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.
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.
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.
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.