Reducing cost of public housing: Some policy suggestions

The drastic increase in the cost of public housing over the past 30 years has caused a financial squeeze for many Singaporeans, particularly young couples who desire to own their own homes, and families forced to downgrade because of financial difficulties.

The drastic increase in the cost of public housing over the past 30 years has caused a financial squeeze for many Singaporeans, particularly young couples who desire to own their own homes, and families forced to downgrade because of financial difficulties.

A three-room resale flat in the prime area of Tiong Bahru used to cost just $6,000 back in 1975. Now three room flats in that area are selling for as much as $322,000! This 5,266% price increase is simply mind-boggling! It has far outpaced inflation and increases in salaries over the past 30 years.

The cash over valuation (COV) that buyers are now having to pay is also shooting through the roof, and threatens to get even higher when the casino resorts open next year.

National development minister Mah Bow Tan claimed that one third of resale flats are “transacted at or below” COV. This claim is almost laughable if you ask any home buyer or real estate agent.

The sky high property prices threaten severe long-term effects on Singapore’s future. Many young people delay getting married because of insufficient savings to place a down payment for their first flat, which has a knock on effect on our birth rate and our ability as a nation to replace ourselves in the next generation. Others simply pack up and leave for other countries where they can buy an entire house with a garden for the price of a tiny HDB flat.

Those who do sink their roots here spend their entire working lives paying off their housing loan. After the 30 year loan is paid off, they have exhausted their retirement savings and whatever they do have is locked up in their only “asset” – their home. Unfortunately their home is not really an asset when they can’t sell it because they will lose the roof over their heads, and they have to pay and arm and a leg for another equivalent property to stay in.

This problem started in after 1991 when the PAP government started its Asset Enhancement Scheme, during which the HDB flat transformed from being an affordable roof over one’s head, to an investment vehicle that could reap tens of thousands of dollars in capital gains.

The Asset Enhancement Scheme has been proven to be a flawed, populist policy of the PAP, which is going to cost future generations of Singaporeans dearly.

The solution to this mess is not easy. Whatever measures are put in place to reduce the price of flats for buyers would inevitably disadvantage existing home owners who have bought high and may end up selling low.

This government needs to bite the bullet and clean up its own mess – even if it means losing some votes – for the sake of future generations of Singaporeans.

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I have a few suggestions on how we can lower the cost of public housing for Singaporeans, without causing asset destruction or panic selling.

Sell new flats at cost-plus pricing

The first thing HDB should do is to reduce the price of its new flats.

HDB maintains that flats remain “affordable” and that it still provides a “market subsidy” for buyers. The market subsidy simply means that new HDB flats are priced lower than existing resale properties in the same area. It is not based on the cost of construction and land.

Mr Leong Sze Hian from The Online Citizen has calculated that HDB could be making a profit of over $170,000 per flatin the new Punggol development. Mr See Leong Kit, in a letter published in TODAY, also arrived at a similar estimate of $140,000 profit per unit for the Pinnacle@Duxton development.

For a start, in the spirit transparency, HDB should disclose the profits it makes from each project ─ by showing how much exactly it cost them to build the flats alongside the prices that they are being sold for.

HDB is a government agency. It should not behave like a profit-maximising corporation. There is no reason why new HDB flats cannot be priced at cost plus no more than 5% above the cost price of building the flat and acquiring the land.

Reducing the price of new flats will immediately make it more affordable for many more lower- and middle-income couples who do not have the savings to pay over $300,000 for a new flat. It would also have a knock on effect of slowly lowering the price of resale flats, which would also benefit home buyers.

Perhaps HDB is concerned that these homeowners will sell their flat 5 years later for an obscene profit in the open market. To prevent this from happening, HDB could require that the flats cannot be sold for more than 10% above the cost price (adjusted for inflation) for the first 10 years. This will prevent home owners from profiting excessively after receiving the government subsidy.

Another way of reducing costs is to build flats without all the frills. In recent years, HDB seems to have taken on the mindset of a private developer, coming up with ways on how to meet the apparent demand from yuppie Singaporeans for condo-style living.

This is treading down the wrong path. HDB flats should remain no-frills public housing. There is no need to provide posh condo lookalikes and price them like private apartments. Those who want a more high-class living environment should consider buying private properties.

Build more new flats

During a parliamentary debate in September, opposition leader Low Thia Khiang questioned whether HDB is under-building flats to meet the demand of flat buyers. Mr Mah Bow Tan dismissed it, saying simply that there was “no basis to say HDB is under-building”.

He fanned out statistics that showed that the HDB built 2,400 flats in 2007, 8,000 in 2008 and another 8,000 this year.

As always, government statistics don’t tell the full story.

Just last week, the Sale of Balanced Flats launched by HDB received over 20,691 applications for only 2,132 available flats ─ almost 10 times oversubscribed. The recent Punggol Residences Built-to-Order five-room flats released in August were also 10 times oversubscribed, with 1,587 balloters for just 154 units.

The PAP government has dismissed these clear indications that there is a shortage of flats by suggesting that most of those people who applied were just trying their luck and not really interested in buying a place to stay. This is an insult to the thousands of home buyers who have tried numerous times but failed to find a flat that fits their basic requirements.

It is likely that the main reason why the HDB does not want to build more new flats is because it will lower the overall price of even the resale market, which may be politically troublesome for them.

The HDB needs to examine whether it’s mandate is to provide affordable housing for Singaporeans, or feed voters with unsustainable promises of constantly increasing home asset prices.

PRs increasing flat demand

Part of the reason for the high prices of resale flats is the large influx of foreigners who take up permanent residency, thus making them eligible to buy HDB flats in the open market. A recent ERA report revealed that 40% of resale flat buyers are permanent residents (PR). This is a phenomenal proportion, considering that HDB flats were built to house Singaporeans, not foreigners.

It’s questionable whether all of these PRs intend to sink their roots in Singapore or whether they see Singapore as a stepping stone to better opportunities in the US, or Australia, or back in China when conditions there improve.

I welcome foreigners to come to Singapore, to contribute to our economy and add to our social diversity. Many of my friends and colleagues are foreigners, and I have seen the benefits many of them have brought to Singapore.

However, I am strongly opposed to the government’s policy of allowing in so many foreigners in such a short amount of time, as this has put a severe strain on the housing market, the public transport system and the job situation.

The immigration policy is so liberal that within weeks of arriving in Singapore, a foreigner with the right qualifications can apply for PR and get it approved within three months. Without having contributed even a year to Singapore, these PRs are eligible to buy public housing and benefit from a system which Singaporeans have spent a lifetime building up.

Impose waiting period for PRs to buy flats

To rectify this, I propose that all PRs must have lived and worked continuously in Singapore for at least three years before they are allowed to buy HDB flats. This would filter out all those PRs who have shown little commitment to our country and are just taking up residence in order to be able to buy a subsidised flat, save on rental and sell it a few years later for a huge profit.

Lest this proposal causes alarm to skilled workers who are considering applying for PR, I would point out that under this proposed policy, HDB should look at the entire duration that the PR has been in Singapore, not just the period since he got his blue NRIC. Skilled foreigners who have demonstrated a commitment to making Singapore their home should have no worries about this new policy disadvantaging them.

Conclusion

I have laid out in this article just a few suggestions on reining in unaffordable public housing costs for home buyers. It is a work-in-progress and by no means comprehensive. I hope that policy makers will consider some of these suggestions for the sake of the thousands of Singaporean home buyers ─ including future home buyers ─ who are just seeking for a decent roof over their head.

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This article was first published on Hammersphere.

Author: Gerald Giam

Gerald Giam is the Member of Parliament for Aljunied GRC. He is a member of the Workers' Party of Singapore. The opinions expressed on this page are his alone.

13 thoughts on “Reducing cost of public housing: Some policy suggestions”

  1. On top of the profit that our Govt make from selling the HDB flats to Singaporeans, they also collected millions of dollars in monthly levies from construction companies who hire the foreign workers to construct these buildings.

    Definitely these costs are passed back to every prospective property owner. Not to forget the GST, stamp duties and property gains tax, etc.

    The next obvious question is : Is our Govt the main culprit in jacking up the costs of any property that we are buying ? It would be interesting if at the end of the day, it is revealed that say over 50% of the selling price of each HDB flat actually goes to back to the Govt in the form of profit including other direct and indirect taxes.

    I suppose that is the real reason why they can’t reveal the breakdown of the actual costs. It would be political suicide for our PAP leaders.

  2. If changes causes HDB prices to “moderate”, it would cause great hardship to those who bought their HDB flats during the boom years. Now they are stuck with high loans and low value houses.
    How do you address this problem?
    This problem won’t just affect the HDB flats.
    It will impact the private homes too as the prices of private homes is a function of the HDB flats.
    What you see in the US will suddenly happen here.
    Many housing loans will have negative equity and borrowers will be forced to top up and if they can’t they will be repossed, i.e., what you see in the US now.

    To be fair, the problem of rising house prices is really due to the buyers.
    If they are not so desperate, there will not be any transactions at such ridiculous prices.

  3. There’s no hope in merely writing letters my friend.

    They won’t do anything. All that can be written and suggested has been already.

  4. Hi Gerald,

    I just want to touch on the PR part of the article. Upon getting PR, their employment is supposed to start contribution to their CPF account at a reduced rate for the 1st year.

    This means PR will have very little CPF to help them buy a flat off the resale market. Furthermore,they cannot get HDB loan,they must use a bank loan if they need financing.

    For banks to grant them a loan,they need to see minimum 6 months CPF contributions statements. They need to put up minimum 5% cash for bank loan too.

    Therefore,the amount of cash a PR needs to prepare for a HDB resale in this case is 5% of purchase price plus any shortfall in their CPF and also COV. This amount of cash can be up to 3 times that as compared to a citizen buyer. Either they saved a lot of cash before they get their PR or usually..this money got to come from abroad.

    They interest they pay to the bank can be an indirect contribution to our country too.

  5. Jennifer – Thanks for the kind words. :)

    Alan Wong – I think it’s quite clear from the calculations of the likely land and construction costs that HDB is still raking in a huge profit from most of its developments. They refuse to reveal their costs because it would be a very inconvenient truth for them.

    Idiot – You’re right. This is a problem that the PAP government under Goh Chok Tong got us into, and now they have a responsibility to fix it and not pass it on to the next government. I’m not expecting that HDB causes prices to plummet. But they should at least prevent prices from increasing at the record pace that they are now.

  6. Hi Gerald, I agree with most of your points. The govt shouldn’t have encouraged the belief that HDB flats can be commercialised.

    For a start, in the spirit transparency, HDB should disclose the profits it makes from each project ─ by showing how much exactly it cost them to build the flats alongside the prices that they are being sold for.

    Actually I doubt the HDB makes “profits” from every project. The HDB is not trying to be some profit-maximiser, but it’s just following a flawed policy.

    Reducing the price of new flats will immediately make it more affordable for many more lower- and middle-income couples who do not have the savings to pay over $300,000 for a new flat. It would also have a knock on effect of slowly lowering the price of resale flats, which would also benefit home buyers.

    Strongly agree with this point. Let’s say the HDB builds new flats in Jurong West, and places a cap on the prices i.e. 4R flat on 10th storey cannot be sold for more than $X etc. This will definitely allow first-time buyers to “feel” that HDB flats are affordable. Secondly, similar resale flats in the neighbourhood will face a downward pressure in prices because of 1) extra supply of flats and 2) price limit on these new flats. Hence the prices of resale flats in the area may drop.

    Perhaps HDB is concerned that these homeowners will sell their flat 5 years later for an obscene profit in the open market. To prevent this from happening, HDB could require that the flats cannot be sold for more than 10% above the cost price (adjusted for inflation) for the first 10 years.

    Hmm. I disagree with this point, because the prices of resale flats should be settled by the market, rather than the govt. This is because some flats may have genuine increases in their prices, i.e. LRT addition, new shopping centre etc.

    Perhaps placing a capital tax will be a better deterrence for speculators?

    HDB flats should remain no-frills public housing.

    Strongly agree too. EC and DBSS should be scrapped. HDB flats in general are good enough for everyone. While the HDB has good intentions to offer more choices, it must go back to its original mandate of providing affordable public housing for EVERYONE.

  7. eternalhap – Thanks for your feedback. About the point you disagreed with:

    the prices of resale flats should be settled by the market, rather than the govt. This is because some flats may have genuine increases in their prices, i.e. LRT addition, new shopping centre etc.

    I see your point. But if you allow prices of resale flats to be settled by the market, you’ll be back to the exact situation we are having now, where COV is obscenely high and beyond the reach of many buyers. In addition, it doesn’t seem right that the govt (HDB) sells the flats at cost+, and then these buyers sell for a profit of say $150k+ five years later. How do you propose to work around this situation?

    Of course, one could argue that if HDB sells the flats for cost+, the eventual resale price will also be less. But I won’t count on that.

  8. In addition, it doesn’t seem right that the govt (HDB) sells the flats at cost+, and then these buyers sell for a profit of say $150k+ five years later. How do you propose to work around this situation?

    Perhaps a solution is to impose a progressive tax on the profits of flat sellers. For example, a profit of $100k can be taxed at 20percent, leaving $80k for the seller; while a profit of $150k can be taxed at 50percent, leaving $75k for the seller.

    This may force sellers to reconsider their demands of high COV. Rather than the govt arbitrarily setting a price cap at which owners can sell their flats, a tax allows the market more freedom to negotiate their flat prices, which as mentioned can be due to genuine reasons for rise or fall in price.

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