Wednesday, April 27, 2011

What's Wrong with HDB Prices?

So HDB prices are not overly expensive but everybody blames our Govt for the pitiful state of things. Now new couples cannot afford HDB, not to mention low and middle income families, old folks, the disadvantaged. If they cannot afford HDB, where are they going to live? How are they going to survive? The sentiment on the ground is definitely very different from what we have established in the last post.

We shall look at a few issues that might shed some light into the disconnect:

1. Then and Now
2. Sour Raisins
3. Policy Blunders
4. Broken Dreams

Then and Now. Most people have great memory with regard to two things: their salaries over the years and their home prices. This point illustrates how the Price to Income has changed for HDB over the years. Long long time ago (like the 1970s), as the older generation would tell us, HDB flats were going for $20,000. Back then the pay was like $600 per month, so price to income was a mouth-watering 2.8x! And nobody wanted them! Okay maybe that's too ancient and not so relevant. Let's look at 2007. According to HDB website and Singstat, 4-Rm HDB was going for $241,000 and our median household income was $59,000 or so. That's still a cheap 4.1x compared to 6.4x today.

So while HDB is still cheap today when compared to other Asian cities, it is definitely much more expensive compared to its own past. Our incomes have not risen as fast as home prices. Everybody knows that. Well... except the Govt. Or actually they did know, maybe they just had a different agenda: like building the country's reserves or something.

Sour Raisins. To make things worse, our low income households bore the full brunt of higher prices. In 2000, the monthly salary of the lowest 10% was $1,276. In 2007, it went up to *drumrolls* $1,221. Sorry, it actually went down by $55. Finally in 2010, it went up to *drumrolls and crackers* $1,400. An increase of a whopping $12 per year from 2000 to 2010! How impressive! Meanwhile the top 10% grew from $14,959 to $23,684. Close to $10,000 increase. Answer to the recent poll: 17x difference.

Okay, that's a bit dramatic. But the point here is that the lower to middle income group hadn't had it easy. While the top 20-30% of the population enjoyed higher salaries, get to eat at fancy restaurants, drive new cars, upgrade to better 5-Room or Executive HDBs or even condos (yes this refers to all of you money-grubbers reading this blog!), these low income families are eating from hand-to-mouth. It's not even sour grapes, it's leftover sour raisins. And they have to share with their kids while servicing their 35 yr mortgage.

Frankly speaking, it doesn't really matter to them whether the price to income is 5x or 10x, to them it's always 35x, or until retirement. They definitely don't benefit if prices go up, bcos it's their only home and they cannot sell. The Govt seriously needs to do something here. Albeit they are already lending a helping hand, just that it's not publicized that much.

Policy Blunders. While HDB prices are inexpensive, I guess what really gets on peoples' nerves are various policy blunders that led to lower quality and service, like diminishing floor area, supply demand issues and the stupid 8k rule.

On lower quality, it's no secret that home sizes are forever shrinking. An old 4-Room HDB are now as big as 5-Room. Maybe in another 10 yrs, a 5-Room would look like Mickey Mouse's toilet. Bcos they counted the floor area of your balcony which is now bigger than your living room, the aircon unit, the common corridor and staircase as well! Why is this allowed to happen? Talk about major policy blunders!

Quality of finishing also had some hiccups. Remember the aluminium window frames that fell off? Or wall tiles that keep cracking? Well, admittedly, some of these issues have been resolved.

On lower service, this is actually tied to the supply demand mismatch. Basically new HDB owners have to wait on average 2-3 years or so before they get their flat thanks to HDB's "policy" of building behind curve and always in a roller coaster fashion. Just as an example, they overbuilt in the earlier part of the decade, flooded the market with tens of thousands of flats in Boon Lay and Sengkang. Then decided not to build anything, which led to the current situation of newly weds having to wait 2-3 yrs between ROM and customary ceremony. Meanwhile we want higher birthrates!

And now HDB decided to go all out and build 40,000 flats in the next 2 years, staging the market for the next cycle of boom and bust.

So despite paying up for a more expensive home, Singaporeans have to wait longer to live in a smaller unit with probably more defects and subjected to illogical rulings like an 8k income limit for a $780,000 flat.

I guess that is the ultimate unforgivable deed.

Broken Dreams. So far, all the analyses are being done on HDB. Prices though not as expensive as other Asian cities, are rising too fast too furious and policies are crap. Hence there's a lot of dissent on the ground. The far more important piece of the puzzle, is actually the private condo market. Even without doing any detailed analysis, most rational people would come to the conclusion that the Sg property market is frothy. Just a quick glance of two measures: Price to Income is more than 20x if you use median household income, or 13x if you use the 90th percentile. Rental yield is closing in on 2%. ie Froth-on-your-Tiger-Beer level. Any frothier, it's either going down the throat or the chute.

But the biggest setback posed by the private home market is this: It destroyed the 5C dream. THE Singapore dream. An average condo now costs more than a million bucks. Actually the average price is probably like S$1,875,000 (using $1500 psf times 1250 sqf). This means that 80% of the population with annual income of less than S$100k, cannot afford to upgrade to a condo, no matter how hard they try. Bcos it will take them close to 20 yrs just to earn that face value, assuming they spend nothing. With the new ruling of only 60% LTV, it means you need at least S$750k in cash or CPF to buy an average condo. Well, if you have S$750k, I guess it's better to buy yourself 20 yrs worth of food and staples in preparation for retirement. Bcos those are the next items to skyrocket in prices.

So that's the long and short of it. Singaporeans are probably more unhappy with uneven distribution of fruits of labour, policy blunders that let to poorer quality and service and the broken 5C dream. More so than just rising HDB prices itself.

Next post, we discuss some possible solutions!


  1. Yes, income inequality is my point exactly. Very good read, thank you.

  2. Thanks 8percentpa,

    Your analysis is very understandable and makes solid sense.

    Time for a change....

    Civil servant

  3. Just bring in another 900,000 FWs (and renew the whole population)!
    Oops! Who said that?

  4. Hmm very interesting post.

    To be specific, I don't think it's the income disparity. I think it's about how policies in Singapore completely overlook certain "sandwiched" classes.

    One example is the "lower-middle" class; people who earn a variable income just above $1500. They are unable to afford a HDB flat outright, yet unable to rent one because HDB sets a hard cap of $1500 for rental flats.

    Another example are couples with a combined income of just over $8000. They are unable to qualify for a HDB flat, yet unable to afford a condo/landed property. My cousin pays more than $2500 a month out of his combined family income of $8500 for his condo loan repayment, and this is for like 20 years. Take away CPF, car loan repayment, supporting his parents and his son, he doesn't have much left. His wife and him are degree holders and working from 9am till past 11pm every day, yet they spend most of their time worrying about how to save for their child's future education.

    I think Singapore first has to fix its policies, especially in relation to housing, before addressing other issues.

  5. Good point on the "sandwiched" classes, I definitely agree that they are short-changed.

    HDB does have a few policies that need to be reviewed.

    At the same time, foreigners, poor income for the bottom 20%, these are major issues that need to be tackled in relation as well.

    The former PPS of GCT really did sum it well in his economic paper, I urge readers to read it!

  6. A piece of advice for the case mentioned here. There is a very good way to improve his cash-flow. As condo price is all time high, it is a good time to sell his condo and I am sure he will make some money. Some people actually quit their job for a while so that they are below the income ceiling to buy a HDB. In this case, you will have spare cash to invest to get better return.

  7. Hi 8percentpa, great analysis. love it when people are able to support critiques with sound argument and clear statistics (though they can lie).