Of late, Singaporeans have been complaining about the ridiculously high prices of HDB flats.
A standard 5 room BTO costs about $350,000, whereas a 3 room costs above $200,000.
Should the prices be as high as stated? Let us analyse the details:
1. Land Prices
According to HDB's FY2012 report( http://www10.hdb.gov.sg/eBook/AR2012/financial.html), about $7.15 billion was spent building 25,000 HDB flats. Of this, $4.2 billion was land costs and $2.5 billion was construction costs, with the remainder being miscellaneous fees.
Hence on average, land prices costs about 2/3 of the total cost of the HDB flat. If we factor out the land prices, a $350,000 HDB will cost only $116,000.
Also according to HDB (HDBSpeak's http://www.hdbspeaks.sg/fi10/fi10336p.nsf/cc/CostofLand?OpenDocument),
The prices of new HDB flats are already heavily discounted from comparable resale flat prices. At the same time, eligible Singapore citizen households have access to CPF housing grants and concessionary HDB loans. The vast majority of families in Singapore find public housing to be within their reach.
Paraphrasing, HDBs are 'affordable' to citizens, therefore it is pointless to reduce prices by reducing land cost.
This is akin to saying, so long as we dont spend 100% of our income on healthcare, healthcare is affordable!
It also borrow's Mah Bow Tan's quote of :
To reduce the price of land arbitrarily is tantamount to a raid on Singapore’s national reserves, if the full value of the land is not recognised and paid for. Neither the Government nor HDB can move the value of State land up and down as it pleases.
It then goes on to contradict itself:
What HDB does is to recognise the value of the land it buys, as determined professionally by the Chief Valuer, and then helps Singaporean families with their first housing purchase by pricing the eventual sold flat at a price that is well below comparable market prices.
So, who does the Chief Valuer belong to? IMF?
And who do the reserves belong to? An extra dollar in the reserves, vs an extra dollar in people's pockets, whats the diff?
Here's the diff: Once money lands in the reserves, it is gone forever. (Or at least for 200 years, given that we can only spend $3.8 billion of NIRC every year compared to $800 billion est. of reserves)
At the 25 April NatCon, when I floated the query of "Why should land prices be included in HDB pricing" , KBW said:
You need to acquire a piece of land; you need to reclaim a piece of land[1]. All those costs money to taxpayers[2] and we are just trustees of taxpayers and those costs are to be accounted for. And even when you have got that land prepared, land is only valuable when we invest in infrastructure, roads, MRT... And all those costs billions of dollars[3]. So to say that land cost is a pittance and therefore should be excluded from total construction costs… I myself think it is not quite an appropriate argument.”
[1] And then I did a google search : To reclaim land costs $15 per square meter(http://www.atimes.com/atimes/Southeast_Asia/EG31Ae01.html) .
What is land selling for?
2/3 of $250 psf, $1666 psm, times 15 storeys = $24,999 psm!
[2] These cost money to taxpayers. So when you sell the land, why isn't the money being returned to taxpayers? Why did you give them to Tony Tan to lose?
http://therealsingapore.com/content/51-pay-cut-president-tony-tan-does-not-make-42b-he-lost
[3] Again, are the costs of infrastructure met by land sales , or are they met by our $12.8 billion DEVELOPMENT EXPENDITURE?
Furthermore, land isn't actually sold. It is leased. After 99 years, the land, and the property on top of it, returns back to the government! The government doesnt lose any reserves!
And last but not least, SDP created a housing proposal, which factored out the cost of land (http://yoursdp.org/_ld/0/7_Housing_a_Natio.pdf) , and that proposal was praised by none other than a GIC Economist (http://yoursdp.org/news/2012-11-05-5432), calling it http://yoursdp.org/news/2012-11-05-5432," theory and methodology sound and rigorous, the empirical work seems well researched and remarkably detailed as well"
2. HDB/MND Monkey Financing
According to KBW, HDB loses money for every flat that it sells. That is true. However, what he did not mention is, that the government also gives a grant to offset (a fraction) of the losses. The remainder, it has to take out a loan from MOF to finance.
But here is the interesting part:
- According to HDB's financial report,HDB is $40 billion in debt.
- About $2 billion of expenditure is loan repayments to government.
- About $750 million is the deficit incurred on homeownersship (assuming that it is the money lost on HDB flats)
- Main Source of Income are downpayment of HDB flats and mortgage repayments
- The government gave a $740 million grant, but HDB had to take out a $1.4 billion loan.
- Government's budget surplus was $3.8 billion.
Now, interestingly, HDB loses money every year,because it ALLOWS homeowners to pay a downpayment and 30 year mortgage loan, instead of full downpayment which fully covers the capital expenditure. And this allows it to tap on taxpayer money (government grant) to partially subdise the losses.
As a result, of an average $300,000 4 room flat, $30,000 is actually subdisised by government grant already. But we end up paying full price in 30 years!
Also, because the government gave only a $740 million grant, and not a $2 billion grant which it is in a position to do so because of the budget surplus, HDB takes on $1.4 billion more debt, which it has to pay off in the future, PLUS interest!
Not surprisingly, even though our HDB costs do not inflate with time, (it costs $350,000 forever to build a 5 room flat in 2012), we have to pay interest on our mortgage loan at 2.6%, because the government itself charges a 2.5% loan interest on HDB's loan.
And as a result, we pay up to 70% more for HDB flats! A $350,000 5 room flat, we end up paying $612,000.
Expect housing prices to rise for the next generation because of this charade!
3. 99 year Lease
One question which has always eluded me is that, since absolutely no one lives a further 99 years when they buy their first flat at 30, why is the lease put at 99 years?
I may buy a 5 room flat at 30, raise my family and sell it off when my son turns 33 and buys his own flat.
Even if the land cost is justified, by paying "rent" for a 99 year lease instead of , say ,33 year lease , we end up paying a lot more!
HDB lives on this , "buy high, sell high" concept of asset appreciation. Its idea is that, if we make a long lease, yes, you pay more, but you can sell for more as well.
But as investment goes, high prices carry higher risk. A flat bought for $300,000 and sold for $600,000 of course carries more risk than a flat bought for $100,000 and sold for $200,000.
So lets say we reduce lease from 99 years to 33 years, and lived through for the duration of lease:
Current Scheme:
1st person: Paid $300,000. Sold for $600,000. ($300,000 earned)
2nd person: Paid $600,000. Sold for $1.2 million($600,000 earned)
3rd person: Paid $1.2 million. Sold for nothing (lease expired).
Net Result: -$1.2 million
New Scheme:
1st person: Paid $100,000. ($200,000 saved)
2nd Person: Paid $200,000($400,000 saved)
3rd Person: Paid $400,000.($800,000 saved)
Net Result: -$700,000
So you see, over the course of a lease period of a HDB, people end up losing almost TWICE as much money as compared to when a lease was shortened.
The asset appreciation scheme is very selfish and not sustainable in the long term: The first 2 lesees earned $300,000 and $600,000 respectively. But the last guy lost $1.2 million, and as a result, has no money to fund his retirement!
Looking like A PONZI SCHEME?
Comparatively, I dont see why the last guy should be made to lose $800,000 more so that the first 2 guys can make $300,000 more in scheme 1 than scheme 2.
If the government truly believes in long term outcomes for the people, it should have know better than to have a long lease period, to artificially blow up a resale bubble and then have the last guy lose his retirement savings heavily!
4. In Summary:
So, now let us compute how much we can save on HDB flats had we
1) Factored out the land cost
2) Have the government paid a grant instead of a loan to HDB
3) Adopted a 33 year lease
Given a $300,000 BTO flat.Say we pay a 20% downpayment and 30 year loan, and as a result, we pay $480,000
Take away HDB's monkey financing, and have the government give grant instead of a loan,we wont have to pay interest: $300,000.
2). Take away land costs, and 2/3 of the costs is factored out: $100,000.
3). Have a 33 year lease, which 1/3s the price: $33,333.
Yep, now we pay $33,333 instead of $480,000. Saving $447,000 of CPF for our retirement!
Any more problems with meeting the minimum sum?
Abel Tan
TRS Writer