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.

8 Responses to “Housing minister’s frustratingly incomplete sales job, part 1”


  1. 1 mahb 24 November 2010 at 22:03

    Again there is no breakdown of cost and nobody know what is included in the “$220,000 to $240,000 development cost”. I am certain that if they had nothing to hide they would have plenty of detailed examples in the papers and everywhere for all to see and appreciate that we do really get a subsidy.
    Obviously that development cost includes land so there is no real loss or they would have stopped building hdb blocks long ago.

  2. 2 George 25 November 2010 at 01:14

    Alex,
    When HDB housing is a political tool, there is no way you are going to get any transparency or decent details.

    This issue dates back to the time when Chiam See Tong and the late (and disgraced and corrupt) Teh Chiang Wan was the ND minister. It is that long and that much to hide!

    I suspect Singaporeans will never get any closure on this issue in the life time of this govt.

  3. 3 George 25 November 2010 at 01:18

    Have to rewrite. Please use below in place of above:

    Alex,
    When HDB housing is a political tool, there is no way you are going to get any transparency or decent details.

    This issue dates back to the time when Chiam See Tong was challenging the late (and disgraced and corrupt) ND Minister Teh Chiang Wan for details in parliament. It is that long ago and that much to hide!

    I suspect Singaporeans will never get any closure on this issue in the life time of this govt.

  4. 4 Alan Wong 25 November 2010 at 10:55

    “Under DBSS, the private sector will undertake the entire public housing development process, from the tendering of the land to the designing, building and selling of the flats. The tenderer will also have the flexibility to design and price the DBSS flats as well as decide on the terms of payment for the flats.”

    Firstly isn’t HDB profiteering from the sale of the land itself as the subsequent selling price of each unit will now be at the mercy of the highest bidder ? Also the highest bidder determines his profit margin and will design the flats to give the maximum returns.

    How does this whole DBSS scheme contribute to making our public housing affordable if they are always awarded to the highest bidder ?

    The same analogy can also be seen at the tendering of HDB coffee shops to the highest bidder. Does this bidding process help to lower or increase the rental of the individual food stalls and subsequent food prices at these neighbourhood coffee shops ?

    Our Minister can continue to defend his stubborn stand but it doesn’t take a genious to figure all this factors contributing to our escalating HDB prices, isn’t it ?

  5. 5 the boboshooter 25 November 2010 at 14:51

    Dear Alex

    I think there is no need for you to spend too much effort rebutting the minister’s comments which in my view is entirely nonsensical – I tell you why:

    “Market-based Pricing” assumes that there are fair market forces behind the supply and demand for flats, i.e. there are many buyers and sellers who can’t fix the market price. If that were true, providing a subsidy based on a market derived equilibrium price would make some sense.

    However in Singapore’s case, there is only one player – the HDB is effectively the monopoly supplier of new flats for ALL low to middle income housing (accounting to some 80% of the entire housing market). While transactions happen in the secondary market, if the HDB doesn’t build flats, the net supply of flats on our tiny island will be a big fat zero. The HDB effectively sets the price of housing by increasing and withdrawing supply of flats.

    Let me give you an extreme case: If the HDB wanted to price a 5 room flat in an “ulu” district for $1 million at a so-called “subsidized rate”, all it needs to do today is to stop building flats for the next 5 years while the population grows to 6 million. I assure you if this happens the market price of a HDB flat would well over a million bucks in the market. We are all instant millionaires due to our ownership of property. Who pulls all the strings here?

    Taken to a lesser extreme, isn’t the above example a reflection of what’s happening to the housing market today? The population has grown by a million while the HDB has built only several thousand flats.

    Coming back to my initial comment about “no point rebutting”- do you think these overpaid politicians don’t know the above? I think they either think of themselves as too clever by half or that the voters are too stupid to see through their pyramid schemes, probably both.

  6. 6 Madison Chua 26 November 2010 at 10:39

    I really applaud you detailed, thorough and comprehensive analysis of the HDB pricing debacle.
    Without a doubt, it is used as a political tool by the PAP.
    We, the people, allowed this to happen. The good news, we can take that power back. But we must want a change to happen.
    We must send a strong, clear message to the power in position that we are not fools. Thank you for inspiring and enlightening us.

  7. 7 Bollocks 26 November 2010 at 10:51

    Singaporeans should start selling their HDB flats and move to JB or elsewhere cheaper. I will do that.

  8. 8 adnandp 5 December 2010 at 23:08

    weldone good job,,,, keep it up….


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