Sunday, May 01, 2011

Solutions to the HDB conundrum

This is a continuation of the last 2 posts:
Are HDB prices really expensive?
What's wrong with HDB prices?

What is the solution to this huge conundrum of HDB prices being much higher vs its history and vs some Singaporean household income (esp lower income groups) yet lower in terms of rental yield and absolute prices vs other Asian cities?

The Opposition had come up with the cost plus solution. ie if the cost of building a HDB flat is $150,000, then the Govt should just put a tag of say $200,000 and sell it to Singaporeans. While this solution is pleasant to most would-be buyers, it creates huge problems for the system.

First by making new HDB prices widely different from current market prices, you run the risk of enticing speculators to join in the fun. Already, there are young couples who had tried to game the system just to get a good flat at a good location, balloting 10x in the span of a few months. It might become a major issue. Maybe people might just pretend to get married just to get a HDB flat then sell it after 5 yrs, divorce and split the profits. Things can really get out of hand. Hence cost plus model might not be ideal.

It is also imperative to bring prices down slowly over time rather than crashing it, a pointed highlighted by various ministers as it affects the valuation of 1mn homes. If prices crash, a lot of people might not be able to pay their mortgages, go bankrupt and create more problems.

Having said that, there are other possible solutions, which admittedly, the Govt is already implementing. Well, what do you expect, it's our First World Govt after all. They would have thought about it.

Economics will tell us supply and demand determines price. So we should aim for tools that can help us control these, as well as measures that can deter punters. Anyways, here are the some widely discussed must-implement measures:

1. Smoothen supply and leave some slack

If you look at HDB supply of flats over very long periods like 5-10 yrs or more, you see huge ups and downs, some years 20,000 new flats, recently has been 8,000 and lowest was at 5000. They should have learnt long ago not to time such cycles. Knowing that Singapore has 20,000-26,000 marriages every yr, just build say 15,000 flats every year (since not every new couple will get a HDB). Then review the system every 2-3 years.

In fact it might be prudent for HDB to always have some slack. Ensure there are always 5,000 flats available. In times like this, release them and make people happy. After all, if it's the Govt, isn't it ok to have stockpile of flats, when govts around the world stockpile stuff of national interest like oil, rice, or even gold.

2. Increase grants or other benefits to needy

While we cannot go for a cost plus model, we can always increase grants to people who need them. Current grants are like $30-40k when HDB prices can go to $700k. This is a miserable 4-6% of HDB prices. This should be increased to 10-15% to make it relevant.

As for lower income households, HDB can also help by reducing the interest rate for mortgage. Currently it's still 2.6% while commercial banks are giving 0.8%. Perhaps for the needy, HDB can match the commercial rate.

3. Variable LTV

For most speculators, LTV is an important ratio. LTV stands for Loan-To-Valuation and it basically determines how much money a buyer can borrow from the bank to finance the mortgage. For HDB, it's 80-90%, ie one can borrow up to 80-90% of the house price. In other words, punters can simply put up 10-20% in cash and punt the property.

The LTV can be made variable to deter punters and help the poor. Total asset size and household income might be a good place to start. A household with $50k in assets and $50k annual income probably isn't looking to punt HDB. But a retiree with zero income on paper but $50k from overseas stock dividends and $5mn in asset after his condo en-bloc sale might be.

There are other probable solutions to help cool the general property market (not just HDB) and also protect the rights of home owners. Maybe someone should write a 46 page report to address these points.

1. Improve lending rules to deter punters

Albeit this is already being implemented esp on the LTV front. Perhaps more can be done at the int rate level. Implement measures such that commercial banks cannot provide lending at ultra low interest rates as it encourages punting. This might include charging a higher spread over SIBOR or SOR, or maybe even a complete revamp of the system: ie not using SIBOR/SOR but a flat rate of say 2.x%, like HDB. The other solution would be for MAS to raise short term interest rates. However this have far wider economic implications.

2. Tax developers more

Property developers enjoy supernormal profits. If a developer just sell 60% of a condo development and can breakeven, something is not right somewhere. The other fact is somehow any Ah Beng, Ah Seng also can be developers. Look at Popular bookstore, SPH or some of the smaller construction firms. I am not sure about the specifics, but I think there is some loophole somewhere. Increase their taxes.

3. Change en-bloc rules

If 80% of the people say you should let them sleep with your wife, does that make it ok to really let pple sleep with your wife? The en-bloc rule is terrible for someone with no intention to sell their house. Protect their rights - naturally this will disrupt the supernormal profits of developers as well.

4. Land sales

This is coming. Marlboro Tan was pressured to do something to cool the property market. Maybe land supply should also follow the same logic with HDB, ensure some supply in place and use it as a tool to control prices. Also, make it difficult for developers to get land cheaply.

5. Tighten psf criteria

As you should know, they change the ruling some time in the 90s to allow like balcony, aircon area, wall area to count towards floor area of house. Hence old flats are much bigger even with same paper floor area. Change this. Or maybe make sure it doesn't get worse and owners doesn't get shortchanged.

6. Talk down markets

Talk is cheap. Just give some conservative statements. Like "although property prices will rise in the long run given Singapore's progress, the current situation calls for prudence. We urge new buyers to consider their financials when shopping for new homes." Don't just talk Ra-Ra all the time.

7. Restrict foreigners

Make it more difficult for foreigners to buy. After all they are mostly punters anyways if they don't stay here, or have any connections with Singapore. How do they contribute to the well-being of Singapore? Make sure they need to park like a godzillion dollars here before they can buy anything. Oh and their LTV should be like 20% or something. And tax them jialat jialat!

Well these are some measures that can be put in place, albeit some already are. The implications are that property prices will fall, a lot of punters will go bankrupt and the banks with the most mortgages might suffer a little. But it might be a good thing for the future. Take out the froth, endure some pain. At least our kids would be able to afford HDB again and maybe even pursue the 5C dream of owning a Car, a Condo, a Country club membership and have some Comfort in having their own Children some day.


  1. Good analsyis and suggestions. Hope the oppositions read your blog and maybe get a couple of your suggestions to the parliment. Cheers.

  2. Great analysis. Although, I'd like to point out that it's not only young, married couples who want to buy HDBs. There are young, single people who are renting (like me) who need a place badly too (because we have no family around to stay with). And we fall through the cracks in an overly rigid system like this. So perhaps for #1, they need to assess it beyond just marriages.

    I just can't help but wonder if the gov't is marginalizing single people. We're taxpayers too, you know.

  3. Hi Ivy,

    You can stop wondering, the govt IS marginalizing singles. But I guess you are still young, so can change that status in a few years :)

    As a country, it's really quite difficult to support singles. I don't have the no.s, but I don't think all the working singles in SG add a significant portion to the tax revenue.

    Neither do they swing the vote at elections (again that's more perception than hard fact based)

    By giving every single a HDB means one less for eligible households. So it is justifiable? Very difficult.

    So really, I think it's better to get married :)

  4. I think the government knows what to do with HDB prices and all those nonsense.

    But I am keen to believe that they really more concerned with GROWTH. Cause when there is GROWTH, their pockets GROW too.

    I hope this election wake them up somehow. Anyway well written article. And I like your analysis of Mr Tan Bee Jay plans. This government is just too proud and high handed to listen out to anyone.

  5. Thks, a good read! Can i add 1 more suggestion: Impose capital gains tax on private (maybe HDB too) property transactions by foreigners. And btw, are foreigners taxed on the rental income they earn here? If not, it's time to implement. Any measures that curb speculation in private property will indirectly help reduce prices in HDB flats.

  6. Foreigners are prepared to pay top dollars for our property because Singaporean has contributed in making the country safe, green and vibrant to live. So while they can pay higher value for the property they buy, government should ensure that they must sell it back to only Singaporean. This would limit the amount that they would pay for the property and Singaporean are protected from sky high prices. Of course, proper legislations/rules should exist to present foreigner selling to another foreigner using Singaporean as intermediary.

  7. Hi Ivy

    Singles are in a way 2nd class citizens in Singapore. We do not enjoy the benefits that are afforded to people whom are married. The main benefit I can think of is that married couples who get hitched earlier benefit from the general appreciation of their homes.

    Some may argue that since the HDB unit is the ONLY house most couples own in general, any rise in value is only a paper value. But do not forget that AT LEAST they have a paper gain to begin with. What do the singles have in this aspect? NOTHING. Because they cannot buy a house by themselves immediately when they start working because of HDB's rulings.

    To make things worse, foreigners whom are married can apply for a HDB flat if both are PRs or if the foreigner has a Singaporean spouse even if he/she failed to get the PR. With the spectacular rise of the property which they bought much cheaper in the earlier years, they benefit from the rise in value and should they decide to return to their home country, they make a significant gain on their capital while Singaporean singles just watch and cannot benefit.

    I'm not trying to be xenophobic in this case and I empathise with the difficulties and some of the harsh words directed at some of these foreigners when sometimes, all that these people want is to mind their own business and try to create a better future for themselves. Something which both u and I will do try to do, something a normal person will try to do. I will feel indignant and frustrated too if I am at the receiving end of such xenophobic people but the thing is that we have to be mindful that no matter what, it will always be UNFAIR to foreigners in general. It has to be because it is only reasonable to do so. All countries do that to protect their citizens.

    But in this case, on the topic of houses, what have the singles in Singapore gain? Yet the irony is some of these married foreigners need not do much in terms of planning (because buying a house is such a natural thing to do after marriage) but yet they benefitted significantly.

    Do singles pay less tax per head compared to married couples? Why are we penalized indirectly over one of the biggest items in terms of commercial value staying in Singapore in our lives?????