PUBLIC housing policy is headed towards a serious revamp. After 50 years, the time is ripe to revisit old assumptions and examine existing policies, National Development Minister Khaw Boon Wan said in Parliament last week.
Some old assumptions no longer hold. For one thing, singles will be allowed to buy subsidised new Housing Board flats. Current policy allows them to buy only from the resale market. They get a cash grant of $15,000 from HDB if they earn $5,000 or less.
Last Friday, Mr Khaw announced that singles aged 35 and above, and earning up to $5,000, will be allowed to buy two-room new flats in non-mature estates. These restrictions might be relaxed over time, he hinted.
He also pledged to bring down the price of new flats in non-mature estates by up to 30 per cent. Two days later, at a grassroots event, he offered up three radical suggestions on how the latter might be achieved: Having shorter leases; a longer minimum occupancy period before a flat can be sold on the resale market; or requiring that flats be sold back to HDB at the original sale price, with a slight interest.
Although Mr Khaw made clear these suggestions were for discussion only, and invited Singaporeans to the conversation table to rethink public housing, buyers, sellers and industry players alike are already wary.
Property stocks tumbled a day after his remarks, with investors worried about the effect of the changes on property prices.Soaring home prices
WHAT exactly might a rethink on housing policy entail? How radical will the changes be? How far should the Government go in remaking public housing?
First, some background on why the Government is contemplating such an overhaul. Housing prices have soared on the back of a supply crunch of new HDB flats, no thanks to a slowdown in building from 2006 to 2010. HDB is making up for lost time, with 110,000 new Build- to-Order (BTO) flats targeted to come on stream by the next three years.
Global liquidity and high domestic savings have also caused private property prices to rise, putting these properties out of reach of young couples, who have had no choice but to turn to the HDB resale market.
This in turn caused a spiral in HDB resale flat prices. The HDB resale price index hit a record high in the fourth quarter of last year, at 202.9 points. In 1990, it was just 33.6 points.
As more BTO flats are built, the resale market has slowed: Annual growth for HDB resale flat prices was 14.1 per cent in 2010, falling to 10.7 per cent in 2011, and 6.6 per cent last year.
Concerns about affordability have arisen not only among young aspiring home owners but also middle-aged singles and parents of young couples wanting to set up home.
No longer an asset?
OBSERVERS say that while the Government clearly has good political reason to bring down prices, it must also be sensitive to the impact of these changes on the overall property market.
Policy changes are thus unlikely to upset the fundamental belief of many Singaporeans who see HDB flats, bought direct from the Government at a subsidised price, as sure-fire good investments that will appreciate in value.
HDB home owners form a large voting bloc: Collectively, they own about 900,000 flats. Of these, 43,000 flats are rented out. The ruling People’s Action Party (PAP) has long touted home ownership as a way to give citizens a direct stake in the country, allowing the average worker to benefit directly from the rising wealth of the country as it developed over the decades.
Since the 1990s, it has actively promoted the idea of an HDB flat as both a home and an asset whose value can be monetised for retirement.
“Stocks are volatile, deposits are paying close to zero, but property, as we’ve been taught, is not just a roof over our heads but also an investment vehicle,” says Bank of America Merrill Lynch economist Chua Hak Bin.
Will an HDB flat cease to be an asset and revert back to being only a home?Mr Khaw has hinted that making large profits from reselling flats may be less likely in the future, given slower economic and wage growth in coming years.
“Looking ahead, as we may no longer get the same kind of returns from reselling a HDB flat as in the past, how will its role as an asset be affected? If it is likely to diminish, how should we make the adjustments?” he asked.
He did not provide answers, but invited Singaporeans to discuss the impact of trade-offs involved in housing policy changes. His remarks, however, seem geared towards moderating expectations of large capital gains, not denying them altogether.
In other words, the days when young couples buy a flat for $200,000 and sell it for twice the price five years later may be over. That kind of rapid gain benefited existing home owners but passed on the costs to future generations of resale flat buyers.
Instead, modest price gains of, say, 3 to 5 per cent a year, in tandem with income growth and inflation, may be more sustainable.Options to lower prices
IF THE PAP is unlikely to be so abrupt as to introduce housing policy changes that will destroy Singaporeans’ housing asset values, what might it do?
Mr Khaw wants to bring down the price of a new HDB flat to a level that is roughly the equivalent of four years of the median household income of HDB applicants. Data from the HDB website shows the median monthly household income of a four-room flat applicant is $4,100 and $5,800 for a five-room flat applicant.
This would imply target prices of $197,000 and $278,000 for four- and five-room BTO flats after housing grants which can range from nothing to $40,000.
BTO flats in the last exercise were sold at up to $300,000 and $400,000 respectively. The Government will have to explain to those flat buyers why they ended up paying more for their flats. Would they have to be compensated somehow?
Lower BTO prices could also drag down HDB resale and private mass-market condo prices, by channelling demand away from these alternative markets.
Lower prices will also reduce wealth: According to the Monetary Authority of Singapore, property holdings, at $790 billion, accounted for half of household wealth last year.
With these constraints in mind, property analysts suggest ways for the Government to introduce lower flat prices without collapsing the rest of the market. One way is to create a new tier of public housing which cannot be sold on the open market. Such flats can be priced low to make them affordable, but can only be sold back to HDB.
“This would give the new generation a choice in what they want, so they go in with eyes open,” says PropNex chief executive Mohamed Ismail.
The drawback is that this could create a social underclass, depriving the low-income of the chance to enjoy rising home values.Having subsidised government housing which does not rise in value, as in Indonesia and Malaysia, could also drive many buyers to the private sector, escalating prices there further, notes DBS economist Irvin Seah.
Another solution is to shorten the lease of flats by at least 20 years, down from 99 years now. But this would not bring down the cost of flats by much, as construction costs have risen in recent years, offsetting the cheaper land cost of a marginally shorter lease.
Even shorter leases, of say 40 years, may bring prices down but would make the homes unattractive to buyers because they would be hard to sell later on.
Other options include one by researcher Tan Meng Wah, to sell new flats minus their land cost. When the flat is eligible for resale after five years and the home owner decides to sell it, the HDB will lay first claim to collecting back the pre-determined land value from the capital gain of the flat. If the capital gain is less than the land value, HDB will make up the shortfall.
Another suggestion is to reduce demand for new HDB flats by not allowing HDB flat owners to buy private property. If they want to enter the private property market, they would need to sell their HDB flat first. This means more resale flats would enter the market, bumping up supply and calming prices. About 47,000 HDB owners currently also hold private residential properties.
OrangeTee research and consultancy head Christine Li sums it up thus: “There isn’t much room to adjust BTO flats downwards. And not offering a big enough discount would still lead buyers to the resale market.”
Young couples want affordable homes and would gladly welcome a fall in new flat prices. But existing owners, who hope to sell their flats for retirement income, would prefer that prices be kept buoyant.
Maintaining the right balance between treating housing as a roof over one’s head and as an asset will require delicate handling. Given the difficulties of bringing BTO prices down without having a major impact on the rest of the property market, the Government is unlikely to come up with very radical changes and is more likely to proceed with caution.
This story was first published in The Straits Times on March 14, 2013
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