TR EMERITUS

By David See Leong Kit HDB's response "Why we peg to market rates: HDB" ( TODAY Sept 25) to my earlier letter has necessitated my right of reply. (read letter here) Instead of merely accusing me of being "misleading and illogical", HDB is expected to be transparent in disclosing fully the actual breakeven cost of new flats in all its projects.  After all, these are public housing developed with public funds. These exasperasting remarks of a  couple wanting to start a family sums up the genuine frustrations of young Singaporeans at the sky-high prices of public housing:  "How to live in cheaper Woodlands when work is in Shenton Way and parents are in Tanah Merah?  The Government must come up with more practical solutions !" Let me now summarise these two main issues:   (1) Root cause behind high prices of new and resale flats. In the 1970s, at HDB Marine Parade Estate, prices of 3-room, 4-room and 5-room new flats were  $17,000,  $20,000 and $35,000 respectively. In 1990,  5-room new flats cost around $70,000. Such prices then reflected a "cost-based" pricing approach. But, following the 1994 property bull run, HDB switched to a  "market-based" pricing approach.  It confirmed that  "the prices of new HDB flats are based on the market prices of resale HDB flats, and not their costs of construction". In 2000, the total breakeven cost (comprising construction cost, land cost and other related costs) of a 5-room new flat was an estimated $120,000. However, under the market-based pricing approach, HDB will first look at the prevailing market price of, say $260,000 of a 5-room resale flat.   It will then pick a slightly lower figure of, say $200,000 as the selling price of the new flat -- regardless of its actual breakeven cost of $120,000. HDB will then proclaim the new flat buyer is getting a so-called  "market subsidy" of $60,000, the difference between resale flat market price and new flat selling price.  There is really no  "cash subsidy" given to the buyer, and HDB is actually making a profit of $80,000 for each flat sold. The losses reported in HDB financial statements could well come from "transfer pricing" accounting between HDB, Singapore Land Authority and Ministry of Finance. HDB's "market-based" pricing approach is the root cause of prices of new flats and resale flats chasing each other in a never-ending upward trend. A plate of chicken rice cost $3 in HDB coffeshops and $20 at hotel coffeehouses.  It is both illogical and ridulous for HDB to proclaim that every person eating chicken rice in HDB coffeeshops is getting a  "market subsidy" of $17 per plate! (2) Are HDB new and resale flats really affordable? It is misleading for HDB to merely state "first-time flat buyers use 17 to 29 per cent of household income for their loans, below the international benchmark of 30 per cent" without disclosing the assumptions used. HDB has since confirmed to me that a 30-year loan period was assumed. Of course, if you stretch a home loan to as long as 30 years, even private property will become "instantly affordable". For a couple with combined $8,000 monthly income, a HDB loan of $500,000 at 2.6 per cent interest and monthly loan instalment of $2,000 may appear affordable.  But at the end of the 30 year loan period,  they would have coughed up some $800,000 in total capital and interest repayments. A sensible home loan period would be around 15 to 20 years.   EDITORS' NOTE: Mr See's follow-up reply was not published by the mainstream media.  Read More →

From our Correspondent National Development Minister Mr Mah Bow Tan has chided Singaporeans for comparing prices of public housing today with those 20 years ago. Referring to the benchmark to ensure that a household pays less than 30 per cent of its monthly income to service a home loan, he said: "We'll keep the prices such that they are pegged to the income, so this is how we manage affordability. We make sure that the prices do not exceed the 30 per cent benchmark." As for comparing prices with those of 20 years ago, 'those are not meaningful comparisons'. "If we did that, we'd be comparing many things that we did 20 years ago, do we want to go back 20 years?" he added. Mr Mah also reminded Singaporeans that the system had enabled them to own an "asset": "If you want to argue it's too high, you can use all sorts of arguments,' he said. The main point is this is part and parcel of a financial system that will allow people to own an asset. This asset, the home, enables owners to monetise it for income later in life, he said. This may involve selling the property or applying for the HDB's lease buyback scheme, which gives homeowners a source of retirement income." Though the prices of HDB flats has sky-rocketed over the last twenty years, few owners are able to monetize it for income unless they emigrate to another country since they still have to fork out cash to buy another property at a higher price which will plunge them into greater debts. A recent study done by two NUS professors Abeysinghe and Gu Jiaying showed clearly that “higher property prices, instead of creating a wealth effect, exert a significant and negative “price effect” on consumption expenditures leading to a fall in the average propensity to consume.” (read article here) As house prices go up, the increase in the value of housing assets is accompanied by a concurrent rise in the financial liabilities of households, in the form of higher downpayments for purchase of residential properties and burgeoning housing loans. Furthermore, one really "owns" an asset if he/she is able to pass it down to descendents. While HDB's lease buyback scheme does ensure homeowners a monthly source of income, it will also mean giving up the ownership of their property. After paying and "owning" the flat for many years, they suddenly find themselves left with nothing to leave their children. The need for HDB to introduce the lease buyback scheme is a clear indication that Singaporeans are overpaying for HDB flats to the extent that they do not have enough savings left for their retirement. If HDB flats are indeed easily affordable, Singaporeans should be able to repay the loan within 10 to 20 years with a substantial amount of savings left for their golden years. They will not need to lease back their flats to HDB for that pittance of monthly income. Mr Mah does not seem to understand that the 30 per cent benchmark cannot be used as an arbitrary figure to determine housing affordability which should be linked to other factors such as the cost of living, retirement planning and a country's welfare system As Singapore does not have a social safety net to speak of, it mandates that Singaporeans save more to prepare for old age when they are expected to work for lesser hours and more prone to illness. Perhaps Mr Mah should provide us with the figures of the number of Singaporeans who are able to complete paying their housing loans twenty years ago compared to now for a more "meaningful comparison" instead of blindly quoting the thirty per cent benchmark. The gist of Mr Mah's message is clear: Singaporeans should stop comparing things now to the past, the prices of HDB flat will continue to increase and there's little he can do about it other than the blanket reassurance that the government will continue to "ensure affordability". After all, there is a huge world of difference in the pay of Mr Mah twenty years ago compared to now.   Related articles: >> Part 1: Singaporeans do not own their HDB flats >> Part 2: HDB flats are not affordable to most Singaporeans >> Part 3: HDB flats do not generate wealth for Singaporeans >> HDB uses unknown “benchmark” to assess affordability of flats >> High cost of HDB flats a key reason for low birth rates by Jeremy Koh and Eugene Yeo >> Mass market buyers now inflating property prices by Jeremy Koh >> Record home sales: a boom or bomb in the making? by Jeremy Koh and Eugene Yeo  Read More →

OPINION There is much debate recently if cash-over-valuation (COVs) are squeezing ordinary Singaporeans out of the resale market. With the prices of resale HDB flats hitting a record high in June 2009, sellers are capitalizing on the inflationary market by asking for ridiculously high COVs. A 30 year old 3-room flat at Toa Payoh was recently transacted at a COV of $70,000. As buyers will have to pay at least 10 per cent of the flat's valuation upfront in cash, they may end up paying more than $100,000 as downpayment for a HDB flat if COVs are included. Despite the rising concerns and disgruntlement on the ground about COVs, the official stance from HDB is that they have no right to intervene to scrap or place a cap on COVs since it is the pregorative of the seller to decide on it. In parliament two weeks ago, National Development Minister Mah Bow Tan was asked if there are any alternatives to COVs. Mr Mah explained that cash over valuation was not unique to HDB flats, but part and parcel of today’s property transactions – whether private or public. There is a factual inaccuracy in the above statement. COVs are only unique in the resale HDB market. Buyers of private properties are required to pay up to 20 per cent of the property's value in cash, but that is not COV. COV is additional cash demanded by the seller on top of the valuation of the HDB flat. For example, for a 4-room flat is priced at $400,000, the buyer needs to pay $40,000 directly to the seller (5 per cent must be in cash, the rest in CPF) while taking up a loan of $360,000. If the seller asked for a COV, it is considered as an additional "premium" to pay in order for the buyer to secure the deal. There are no COVs in the private property market. One simply pay the agreed price for the property. The buyer need not pay extra cash to the seller in the form of COV. Mr Mah also claimed that almost a third of the resale flats are sold at or below valuation: “Buyers can choose not to pay a cash over valuation. And in fact, the latest data shows that almost one third of transactions today are transacted at or below the valuation. So cash over valuation is not a forgone conclusion. It’s not evident for all transactions.” Another interesting statistic in the ERA report was how 86% of ERA’s HDB recent resale transactions were concluded with Cash-Over-Valuation (COV). This number seems to come into conflict with what Mr Mah Bow Tan said recently about a third of HDB resale transactions are done at or below valuation. According to figures released by HDB for the second quarter of 2009, the median COVs for both three room and four room flats is $5,000 while it is $0 for five room and executive flats. (Source: HDB) The reason why there are few COVs asked for larger-sized flats is probably because of their already high prices. However in the last quarter of 2008, the median COVs for 5 room and executive flats are $11,000 and $15,000 respectively. Given that the 2nd quarter marked the bottom of the property market, we should expect the median COVs to rise during the third quarter. As Mr Mah did not quote any specific study or source, it is unsure how he arrived at the conclusion that a third of the HDB resale transactions are done at or below valuation when data from HDB seemed to suggest otherwise. Even then, the majority of flats transacted at or below valuation are likely to be 5 room or executive flats which cost more than $400,000. Is Mr Mah asking Singaporeans to fork out more money to purchase larger flats than they need? For young couples without children who earn more than $8,000, they will have to fork out a hefty COV for three or four room flats in today's market unless they opt for 5 room and executive flats. Besides, at today's astronomical prices, even flats sold at or below valuation are considerably more expensive than those sold in the same estate the year before. Unless first-time owners have enough cash to pay for the COVs, they are unlikely to obtain a flat of their choice. Mr Mah had urged Singaporeans to be less "selective" and be more realistic when purchasing HDB flats. However, is it fair to expect Singaporeans to lower their expectations when they are paying so much for a flat? Unlike in the past when the mortage loans for HDB flats can easily be repaid within 10 years, Singaporeans have to work for their entire lives in order to pay up the 30-year loan in full at current prices. It will be an unthinkable disaster if they are retrenched or fell ill during this period of time. The government can do much more to control the rampant rise of COVs by either putting a cap on it or scrapping it altogether. Leaving it entirely to free market forces will only lead to widespread inflation by greedy sellers eager to capitalize on their flats. HDB has already imposed many restrictions on the sale of HDB flats such as the 5-year minimum occupation period, ethnic quota in each block of flat and a resale levy on those who downgrade to a smaller flats and so it is perplexing that they can't do something about the COVs. The primary purpose of HDB is to help Singaporeans own a home of their own at affordable prices and not to ensure that home owners make a hefty profit from the sale of their flats via COVs.  Read More →