The TRUTH behind HDB’s Deficit

There has been much controversy on the fact that “HDB loses millions of dollars every year”. I found no less than 5 TRS articles covering it.

I first mentioned it at a National Conversation on April 25 this year.

I said “According to Leong Sze Hian (sic), the actual construction cost of a HDB was $150,000 for a 5 room HDB flat. So why are we paying $300, $350, $400,000 for a HDB”

Another guy rebutted me, mentioning that “Land costs should not be excluded from the equation”.

I was quick to rebut him, saying “The land belongs to the government. Who does the government serve? The people. So why do the people have to pay for something whom their servants own?”

This led to Khaw mentioning all the factors behind land costs, reclaimation, acquistition, and infrastructural costs, and the losses of million.

Now, I wish to settle the issue once and for all how much the HDB actually “loses” per HDB flat.

I did some Leong Sze Hian style snooping around HBD ‘s financial reports, the government budget statements and so on and so forth.

This is what I found out:

• Land reclamation only costs under $15 per square meter.
• Infrastructural costs are met by a separate $12.8 billion Development expenditure fund.
• If you can’t repay your mortgage loan, your house will be repossessed.
• Mortgage loans account for up to 20% of a household income (up to $1500 a month)
• HDB’s budget deficit was $1 billion in 2012, down from $2 billion in 2011. It was given a $745 million government grant in 2012, up from 2011 by $345 million . The remainder was met by a government loan, with INTEREST.
• What KBW said was “true”, HDB is $52 billion in debt.
• The income components were mainly mortgage loan instalments and rent
• The largest operating expenditure components were loan interest and repayments back to the government.
• It costs $4.2 billion to acquire the land for HDB in 2012, twice that of construction costs ($2.5 billion).
• 25,000 flats were built in 2012, so average construction costs amount to $100,000 per flat, and land costs $168,000.
• 12,000 flats were sold, and the gross amount “lost” was $757 million, or $63,000 per flat.

My comments:

1. Owning a home under mortgage is effectively no different from renting, your house will be repossessed if you can’t pay all the same.
2. HDB slyly allowed the homeowners to spread out repayments over a 30 year loan, so that the mortgage repayments will not be enough to completely cover the costs prices for the current financial year. As a result, it can take advantage of a government grant to subsidise as much as 2/3 of their deficit, while homeowners eventually have to pay FULL PRICE for their HDB, even it was met through grant already (see point 4).
3. As a result of a 30 year loan, you eventually have to pay 44% more because of interest. According to HDB loan calculator, at $300,000 loan, you pay $1202/month instalments, which adds up to $432,000.
4. The government loan scheme is nothing more than left pocket to right pocket, WITH INTEREST. Whenever HDB takes out a loan, it also has to pay interest, and as a result, HDB owners have to be charged more to cover the interest. Nothing more than an elaborate scheme for the MOF to profiteer.
5. HDB’s deficit was half in 2012 than in 2011, but the government grant doubled. Very funny? Since the government made a $3.8 billion budget surplus in 2012, why not increase the grant component, so that HDB pays less loan?  What is the criteria which decides whether government gives grant or loan?
6. Interestingly though, the interest repayments accounted for twice as much as the loss of the homeownership scheme, while the government grant almost fully covers the total lost through the homeownership scheme. This leads me to surmise that most of HDB’s deficit are due to the LOAN INTEREST themselves,  solely there because the government decided to give a loan rather than a grant to HDB. Conversely,  had the loans been written off, HDB wont be in deficit after the grant.
7. Whenever we pay $300,000 for a flat, two thirds of it goes into the reserves as land costs. If we factor out land costs, prices can be reduced by two thirds.
8. Land costs are not de facto physical costs, but rather opportunity costs. If the government sells its land for for less to HDB, it wont lose any money, or negligibly, but it would have to forgo a profit.
9. Land is part of our reserves, and if we sold it for free, then our reserves will be raided. But the net effect is that money that would otherwise belong to the government will belong to the people instead, not much different.
10. HDB BTOs are not subsidised at all. Given that the average flat built was a 4 room flat, which was sold at $250,000 +,  the costs of the flat reflect exactly what the HDB paid for construction costs and land.
11. If you want to blame anyone, please don’t blame Khaw, HDB is but a scapegoat. Blame the MOF and the government at large. SLA is owned by the Ministry of Law, so blame Shanmugam. MOF who decided to give a loan instead of a grant, is headed by Tharman. So blame them instead. And don’t forget to blame the person who hired them , LHL.

If I were Government

• I would immediately factor out land costs for HDB. If land sits on top reclaimed land then I would have to add that costs, but that cost is trivial ($15 psm compared to $1500 psm for HDB cost price)
• For the remaining $2.5 billion construction costs, I will meet it entirely using funds from the budget surplus.  This will reduce the surplus by about $1.75 billion to about $2 billion.
• However, I cannot sell HDBs for free, because that would reduce the incentive to work. Instead, I will rent it out for a price adjusted towards the income level of the homeowner, based on stratum income ceiling for different types of flat.For example, flats valued at $100,000, for income between $1000-$2000 a month, for $100 a month, (adjusted for wage growth, increasing by 7% p.a) ; flats valued at $200,000, for income between $2000-$3000 a month, for $200 a month.. Given 900,000 families with a mean income of $7500 a month, this would earn about $8.1 billion.
• Proceeds from the rent will go towards homeowners’ s CPFs, to substitute the need to sell the house for retirement funds. This and the above point have a net effect of “robbing the rich” to give to the poor, without having to tax them directly. Also , this allows the “homeownership nest egg” to grow at the same rate of wage growth, which is not only sustainable, but also moneitzable without having to sell off your houses.
• A separate housing board will be created to oversee flats for investment purposes.

Abel Tan