Friday, May 03, 2013

How much should HDB pay for the land?

One of the most popular posts talking about HDB Singapore on this blog is titled: What's Wrong with HDB Prices?

This has a perennial debate since Marlboro Tan's time and recently our new HDB Minister Mr Khaw talked about this again. Obviously Mr Khaw is a more eloquent man and what he says make a lot of sense:

"You need to acquire a piece of land , you need to reclaim a piece of land. All those costs money to tax payers and we are just trustees of tax payers and those costs are to be accounted for. And even when you have got that land prepared, then land is only valuable when we invest in infrastructure, roads, MRT, etc etc. And all those costs billions of dollars. So to say that land cost is pittance and therefore should be excluded from total construction cost, I myself think it is not quite an appropriate argument."

The problem is always in the calibration. So how much should HDB pay? So in the 1970s HDB paid almost nothing for the land and hence it cost $10,000 to buy a 3 room then. Of course, that's too ancient to talk about and now HDB pays market rate for land parcels and sells at a loss to Singaporeans. To Mr Khaw, this seemed to be the correct approach.

However market rate is determined by supply and demand in which supply is determined by the government. Market mechanism also sometimes breaks down because moving prices create anxiety and cause people to behave irrationally. We saw that in the Singapore property market when people pay S$1700 psf for some suburban project and more than S$3000 for super luxury condos. In absolute quantum of millions and tens of millions of dollars, these are monies that can buy villas and hectares of productive land in other countries.

Perhaps the solution is for HDB to move towards targeting a long term moving average of market prices which could reduce some volatility in HDB selling prices and also for the government to better regulate the sale of land to control the market. HDB should also move towards percentage based subsidy for new buyers and receive a percentage based grant from the government to ensure that it doesn't go bankrupt.

Well actually since it's a Singapore government entity, HDB Singapore technically shouldn't go bankrupt as the Singapore government has the obligation to bail them out as the MOF had done by providing billions of grants over the years.