I attended the People’s Association Youth Movement (PAYM) policy forum @ Jurong GRC on Sunday (11 April). The discussion, entitled “HDB Flats: Towering Pinnacles, sky-high prices?”, was attended by about 50 people.

The three speakers were Ms Grace Fu, Minister of State for National Development, Ms Tan Chew Ling, acting director of HDB’s estate administration and property department, and Mr Tommy Tan, Managing Partner of JATT Realty.

The questions and answers session was probably the more interesting part of the forum, so I shall skip right to it.

Cost-plus versus Market subsidy

The first question was from SMU student Nathaniel Koh, who asked why the HDB was using market subsidy pricing, instead of cost-plus-profit pricing. He also questioned whether the presentation on the affordability of HDB flats using the median income of flat applicants was appropriate?

The HDB currently operates a market subsidy pricing model, which means it prices its flats at the market rate but sells them at a discount. The cost-plus-profit model would mean flat prices are generally pegged to construction costs.

The response from Ms Fu was that a cost-plus-profit model would not be fair as construction costs tend to fluctuate from project to project.

In my view, this argument may not be valid. Whether the HDB adopts a cost-plus-profit or market subsidy pricing model, the primary issue is one of policy.

The finer details of implementation can be ironed out. For example, some price smoothing or stabilisation mechanism like moving averages, may be used instead of a project-to-project cost pricing model.

Moreover, whilst some may pay higher or lower prices due to the fluctuation of construction costs, at least, arguably, everyone may pay lower prices under a cost-plus-profit model.

This brings us to another question. Why has the HDB consistently refused to provide the cost break-down for flat construction, despite almost yearly questions in Parliament and newspaper forums?

Affordability based on flat applicant’s median income

The response from HDB’s Ms Tan to Koh’s second question was that since the median income of 2-room flat applicants was $1,350, and those who earn not more than $1,500 also have the option of a rental HDB flat, it is therefore affordable even for the lower-income.

I don’t think the response answered the question, as using applicant income does not account for those who could not afford to apply in the first place.

Nobody wants smaller BTO flats, but resale prices increase the most?

The question was asked as to why we have the phenomena of smaller 2- and 3-room build-to-order (BTO) flats attracting the least applications, whilst prices of smaller resale flats and cash-over-valuation (COV) sales are increasing rapidly. The person fielding the query also asked how this can be resolved.

The response from the speakers was along the lines that the HDB can control neither the market nor the number of applicants.

In my view, the problem may be that the HDB had stopped building 2- and 3-room flats for some time, and only resumed building 2- and 3-room flats in 2006 and 2004 respectively.

To resolve this problem, HDB policies that make it difficult for downgraders to downgrade directly to new smaller flats could be reviewed. We also need to account for the fact that it takes about eight years (three years to build and five years Minimum Occupation Period (MOP)) for such flats to be available for the resale market.

Otherwise, the fact that 3-room prices rose the most among all flat types in 2007/2008 may continue and at an even higher rate. For some background, the average price of a 3-room flat rose from $185,000 in the third quarter of 2007 to $232,000 in the third quarter of 2008 – a 25 per cent increase. The average price hit $260,600 in the fourth quarter of 2009, with the cheapest at $225,500 plus COV of at least $20,000.

What if buyers cannot sustain a 30-year mortgage?

Another question asked was how young couples could be helped if they cannot pay for their mortgage in the future.

The response from HDB’s Ms Tan was that the HDB grants concessionary loans on the basis that the repayment cannot exceed 40 per cent of income, and Ms Grace Fu also said that most of those who ran into difficulties paying their mortgage were not first-timers, but those who had cashed-out of their previous HDB flats.

I would like to ask for the statistics as to how many, for example, of the 30,770 HDB flat buyers in arrears for over three months as of September last year, fell into this category of “cashed-out on their previous flat”.

Another question from an attendee: Is it true that rising HDB prices will generate wealth for Singaporeans?

The audience was asked to vote Yes or No by a show of hands.  After much prodding some eventually raised their hands.

The response from HDB’s Ms Tan was that your HDB flat is like a cash cow that can be milked in retirement, but don’t slaughter the sacred cow too early.

Ms Grace Fu also raised the question of whether capital appreciation is not important to Singaporeans, or is it a better alternative for prices to appreciate so that they have the option to downgrade to monetise for retirement. She added that if we use a cost-plus-profit model, whereby the flat is treated as a home and not a growing asset, then, when buyers sell back to the HDB, it will also be at cost-plus-profit prices.

I did not quite understand the logic of the above, as we are only talking about cost-plus-profit prices when you buy, not when you sell or have to return it to the HDB.

No Executive Condo launch in last five years?

A member of the audience who earned a monthly salary between $8,000 and $10,000 asked why there have been no Executive Condo launches in the last five years.

The answer was that sites were on the reserve list, but there were no takers from private developers.

So, there must be something wrong with the price and terms that the HDB was giving to developers. Instead of just saying that there were no takers, perhaps the HDB could review its terms?

Part 2 of this article will talk about the presentations at the forum, which mainly focused on HDB statistics and affordability, whether there is sufficient supply, and whether permanent residents are driving up prices.

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By Leong Sze Hian

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