers, then HDB?
You are right. HDB has lost its compass, befuddled no doubt by the pendulum swings of its political masters – overbuilding in the 90s, underbuilding in the noughties. Policies like DBSS intended to help private developers through one period (why, is anyone’s guess) became enshrined.
This is before we even get to the question of why the rest of the household sector is subsidising HDB buyers who in turn pay “subsidised” market prices. 85% in public housing must statistically include the middle middle class.
perhaps when pricing new BTO flats – instead of using income deciles of the population, you could use income deciles of the first time buyer. Many Singaporeans already own their flats. The new flat buyer is likely to be younger and just starting out in career.
(Mah Bow Tan and HDB used the median first time buyer to calculate and show affordability of flats, and that was the only half correct thing they did in that whole excercise)
I like housing for various levels of incomes to “cater to the aspirations of Singaporeans” so I have nothing against DBSS per se. Setting a 20 year mortgage seems fair and do-able, leaving enough savings for retirement and medical. and I also like the idea of setting price caps and let the developers bid base on that. pretty interesting that 🙂
But it can be argued that DBSS is really for upgraders, so there’s no need to restrict price referencing to first-time buyers.
The policy of enhancing assets at the expense of the have-nots is plainly self-serving because the powers-that-be stand to profit as asset owners themselves. This is but one of the many manifestations of public policies going awry because of elitist rule. We have to remember that this is a democracy, not a plutocracy.
How should we realign the interests of policy makers with those of the nation? For a start, tie the pay of policy makers to the nation’s median wage, instead of GDP growth. This will make them pay attention to the poorer deciles of society.
Making an obscene profit of 25% (corrected from 76%) from public housing flats and they still claim it is reasonable ? The suckers must really be daft.
Do we know why HDB has been silent all these years about the land cost factored in the sale prices of each new HDB flats and still refused to divulge the actual figures until this very day ?
So far what has been revealed is only the fact that the market value of the land cost has been determined by the Govt appointed valuer under the SLA, as if the Govt appointed valuer is God and nothing wrong or incorrect can come out of it.
The fact that they are not revealing any breakdown of their costs including their land costs goes against the very nature of PAP govt who we all know will not hesitate to claim credit where it is due. One suspect that if these real costs are shown for all to see, it may be revealed that SLA is actually the culprit taking another big cut of the profits while HDB is manipulated to be the one suffering a large deficit annual year. No ? Show us the proof then.
Otherwise how to explain to the people that HDB have to suffer a yearly deficit while at the same time, its selected DBSS private developers are laughing all the way to the banks with obscene profits, with compliments and courtesy of HDB ?
“Get out of middle-class housing. Focus on housing for the lower 50 or 60 percent of households and do it even more cheaply.”
Agree 100%.
I have always held the opinion that HDB should just confine itself to 4-room flats and below. But it is politically unacceptable now: Even if they decide to do it people will not accept it because everybody wants their HDB flat ‘big & cheap’. You alluded as much in your comparison between new 3-room prices and resale 5-room prices.
On the DBSS scheme alone, there is nothing wrong with the developers making money because they could also have suffered losses if the market turned against them. It has happened before with State (URA) land sales that developers had to stomach losses (e.g. Trumps at Kembangan).
But that is not to say that the DBSS scheme is good policy.
DBSS, exec-condos, and showcase projects like the Pinnacle justified on the basis of the ‘sandwiched’ middle-class are a fallacy because there will always be a ‘sandwiched’ class of buyers no matter what! The way to satisfy the inevitably ‘sandwiched’ is to simply let them choose between scrimping for a more expensive (private) flat or living more comfortably in a ‘less-glamorous’ public flat.
Khaw BW claims he had sleepless nights for the past 5 weeks over the housing issue. His predecessor, the dud who created this housing mess and bubble, is happily collecting his MP’s allowance and will be collecting pension after the next GE. What degree of accountability do citizens have given that netizens have been giving alarms over the years on the housing issue? Of course Mah BT is not the only culprit, there was also the half baked idea abt Punggol 21 during Goh CT’s era, which led to a sparsely built town which nobody wanted to stay in the initial years. In the meantime, S’poreans will slave away 30 years to build the country’s reserves, who would want their children to suffer the same fate.
The Minister is doing his very best to build more flats at a more affordable prices. I am sure if not for his intervention the price of DBSS Centrale 8 project by Sim Lian Group Limited would have not been reduced by $100,000 overnight.
HDB should not worry too much about those wanting or wanting to sell their 5 room or executive flats. The majority of them will be in an income braket affordable enough to consider a slew of options available to them. It is the 3 and 4 room pricing for new flats that should engage the mind of the Minister. By and large it is those who are starting a family or those who want to down grade who want these 2 types of flats. Those who want to downgrade are of two types – those forced by financial circumstances and those wanting capital gains. For the latter group perhaps a variable 10 to 20% (depending on the amount of gain made) increase on the sale price of the new flat can be imposed.
Let us give Minister Khaw Boon Wan sufficient time to work out and implement desirable changes before passing judgment.
Hi Alex,
The median resale price should already include the COV. Resale price is COV plus valuation.
I can generally agree with your measure of affordability as four times the annual household income or 20 years of mortgage payment using 20% of household income.
However, in your table of estimating housing affordability, the household income should not be correlated directly with floor area. There are many large families with low household income and many small families with high household income. Do you suggest HDB to put a cap on the floor area for which certain household with certain income can buy?
To make the measure of affordability more equitable, i believe, the size of the family should also be considered when measuring affordability. However, since the household income fluctuates over time, such measure of affordability is far from ideal.
I suggest HDB to revamp the whole pricing scheme.
1) Educate the public that HDB are 99-years leasehold units not really owned by the people.
2) Introduce a registration scheme. Each citizen not holding on to private property and intending to move out of existing flat due to marriage or whatever reason to be allocated one HDB room.
3) Couples who got married shall get a 3-room HDB flat.
4) Each working adult shall contribute 20% of his annual income for 20 years to stay and subsequently get the right to stay in the HDB flat for the full lease of 99 years.
5) Example, a family consisting of a working adult earning $30,000 a year, a home maker and a child shall pay $6,000 per year for 20 years.
6) If the family got a second child, they can upgrade to a four-room flat depending on the supply, paying the same $6,000 per year if the income of the working adult remains the same. This way, the number of children does not factor into the flat price since people can upgrade to a bigger flat with no additional cost and the size of flat allocated is based on needs.
7) For those who have accumluted enough savings and want to live in a private property, they would need to move out of their flat. They would not be able to get back a refund for the money they have contributed as that would be considered “rent”.
Therefore, people who can afford move out into private property and those who could not, continue to stay and “own” the HDB flat.
To avoid “raiding the reserve”, the contribution of “rent” goes towards paying for the construction cost and HDB can keep ownership of the land without leasing or selling to anyone.
Dear Mr Khaw Boon Wan,
Sorry to hear about your sleepless nights as Minister for Affordable Housing.
May I offer you the Mah Bow Tan Solution.
Just keep repeating the following mantra.
“There is no problem.
Supply is plentiful and very affordable.
Singaporeans should be constructive in their criticism.
I am worth every penny of my million dollar salary”
If Mah can do it for 20 years, surely you also can do it for another 20 years.
Sleepless nights is just an excuse lah.
Minister Khaw is trying to solicit sympathies
just like a hooker pretending to be in
trouble.
What has he got to worry???
We also happen to have among the lowest birthrate in the world and one way to kill 2 birds with one stone is to accord the subsidy for the HDB flats according to the number of kids a family has. Hence couples who are childless or intend to be so can opt for a 4 room flat and above but enjoy a lower subsidy, if any, than say another couple with 3 or more kids.
Although parents are granted child reliefs here, it pales in comparison to that in Europe and Australia where the tax savings are more substantial and hence the incentive to procreate is far more effectively employed compared to Singapore’s.
With 85% of our population staying in HDB flats, a graduated subsidy cum incentive for bigger (and more valuable) HDB flats based on the number of children per couple have should prove to be a more effective incentive the the current cash grant and child reliefs.
This scheme will ensure that size of the HDB flats are allocated efficiently to the the respective families according to actual needs. It can even be extended to a 3 Gen family to promote family bonding. Not only will this scheme encourage our women to have more children, it will also prevent speculators from buying flats beyond their needs and means. Ultimately it also helps to moderate price fluctuations. As it is many believe in buying the biggest flats possible so that they can rent out the extra rooms to generate extra income. Such income is also deemed to be the ideal means to encash their locked up CPF monies before retirement. Such acts also run contrary to CPF’s objectives.
So long as the ownership of a HDB flat is seen as a foolproof investment scheme over and beyond just a roof over the head, everybody will seek out flats that offers the best yield with little regard to actual needs.
By offering bigger units (and consequently bigger subsidies) to couples with more kids, we can certainly kill more than 2 birds with one stone.
.
They probably have a plan for the low income, building more rental flats. It is going on as I type.
DBSS was a scary scheme started in 2005 by Mah and the 1st development started off, ironically in Tampines as well.
This scheme creates a multiplier effect on surrounding HDB property prices. Since valuation is done by HDB & DBSS flats are considered to be like resale flats.
Now, I would like to digress a little. The sale of state land. It seems there are no limits on current govt to cap the amount of land sold to private developers(I might be wrong). This might cause any elected govt of the day to sell as much as they want & be careless.
By the way, your solutions are good. I believe HDB had such a policy before, getting private developers to construct but the pricing was in the hands of HDB, till Mah thought of turning the heat on the market, by not building enough flats for first-timers & totally discounting the new citizens & PRs.
/// Khaw Boon Wan is complaining of sleepless nights in his facebook blog. That’s because he has to face re-elections in GE 2016. ///
What I find disturbing is his use of his blog to air his views. Is he floating trial balloons? Are those his personal views or official views. As a minister in charge of housing policies, I think he should not articulate housing matters in his personal blog.
How should private developers react to KBW’s ramblings on his blog? Are they just his personal grouses, or would they be somehow translated into official policies in the near future?
Alex,
You have neglected to comment on the more important demand side of the equation. As we all know too well, land is very scarce in S’pore so it is pointless focusing only on supply. Thsi government has allowed immigration to occur unchecked. The government failed miserably in housing plans (does the government think that foreigners/PRs can live on the streets on in caves?). Allowing PRs to buy resale HDB flats.is a key cause for the sky rocketing public housing prices. It is a no-brainer that we urgently need to either disallow PRs in the resale market or impose severe restrictions on this segment in the market (eg. PRs must have worked in S’pore continuously for at least 5 years to qualify).
In the first part of your comment, you criticise the government for not taking foreigners and PRs into consideration in housing infrastructure, for leaving them to sleep on the streets. In the second part of your comment, you say they should be shut out of HDB flats; which means they sleep on the streets?
Are you using this thread as a springboard to vent your anti-government and anti-foreigner sentiments simultaneously?
“anti-government” or “anti-foreigner”?
Alex,
You can say that I’m anti the ultra liberal (read as moronic) immigration policy. If that makes me “anti-government”, then so be it. As for “anti-foreigner” label, not a single S’porean can be tagged with that term in light of the fact that S’pore has one of the highest (if not THE highest) proportion of foreigners in its population.
The two parts of my commentary are not meant to be connected. The first refers to the lack of proper planning before making the decision to open the floodgates, whilst the second is my solution to curb the ever rising HDB flat prices.
That’s a great post. I’ve often wondered why 85% of the population need to live in public housing, thereby making the government the biggest homeowner.
I think that with majority of Singaporeans living in 99year leasehold flats, it never provides a sense of security and hence the national obsession over property and upgrading. I’m assuming their argument is about land scarcity, but surely some clever calculations and long term planning on their part can provide them with a reasonable estimate of land needed for the bottom X% of the population? And should they need the land back, they could buy it like all developers do.
To safeguard against greedy developers, put in strict controls for property ownership be it among Singaporeans, PRs or foreigners. We’re a lot of people on a small island; we can go along with the principal of higher demand, higher prices or try something else because this isn’t about nice-to-have items. This is about people’s basic needs and fundamental security. If it’s not fulfilled, we can never hope to move higher up the hierarchy. Surely, this isn’t the way to develop a country and its people.
Conrad Raj, editor of Today, says likewise: “In my view, it should abandon the [DBSS] scheme altogether and concentrate on the task the HDB was originally set up for -building affordable abodes for the man in the street” in his op-ed 5 July 2011.
http://www.todayonline.com/Commentary/EDC110705-0000204/Only-buy-a-property-when-you-can-afford-it
If you think seriously and deep enough there is plenty of space to accommodate double the population Singapore has now,
Everything can be turned on its head as Minister Khaw Boon Wan is showing the way now.
Just phase out hundreds of 4-12-16 storey HDB blocks progressively and replace them them with 30-40 storey blocks. The issue really is not insufficiency but pricing and afforability.