In our previous article, we talked about the goal Minister for National Development Khaw Boon Wan has, to lower the affordability ratio in Singapore. Today, we’d like to explore the various courses of action he might take to realise that goal.

The following actions, or a combination of them, could help achieve Minister Khaw’s goal.

HDB Flats, Henderson, Clementi

Shortening the total lease of HDB flats

This is one way of reducing the price quantum for Housing Development Board (HDB) apartments, without actually changing their market value. With a lease that is lower than 99 years, the price of each unit can be lower since the land is leased out for a shorter period. But this mechanism must be managed closely, as the time-value of money is not linear; consequently, the relationship between property value and lease remaining will also not be linear.

For example, a shorter 60-year lease should generally entail a reduction in price quantum of greater than 39% (subject to the market conditions and interest rates), even though the reduction in lease is around 39%. Since this additional consideration could sometimes be overlooked or miscalculated by buyers, the resale market has to be monitored closely, lest people become stuck with a property that banks refuse to underwrite due to a much shorter left-over lease, and hence, lower valuation than expected.

Restrict reselling of HDB flats

By applying this mechanism to a specific subset of HDB flats, they can be removed from the resale market, and thus insulating them from the property market as a whole. We expect that this would most likely be applied to built-to-order (BTO) units, and even then, only to certain types of BTO units. Again, this mechanism has to be managed properly, as the setting of the buy-back price is a tight-rope act.

If buy-back price is pegged to the property market, then it will be subject to aggressive price fluctuations. We’d back to square one for such units, except that HDB would be taking the place of resale buyers. One the other hand, if too little is given by HDB on buy-back, occupants of such flats would be better served by a comprehensive rental scheme that doesn’t require a large up-front payment. We think that a good start would be using Central Provident Fund (CPF) interest rates as a baseline. The purchase amount (largely funded from CPF in most cases) would have earned that amount interest anyway, if not used to purchase a HDB lease. From that baseline, further adjustments could be made to take into account inflation and other factors.

This is highly important as a properly administered scheme would ensure that citizens are suitably comfortable, contented and secure in their future expectations, eventually having enough to fund a fair and modest retirement, by selling back to HDB and getting a smaller unit, or renting.

Back-to-basics HDB flats

In recent years, many fancy accoutrements have been added to the venerable HDB flat. Some have been useful despite being expensive, such as extra lift landings and sheltered walkways to public transport. Some, not so much. With residents having to pay for such upgrades, it is inevitable that it increases the price of not just newly-built units, but also resale units.

By incorporating fewer bells and whistles, and only the necessary, value-for-money ones, HDB can reduce their costs. With more uniform furnishings and construction for economies of scale, we believe that cost savings can be quite significant, as we highlighted in BLUTA on Housing, Part 1.

Direct price  reduction in BTO HDB flats

This self-explanatory mechanism is simple and straightforward, yet can have the most dire results if applied indiscriminately and in isolation. A direct price reduction can have many consequences across the whole market. A few of such consequences will be unforeseen, as the property market in Singapore is notorious for reacting unpredictably.

All the measures we have highlighted above will have ripples in the property market, especially direct price reduction. If applied carefully and in concert, we think they will be quite effective. They will also serve to differentiate public housing from private, something we have advocated before (BLUTA on Housing, Part 1, Part 2 and Part 3).

For some of the proposed schemes, it will probably take a little more time from the actual point of introduction before the authorities, market and buyers can properly quantify the appropriate value differences of the various schemes, accept the new lease period or resale restrictions, allow for the market to respond to the nuances introduced and finally for the authorities to fine tune the offerings.

On a final note, as much as we are very supportive of Ministry of National Development (MND) and HDB being innovative in solving our concerns on public housing, we feel it prudent to sound a warning that, whatever the new measures are, they must:

  1. not be overly complicated, so that they can be easily understand
  2. not be so many that the buying public is inundated and confused

 

We look forward to seeing Minister Khaw’s plans for the betterment of Singaporean lives in time to come. With this in mind, we’d like to renew our calls for the MND, and HDB, to consider implementing a more comprehensive and widespread rental scheme. that will take into account the housing needs of all Singaporeans, and give us greater flexibility in choosing how we finance our home.

Do you think Minister Khaw has other plans or options? If you have an opinion or viewpoint of your own to share, please let us know on our Facebook, Twitter, and Google+ pages.

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