By Mr. Propwise

Over the weekend Housing Minister Khaw Boon Wan gave an interview to the Straits Times, where he spoke about what I believe to be a radical shift in policy for the pricing of new Housing Development Board (HDB) flats. In this article we’ll look at the potential changes and how they could negatively affect property prices, especially in the mass market segment.

HDB to be price-setter, not follower

Historically, the prices of new HDB flats have been pegged to the movements of resale HDB prices, i.e. they followed market-based pricing. This created a vicious (or virtuous, depending on whether you were a potential buyer or a home owner) cycle where rising private property and resale HDB prices would push up the pricing of new HDB flats, which would then serve to further bolster pricing in the secondary market.

Over the past six years, resale HDB prices rose by 80 percent, dragging new flat prices up with it, and making them less affordable to new buyers. Rising new HDB prices then set the floor for resale prices, and increased expectations that prices would only keep going up.

But going forward, HDB will no longer be a price follower, but instead act to be a price setter as the chief supplier of homes. As Minister Khaw puts it, HDB will no longer let “the tail wag the dog.” Instead, new HDB prices will now be based on affordability benchmarks instead of market prices of resale flats.

Build to Order (BTO) flats to be priced based on affordability

This de-linking of prices seeks to break the cycle of self-reinforcing price increases between the new and resale HDB flat markets. One possible mechanism that Minister Khaw spoke about was to price BTO flats based on a multiple of median income. Specifically, he referred to pricing new flats in non-mature estates at four times the annual median income of applicants, which would imply a 30 percent fall from current pricing.

However, the exact implementation will be a sensitive issue, as the government has to do it without affecting the larger existing base of flat owners’ asset values. To get feedback and buy in, these ideas will be opened up for debate to Singaporeans in a national conversation. It will not be easy to balance the interests of home buyers versus those of home owners.

Impact on private property prices

While the government can’t set private property prices, they can influence them via HDB policy. By flooding the market with low-priced public housing, this will certainly serve as an overhang on private property prices if the price disparity is too great.

Previously, there was some segregation between the public and private housing markets, primarily through the use of the income ceiling as a way to restrict access to public housing. But even this sacred cow may be slaughtered. Minister Khaw has suggested doing away with the income ceiling for BTO flats so that anyone could apply for them (although there are still likely to be other restrictions, such as the concurrent ownership of private property).

If this really happens, then the private property market will be under threat from public housing as first-time home buyers of all income levels will now be able to make their purchase decision while comparing across the entire spectrum of housing types.Practically speaking, the mass market private property segment will be most affected as high income earners are less likely to consider HDB flats. Of course, for this to have an impact, the government also has to ramp up the supply of HDB flats.

Government continues to talk the market down

The government clearly wants to send a signal to the market that prices should come down. In the interview, Minister Khaw made several ominous remarks, including saying that judging from the crowded showrooms, it has not “sunk in” for buyers that the era of large capital gains are at an end, and then “what goes up must come down.” To further drive in his point, he suggested that there is still scope for prices to fall in some market segments. I believe he is referring to the currently overheated mass market property segment, where per square foot prices of certain developments have almost closed the gap with more centrally located projects.

As I’ve previously discussed, controlling the property market and even bringing down prices have now become a policy aim for the government. The fact that private home prices have risen 60% since 2Q09 despite seven rounds of property measures has become an embarrassment for the government.

Worse, the high level of developer sales in March (from a huge 4,000 plus units newly launched) is likely to accelerate a potential new round of policies to curb investor enthusiasm for property. While the sustained low level of interest rates have continued to feed investor hunger for any asset with yield, thus pushing up their prices, don’t forget that in the Singapore housing market the government ultimately holds the keys.

Property buyers have shrugged off the previous seven rounds of property control measures, pushing prices and volumes higher.But with the government controlling both the longer term supply of public (through BTO launches) and private (through Government Land Sales) housing, and the means to curb demand (through taxes and financing), I wouldn’t bet against the house, especially one that is determined not to “lose any more face.”

By Mr. Propwise, founder of, a Chartered Financial Analyst and resident real estate analyst at, a site to help property owners and investors make profitable decisions in uncertain times. Click here to learn more

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