Leaps in resale flat prices have been making the headlines in the last few months. I will demonstrate in this article what is the most likely chief reason for this: the rise in the number of Permanent Residents, coupled with the fact that no government agency is responsible for catering to their housing needs.
For non-Singaporean readers, I should explain some context: 82 percent of Singaporeans live in flats built by the Housing and Development Board (HDB), our public housing authority (Source: HDB Annual Report 2008/9). Citizens can either buy newly-built apartments directly from the HDB (provided they meet certain criteria) or from the resale market. Permanent Residents can only buy from the resale market. The HDB sells new flats at fixed prices, but in the resale market, prices move according to supply and demand.
As reported by Today newspaper,
HDB resale flat prices have hit record highs again. Prices rose by 4.1 per cent in the second quarter of this year, compared with the previous quarter, making it the fifth straight quarter of increase.
Analysts say the demand is driven by those who don’t qualify for a new flat or want a flat quickly.
High prices in the private property market have also made resale flats an appealing choice, said Dennis Wee Group director Chris Koh.
— Today, 24 July 2010, Resale prices still rising
Siew Kum Hong, in his blogpost Deus ex machina, contests the Minister of National Development’s claim that the government is powerless to influence prices for resale flats. He set out five reasons why prices have been going up strongly, the second and third of which related to foreigner population.
I think we need to distinguish between Permanent Residents (PRs) and other foreigners on work and employment passes. When it comes to purchasing resale flats, only PRs can do so, other than citizens.
Prior to seeing Siew Kum Hong’s blogpost, I came across a post in Temasek Review that pointed the finger at the HDB for the red hot prices in the resale market. It had some numbers from HDB’s annual report that showed the body drastically scaling down its building program during the last few years. I decided to take a look at the source myself. This is what I found:
The numbers for the above were from HDB’s Annual Reports for 2005/6 and 2008/9 (the latest available).
Demand for newly-built flats averages about 10,000 units a year, but HDB’s building program has indeed swung like a roller-coaster. In the early part of the decade, it was building far more than needed, but over the entire nine-year period, the numbers are almost exactly the same. Demand totalled 93,793 units, while 93,763 units were built.
Thus, I don’t see that as any immediate explanation for the rapid increases in resale prices. On the face of those numbers, it is not as if unmet demand for new flats is spilling over into the resale market.
That said, we may have to think beyond numbers. It is more than possible that there is unmet demand, except that it is not captured in the “bookings” data that HDB collects. This can happen when home-buyers, even though they qualify for new flats, don’t feel like waiting, and go straight into the resale market to look for one.
Siew Kum Hong mentioned too the problem posed by HDB’s Build-to-order policy. They don’t actually start building until 70 percent of planned flats have found buyers, so nobody can be sure when exactly the flat will be built, if at all. This uncertainty then puts people off signing up for a Build-to-order flat, which cumulatively means fewer people want to sign up, which then means it takes longer to reach the 70-percent threshold! So people may just give up and turn to the resale market.
Unfortunately, there isn’t much data in the annual reports on the resale market. What I could see was that in a typical year, there would be about 30,000 resale transactions — the sales have to be registered with the HDB; that’s how they capture the numbers. But there are no numbers about demand and supply.
However, we can get an indirect feel of demand and supply by looking at population and the total stock of HDB flats in Singapore.
The population figures were obtained from the website of the Department of Statistics. They show that between 2005 and 2008, our total resident population increased 5.0 percent. More importantly, the number of PRs increased 23.6 percent. You might recall from above that PRs can only buy from the resale market, so this is an important angle. Hence, although we cannot put a figure to it, it does suggest that demand for resale flats has been increasing strongly.
Where would the supply of resale flats come from? From the existing stock of HDB flats, of course. At any given time, a certain percentage of flat-owners would be looking to sell. Yet, from HDB annual reports, I see that between 2005 and 2008, the total stock of HDB flats increased only 0.6 percent, which suggests that the available resale units on the market would not have increased by much.
I don’t have equivalent figures for 2009 and 2010, and without them I cannot get any closer to understanding the price rises in the first half of this year, but one can guess that this trend from 2005 to 2008 is continuing.
There seems to be a policy hole with regard to resale flats. Nobody in government is in charge of matching supply and demand on a macro level. The HDB needs only to consider citizen population in its forward planning, since new flats that it builds can only be sold to citizens. It is not in the business of building flats for PRs.
Yet, most PRs find prices of private condominiums out of reach, so they can only look to resale HDB flats for housing, but if the total stock of HDB flats hardly increases, one could assume that the resale units available would hardly budge too. And all this while, more and more PRs make Singapore their home.
At some point, the HDB needs to expands its scope, and cater to PRs as well. It needs to take into account their increasing population numbers and think about how to provide for them in its building program.
* * * * *
It is very dangerous for the government to allow home prices to rise like this. Although it has been argued that rising prices benefit existing home owners who see their asset values rise, I think this is an extremely short-sighted view.
For most people, when they sell one home, they usually need to buy another, so rising asset values mean very little. Your exchangeable value is what matters, i.e. how much of the present flat you need to exchange for the next flat. Say, in one year, your present flat is worth S$180,000 and your next flat costs $180,000. Six years on, you need to move again. Your second flat has risen in value to S$300,000, but to buy your third flat, it also costs $300,000. You’re no better off.
But at a macro level, we’re worse off. This especially if property prices rise faster than income, for then it means that a greater and greater proportion of disposable income is devoted to housing, whether in the form of rent payments or in the form of mortgage payments. This has a depressing effect on other parts of the economy.
Then there is a “lock-in” trap. By this, I mean that as people purchase flats at ever-higher prices and take a loan to do so, which most do, they find themselves unable to sell at anything below the price at which they had bought. The bank will demand that they pay up the difference in cash. If people can’t, then banks will suffer bad loans. We create the conditions for extreme fragility. The knock-on effects on our financial system, on people’s stress and worry level is magnified every time we hit an economic downturn.
Yet, even though this is a serious economy-wide threat, nobody seems to be in charge of planning. We seem to think that the HDB is the major player, but when resale transactions (at about 30,000 a year) outnumber new flat sales (at about 10,000 a year) by three to one, it is resale prices and their lock-in effects that have greater significance than HDB’s new-flat prices.
(Not that HDB’s new-flat prices are that attractive. The HDB themselves appear to be pushing up their selling prices, which in turn pushes up resale prices.)
We’re on this turbulent ride, bumping and yawing, but nobody’s at the wheel.