By Ku Swee Yong
Re-examining the basis for public housing: shelter or asset?

Changes to public housing policies have been fast and varied. For example, the housing minister recently allowed singles to buy BTOs and he gave further considerations for disadvantaged families. In addition, policies were tightened for new buyers in terms of loan requirements, thereby reducing the risks of a bubble forming in the face of rising resale values. Being cognizant about the impact of the clustering of foreigners in certain enclaves within HDB heartlands, he also addressed the rental of flats to foreigners so as to minimize the risks to our social environment.
What grabbed the biggest headlines was the media interpretation that Minister Khaw Boon Wan intended to lower new HDB prices by 30%.
This is flawed.
What the Minister said in Parliament on 08March2013 was that he wished “to bring BTO prices in non-mature estates to say, around 4 years of salary as it was before the current property cycle started”.
When commentators put the current average of about 5.5 years of salary against the “around 4 years of salary”, they concluded that BTO prices will drop about 30%. This conclusion is true only if the Minister wished to accede to the income levels of current home buyers.
Are current BTO applicants too young and financially too stretched? Are BTO applicants trying to bite off more than they can chew, going for Executive flats when they could comfortably afford 4-room flats? Why not implement a policy to limit BTO applicants to choosing flats priced at 4 times salary?
The public reaction to the “30% price drop” was not entirely positive. The current owners of 900,000 HDB flats do not wish to see such a large drop in the prices of new flats as that would affect their family balance sheets negatively. While trying to satisfy the aspirations of new home owners, numbering say about 20,000 a year, new policies may hit the 900,000 existing owners hard. The Minister had to make clarifications that any policies introduced to keep prices affordable will only apply to new flat owners and will not affect existing owners.

What got us here today?
We are discussing these issues today because the tight squeeze of space is causing discomfort for many. HDB flats are at close to 100% occupancy and mass market private homes are at about 96% occupancy.
The squeeze is somewhat correlated to the tightness in public transport capacity as a significant population living in public housing and mass market private homes commute to work by public transport. The government is already trying to decentralize the jobs, especially financial services jobs and high tech manufacturing. But many people still need to get across the country to their workplace every working day.
Since 2006 till now, the rapid population growth allowed by the authorities far exceeded the supply of physical housing units. To compound the tight situation, the stock of total public housing (excluding ECs) actually decreased in 3 out of the past 7 years due to demolitions of HDB blocks for the renewal of old estates. See table below.

Therefore, HDB resale prices continued to rise. Both HDB resale prices and HDB new launch BTO prices are also hot issues with Singaporeans. Resale prices have continued to rise despite massive new supply and many rounds of cooling measures. In fact, since HDB prices started its steep ascent in early 2007 where resale prices have increased by 100%, an average of 16% per year despite a global financial crisis in 2008. See chart below.

Furthermore, in 2011 and 2012, HDB resale prices have climbed faster than GDP growth plus inflation COMBINED.

Record high numbers of BTOs launched at price levels un-pegged from resale prices have failed to curb market demand and price growth. Why?
Several reasons:
1a. The population is still increasing at over 100,000 per year due to low unemployment rates and the need to fill newly created jobs. Therefore, new housing demand remains strong.

1b. The number of whole flats approved for sub-letting has increased from about 14,000 units (about 1.7% of total stock) in early 2007 to about 43,500 units (4.7% of total stock) at the end of 2012. As more HDB owners treat their HDB flats as investment assets and receive high yielding income streams, fewer units will be made available in the resale market for Singaporean and PR families.

1c. The supply of new flats is stretching the construction industry and the waiting time for buyers to receive the keys to their new flats has not been reduced. If physical supply does not come on-stream faster than before, the resale market will have fewer units on offer to Singaporeans and PRs who need a flat urgently.

1d. The massive supply of new flats has no immediate impact to alleviate the shortage of physical supply. New launches are of little impact on HDB resale prices because in addition to the 3-4 years wait to collect keys, new buyers can only put their flats in the resale market after a Minimum Occupation Period of 5 years. Total time needed from “BTO launch to resale” is at least 8-9 years.

1e. In fact, with the tightening on foreign labour and increased foreign worker levies, there is a risk that construction might be slower and buyers would have to wait longer to take the keys to their new flats. So, with construction companies having their hands full, and their labour costs jacked up, how might we reduce BTO prices? By increasing the grants? Or by reverting to the more restrictive terms of leases in 1971 where HDB flats can only be “re-sold” back to the landlord: HDB?

While public debate continues about HDB supply, pricing, affordability, etc. Minister Khaw called on the nation to reflect on these issues and re-examine the fundamentals of public housing through Our Singapore Conversation forum.
However, before we embark on the task of reviewing the fundamentals of public housing, I believe we need to address several immediate challenges.

2a. Pace of construction:
I consider the current shortage of supply as the most critical issue that should be addressed. Prime Minister Lee Hsien Loong addressed this point in the 2010 National Day Rally: “HDB will try their best to speed up the completion of these BTO flats. It takes about three years, sometimes three-and-a-half years, from the time when you book to the time when you collect your keys. HDB thinks they can bring it down a little bit.” If HDB has met this target, BTOs launched in early 2011 should see buyers moving in by late 2013 or early 2014. I am not sure if HDB has managed to meet the target because higher-than-planned-launches of BTOs, ECs and DBSS in the last 3 years since the 2010 National Day Rally have kept the construction industry busy and trying to meet schedules. The risks lean towards buyers receiving keys more than three years after the booking of the BTO flats. Since the shortage of HDB flats is a cause of rising prices, can we speed things up by perhaps giving a temporary (say 3 years, reviewed year after year) lift to the foreign worker ratio for every HDB construction project?
NOTE: Assuming that we do not demolish any HDB flats between now and the year 2030, there will be more than 200,000 flats that are more than 50 years old when we reach the year 2030. If we further consider the need to replace some of the HDB flats and whole neighbourhoods built half-a-century ago, the strain on the construction sector will increase.

2b. Public education about HDB’s role in public housing:
It is my impression that Singapore’s public housing scheme is being taken for granted, by first time buyers and older buyers alike. Buyers hold very high expectations of what the government should provide them in terms of quality and at low subsidized prices. More could be done to remind the demanding consumers that BTOs are heavily subsidized by tax payers, which include PRs, foreigners and foreign companies with income in Singapore.

Since HDB was set up more than 50 years ago, over 1.1 million flats have been built and HDB has accumulated losses of about S$21 billion. These losses are supported by tax payers as HDB is a public institution. These losses translate to the subsidies that HDB flat buyers have received in the past 5 decades. It would be incorrect to say that taxpayers subsidised about S$20,000 per HDB flat, using the simple calculation based on S$21 billion of accumulated losses divided by 1.1 million flats. This is because the development costs in the 1960s and 1970s, and the level of subsidies then were much lower than today.
Today’s new HDB flats are priced with a generous discount compared to equivalent resale flats nearby. Despite the rocketing prices on the resale market, BTO prices have been stabilised since May 2011, when Minister Khaw de-linked BTO prices from price movements in the resale market. To maintain BTO prices in an environment of rising resale prices, land prices and construction costs, HDB has had to increase its subsidy budget. This growing subsidy expense is not often acknowledged by the public, as it is far less obvious than the outright CPF grants of up to $40,000. Others scoff and rebuke that the HDB acquires state land cheaply when their attention is drawn to the taxpayers’ support. Regardless of what the cost of acquiring the land is, there is little doubt that the opportunity cost to our public coffers is high when we set aside land for public housing instead of more lucrative private housing.
What I am pointing out is that we need to be grateful for the solid public housing scheme that we have. As almost all families have already gotten secure roofs over their heads, our sense of gratitude might have diminished as compared to three to four decades ago when many of this nation were without secure, good quality housing. We need to remind ourselves, especially all prospective buyers of BTOs, to appreciate that HDB flats are public property which are subsidised by taxpayers.
Prospective buyers should feel extremely privileged that they are allowed to apply for 99 years of uninterrupted lease of state-owned property for their families’ comfort and security.

2c. Market confusion:
Amidst rising home prices, the authorities have since 2009 introduced 7 major rounds of cooling measures to keep price growth flat and prevent speculation. The measures included increased property taxes and stamp duties, tighter rules for developers, lower home loan quantum, shorter loan tenure, increased cash versus CPF usage, adjustments to subletting periods for HDB flats, limiting the ownership of HDB for owners of private residences, a new scheme for singles to buy BTOs, etc.
Even before one set of cooling measures has been understood by the market, another set of policies and public housing schemes for families may be patched and tweaked. The multiple rounds of new schemes mixed with cooling measures for public housing coming within the last 3 years do not allow for any medium term effects and benefits to be observed and calibrated. The landscape has gotten more murky and even property agents are finding it tough to respond to consumer queries clearly, without risks of mis-representation unless we refer to the rule-books as we speak.
To add to the confusion, there are numerous new ideas under consideration for public housing which have been tossed to the public for discussion. Without clear definitions, and with some policies yet to be crystallized and implemented, the public debate is wide open with more voicing out their needs, demands and opinions than listening and thinking. I believe it is critical that we take stock of our current situation by keeping silent and letting the energy and noise die down somewhat. No more proclamations to confuse the market. And with our thoughts straightened out, we can then speak, but speak after careful consideration and in moderate amounts together with large doses of listening.

If public housing supply and the increasing prices of resale flats were really of utmost importance, I urge the authorities to urgently tackle points 2a to 2c. Having done that, we will be better prepared to review the fundamentals of public housing for Singaporeans at a more measured pace.

Our Singapore Conversation on Housing

As recent as 10 years ago, HDB was just a basic, entry level home for a young Singaporean family. It has evolved into many more things to a wider group of – studio apartment for older people, “premium” flats like DBSS, homes for singles above 35 years age, an investment instrument for those who live in private residences and rent out their HDB flats. As HDB tries to be “many things to many people”, they have widened the scope from merely providing “basic, entry level homes” to serving the housing needs of diverse and niche groups.

Should HDB go back to basics?
Most definitely. While most are demanding for more, I think we should go for less. Instead of introducing new ideas and new measures, I would prefer that we remove the liberalised rules in 1971 (flats were allowed to be sold for a profit) and 1989 (flat owners were allowed to retain their flats after buying private homes).

The fundamental principle to adhere to: there is a lot of taxpayers subsidies in HDB flats and therefore, the needs of the public has to be prioritized according to those who need taxpayers assistance more.
Therefore, HDB flats should be a simple, no-frills, public good serving the needs of entry-level new families and low income families. HDB should maintain this position until the housing needs of ALL lower income groups and families requiring assistance (such as single parents, aged sick, etc) are provided for. And with a few spare HDB flats (say 0.5% of total HDB stock) on the side, ready to rent out in case the economy hits a rough patch and more families apply for help.

3a. HDB as a market maker
The policy that would get most of my votes is that HDB owners can only sell their flats back to HDB. In order not to disrupt the current 916,000 owners, this rule should be applied only to buyers of BTOs. And as the stock of current flats reduces through SERS, the proportion of flats that can only be resold to HDB will increase to about 30% over the next 2 decades. With HDB already aiming to be a price setter (because they build and sell the most number of new homes), their role can be expanded to be the market maker for resale HDB, i.e. they will set a buy-back formula and they can then sell these flats to other buyers with a mark up.
My suggestion is that HDB prescribes a formula for buying back HDB flats after the Minimum Occupation Period, at a price that is pegged to inflation and GDP growth. Therefore, during years when inflation or GDP growth are weak, or even negative, the value of the resale flats will not grow as much. Given that the flat is a nest egg for most HDB owners, we should allow the gradual price appreciation even as the 99-year lease period runs down.
This scheme will bring extreme price stability to the market even in times of economic turmoil when many owners may need to dispose of their flats urgently. With HDB’s buy-back price formula, a major price plunge will not happen and the loan books of HDB mortgage lenders will not be impaired.
While BTO buyers may complain that this scheme will not allow them to grow rich from any potential significant price increases, like their parents and older siblings might have enjoyed, such a pricing mechanism will also be a safety net preventing significant losses.
As the ultimate “banker” and playmaker of public housing, HDB needs to set aside a sum of money in reserves, perhaps backed by revolving loans, to be ready to buy back flats from sellers and upgraders, before re-selling them to buyers who prefer to flats for immediate use. With such a price-stabilisation mechanism and the solid credit quality of our government, I believe many banks would be happy to bankroll HDB’s short term cash flow needs.
Finally, reselling flats back to HDB will allow retirees and seniors to “cash out” their hard earned savings and move in with their children or move in to rental flats, thereby enjoying the fruits of their savings through their remaining years.

3b. Cap income multiple for BTO applicants
Instead of going against market forces (of increasing land values and increasing construction costs) to reduce the average price of BTOs to 4 times the annual household salary, a more practical approach is to restrict applicants to purchasing BTOs at a maximum of 4 times their annual income. For example, a couple earning $3,000 per month per person (equivalent to $72,000 annual household income) can apply for any BTO flats up to $324,000 after grants. As there will be families who are more practical and apply for smaller flats, we might increase the maximum to, say 4.2 times annual salary such that on average, the 4 times salary objective set by Minister Khaw may be achieved.

3c. Instead of introducing new modifications, bring back the old rules
HDB should not try to be many things to many people. In the old rules, there were no ECs and DBSSs – which were products that satisfied the desires of a very small segment of the market (the total stock of DBSS and ECs today is about 2% of public housing stock). DO NOT FORGET: HDB is a product subsidized by taxpayers. So it should serve the collective interests of Singaporeans, not the interests of a small segment of aspiring home owners.
Let those who aspire to more fanciful products and frills turn to the private housing market. Private housing prices will naturally become affordable when HDB resale prices stop rocketing.
Introducing modifications such as shorter leases of 60-year in order to improve affordability may not arrest the price growth of resale HDB. After a while with growing wealth and high employment, price growth in the resale market will continue. Such modifications also raise new challenges. For example, banks may impose restrictions in financing the buyer of a 60-year lease flat that is being sold with a remaining 45 years of lease. The buyer might not secure 30-years loan tenure and loan terms, and therefore they may still look for resale 99-year flats. Some families may not even subscribe for the shorter lease BTOs because the resale market may be much smaller when they to need to upgrade subsequently.
However, this scheme will work if, as described in point (3a), HDB is a market maker for resale flats because regardless of the number of years left on the lease, HDB has committed to buy back the flat at a price fixed by a pre-set formula, and therefore banks will be happy to finance the next buyer who purchases the shorter lease.

3d. Providing for the disadvantaged, our seniors and our retirees
Let HDB hold a stock of flats for long term rental. Depending on the demographics, social economic conditions and the estimated growing proportion of retirees who need to “cash out” of their flats and move into smaller, rental units, HDB can maintain a stock of say 50,000 to 100,000 flats (about 5-10%) for long term rental. A fraction of this stock may be allocated to take care of the needs of families with difficulties making ends meet. Instead of the dozens of schemes available to families of various situations (e.g. about to be married, already pregnant, single parent families, singles, divorcees, etc), we might simplify matters by providing temporary or long term shelter through rental flats.

I am very much against complexity, especially around public housing issues that matter to almost every Singaporean. I fear that we muddle through the immediate future with too much chatter arising from many diverse opinions.
Policies and amendments to policies as well as add-ons have created a patch-work of public housing rules. Let us work to re-establish clear definitions, go back to first principles, de-layer the rules, remove confusion and simplify, simplify, simplify!

[Singaporeans who would like to update themselves about public housing issues and share their ideas can do so through http://www.mnd.gov.sg/homesweethome/]

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Ku Swee Yong is the CEO of real estate agency International Property Advisor Pte Ltd and the author of two bestsellers: Building Your Real Estate Riches and Real Estate Riches.