By Getty Goh (guest contributor)

In one of my previous blogs, I wrote about why I thought HDB flats could be made cheaper for first time buyers. Serendipitously, the DBSS debacle occurred shortly after my blog was published and the public outcry over the S$880,000 price tag for a new DBSS flat seemed to reinforce the point that many Singaporeans are presently frustrated at how expensive public housing has become. In view of that, I thought it would be timely for me to write a blog to explore the pricing mechanism for new BTO flats and talk about when would be a good time to buy new flats.

Once again, I must qualify and state that this is not intended to disparage the Ministries that are tackling this issue. It is always easier for people to poke holes at existing policies than to come up with a workable plan. So this article is not intended to poke holes at the policies we currently have in place, but simply to provide a different perspective. In addition, I would like to highlight that there is not much historical data available from HDB on new BTO flats, thus much of my conclusions are drawn from circumstantial and anecdotal evidence extracted from press releases, annual reports, etc. With that said, here goes…

Pegging new BTO prices to resale HDB prices

HDB does not officially reveal how new HDB flats are priced. However, from time to time, we are able to get a sense of how the pricing mechanism works from interviews and press releases from the relevant stakeholders. In a recent Straits Times article dated 18 Jul 11, Minister of National Development, Mr Khaw Boon Wan shared that “the prices of HDB’s new flats are typically pegged to prevailing resale prices but are discounted.”

As opposed to fixing new flat prices or even tagging them to things like median income, pegging new flats to resale flat prices seems like a logical thing to do as it offers a like-to-like comparison. While there is no doubt that the government has complete control over how new flats are being priced, one would expect the authorities to also have some influence over the HDB resale market for the pricing mechanism cited by the Minister to work.

Allow me to illustrate. Assuming the government wants to lower new flat prices without tweaking the housing grants and land cost, it can do so by launching more BTO flats. By flooding the market with excess supply, we should, in theory, expect resale flat prices to drop as well (due to the overall increase in public housing supply). Since new flats are pegged to prevailing resale prices (at a discount), HDB would then be able to lower new flat prices correspondingly. Conversely, if the government wants to increase new BTO prices, it could do the direct opposite and limit the supply of new BTO flats. While this may seem to be a fairly round-about approach, it is plausible as it allows HDB to indirectly set new BTO prices by influencing the overall resale market price without varying the other essential factors (e.g. HDB housing grant and land cost).

In the ideal world, the situation painted in the preceding paragraph would proceed like clockwork and new BTO prices can be controlled by simply adjusting supply of new units being released into the market. Alas, the resale HDB market does not behave like that in reality. Based on a comparison between the URA and HDB resale index, it was found that the HDB resale market and the private property market behaved very similarly. This is clearly seen from the high correlation of 88.4% as well as the 2 markets moving almost in tandem with each other (see Figure 1). In other words, even though HDB can launch record number of BTO units, it would likely have little impact on resale prices as there are larger economic forces at work. In view of that, it does not come as a surprise that the COV continues to remain high despite HDB launching many new BTO projects in the recent months.

Figure 1: Comparing URA and HDB price trends (1990Q1 to 2011Q1)

Source: URA and HDB website

The risks of pegging new flats to resale market prices

Conceptually, the private property market has always been known to be volatile and susceptible to market fluctuations. Volatility in that market segment arises from fewer restrictions, until quite recently, to buy or sell a private residential unit. Moreover, the acquisition of land for private residential developments is done either through competitive bidding via the Government Land Sales (GLS) scheme or the en-bloc process, which are affected by prevailing market conditions. Therefore, by pegging new BTO prices to the resale market, which is highly correlated to the private property market, are we not exposing many of our first time home owners to similar market risks?

At this point, I must concede that what I have written is purely postulation on my end and I could be totally wrong. However, given the lack of HDB data, there is really no way for me to confirm or refute HDB’s pricing strategy for new BTO flats. Nonetheless, if the private residential market is anything to go by, the principle of pegging new HDB flat to market prices may have considerable risks. In 1996, at the peak of the 1990s property boom, there were about 15,000 non-landed residential transactions (based on caveats lodged). As at 2009 (before the recent boom), about 41% of the 15,000 had sold their units off while the rest were still holding on to their units. Of the 41% who had sold their properties, about 78% sold it for a loss.

So what does this mean to you? Ultimately, by pegging new BTO prices to the resale market, new flats are not insulated from the cyclical effects of the property market. Just like resale HDB or even private properties, you could be overpaying for your new flat when the economy is doing well. On the other hand, this finding seems to suggest that an ideal time to buy a new HDB is when the overall property market is depressed. Whether or not public housing should be heavily subsidised and sold at a fixed price is really beyond the scope of this blog. Nonetheless, if you think it is fair for a statutory board to increase prices of public housing during a hot property market, you may wish to ask those who are presently priced out of the market and let me know what they think.

By guest contributor Getty Goh, Director of Ascendant Assets, a real estate research and investment consultancy firm. Getty has a MSc (Real Estate) and BSc (Building) from the National University of Singapore.

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