Wednesday, October 27, 2010

HDB Should Return To Cost-based Approach

I fully agree with the letter writer. If the problem is really too high public housing cost, the solution is to revert to the cost based approach which has worked fine. If the cost based solution was not working fine in ensuring access to cheap public housing to Singaporean couples, the relevant authorities should bring out the issues. Other wise, Singapore will have a sub-prime mortgage problem. Already, we read of stories of people living on beaches in tents, or young couples putting of marriage. The latter definitely has an impact on Singapore birthrate.


HDB should return to ‘cost-based’ pricing
mypaper October 27 2010

THE various propertymarket cooling measures announced so far have not addressed these two fundamental issues: Root cause behind high prices of new and resale HDB flats. The high prices of HDB flats will naturally push up private- property prices. Thus, this issue affects all Singaporeans, even those aspiring to own private property.

In Marine Parade during the 1 9 7 0 s , p r i c e s o f new three-room, four-room and five-room flats were $17,000, $20,000 and $35,000 respectively. In 1990, new five-room flats cost around $70,000. Such prices reflected a “cost-based” pricing approach then.

But, following the property bull run in the mid-90s, HDB switched to a “market-based” pricing approach, and has confirmed that “the prices of new HDB flats are based on the market prices of resale HDB flats, and not their costs of construction”. In 2000, t h e t o t a l break-even cost (comprising construction, land and other related costs) of a new five-room flat was estimated at about $120,000.

However, under market- based pricing, HDB will first look at the prevailing market price of, say, $260,000 for a five-room resale flat. It will then pick a slightly lower figure of, say, $200,000 as the selling price for the new flat – despite the break-even cost of $120,000.
HDB will then say the newflat buyer is getting a so-called “market subsidy” of $60,000, which is the difference between the resale flat’s market price and the new flat’s selling price. There is not really a “cash subsidy” for the buyer, while the HDB makes a profit of $80,000 for each flat sold.

The financial losses reported in HDB’s audited statements could well come from “transferpricing” accounting between HDB, the Singapore Land Authority and the Ministry of Finance.

A plate of chicken rice costs $3 at a coffee shop and $20 at a hotel coffee house. It would be illogical to say that every person eating chicken rice at a coffee shop is getting a “market subsidy” of $17 per plate!
HDB’s “market-based” pricing approach is the root cause of the continual rise in the prices of new and resale flats, which is detrimental to flat buyers.
Why is HDB not doing the right thing, as a not-for-profit, low-cost public-housing developer, by pricing new flats on a cost-based, break-even basis, passing on to Singaporeans the economy-of-scale cost  savings from its huge developments?

HDB flats are public housing developed using public funds. Thus, HDB must be transparent and accountable by disclosing detailed cost figures for all its housing projects.

Are new flats really affordable now? While even a taxi driver could say that he was able to afford a $35,000 five-room flat previously, he would be right to worry how his children could afford to buy a similar flat costing close to $500,000 now.

It is misleading for HDB to say that its flats are “affordable” without clearly specifying that a 30-year loan period is assumed. If one were to stretch a home loan for as long as 30 years, even private property would become “affordable”.

For a couple with a combined monthly income of $8,000 , a 30-year HDB loan of $500,000 with a 2.6 per cent interest rate and $2,000 monthly loan instalment may appear to be affordable.

But, at the end of 30 years, they would have coughed up a whopping $800,000 in total capital and interest repayments. A financially prudent loan period would be around 15 to 20 years.


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