HDB will be the price-setter: Khaw

It won't take cue from resale market; the objective is to ensure affordability
By Daryl Chin And Rachel Chang, The Straits Times, 13 Apr 2013

AS THE chief supplier of homes, the Housing Board should set the price of public housing, rather than take its cue from the resale market.

No longer will HDB let "the tail wag the dog" as it did for decades when it used a market-based approach to price its Build-To-Order (BTO) flats, said National Development Minister Khaw Boon Wan.

This resulted in soaring new flat prices as the resale market spiked 80 per cent over the last six years.

Mr Khaw put a stop to this by "delinking" BTO prices from the resale market after he took over the housing portfolio in 2011.

"(Being) led by the private sector (is like) a tail wagging the dog. We should be the price-setter, not be the price-follower... The social objective is to ensure home ownership and affordability," he said in an exclusive interview with The Straits Times.

Even before he stepped into this job, he was clear about wanting to make use of HDB's dominant market leadership position to influence prices, he said, adding: "I can't set market prices in the private sector, but I can influence them."

He dismissed worries that delinking new flat prices from the resale market would mean indefinitely increasing the subsidy that taxpayers give to HDB buyers, as the property market moves in cycles and "what goes up must come down".

HDB pays market rate for its land and construction costs. Hence, when it prices flats below a market rate, it incurs a housing deficit - now in the region of about $1 billion a year, including other costs such as upgrading.

In the wide-ranging interview ahead of housing-themed sessions of Our Singapore Conversation, Mr Khaw also spoke of his plans for the future.

In lieu of the old market-based approach, he favours pricing new flats in non-mature estates at about four times the annual median income of its applicants - 30 per cent lower than the current 5.5 times.

This will be implemented "soon (as) it's not something for the next century", he said.

But how it will be instituted without affecting existing flat owners' asset values, as he has promised, is the tricky part - and what he wants Singaporeans to debate in the national conversation.

A four-year salary cycle is reasonable, he said, because that was what flats cost before the bull run of the last six years.

Anything less than that, he noted, might put undue strain on the state.

Mr Khaw lamented that, judging by packed showrooms, it has not "sunk in" for Singaporeans that the era of huge capital gains from property is at an end, with slower economic and thus wage growth in the years ahead.

While property prices have moderated across the board in the past year, "there is still scope to bring (prices) down to minus (growth rates) for some segments", he said.

Despite breaking with the policies of his predecessor, Mr Khaw defended Mr Mah Bow Tan, who helmed the National Development portfolio from 1999 until he left Cabinet in 2011. He noted that in the late 1990s, Mr Mah faced a housing crash, and was heavily criticised for "ghost towns" of empty flats - a stark contrast to the supply crunch of the last few years. "If I came in four years ago," said Mr Khaw, recalling a period of economic uncertainty after the United States mortgage crisis, "my policies may be the same as his".

"When I came in, it was over and a strong recovery was being experienced, so I could do these things. Policies depend on the time. What's important is nimbleness and don't be too stubborn."

Industry players said his new approach would be popular, as the old pricing model seemed to make buyers pay more for the country's success. But they said it had to be in tandem with an adequate supply of new flats.

If there is another supply crunch like that of the last few years, BTO buyers will come into a windfall as resale prices pull away from those for new flats.

HDB has rolled out 70,000 new flats since Mr Khaw took over. "He cannot do this without his ramp-up of supply of new flats," noted PropNex Realty chief executive Mohamad Ismail. "But as long as public housing is in ample supply, this is the right and logical approach."

BALANCING ACT

Is it two years, three years or five years? There's no free lunch. Each year you subtract means a few hundred million dollars extra per year of taxpayers' money (because of more subsidies needed to make up for the shortfall).
- National Development Minister Khaw Boon Wan, on why the new flats will be pegged to four years of salary

Radical idea: Remove income ceiling
By Charissa Yong, The Straits Times, 13 Apr 2013

NOT one to shy away from radical ideas for housing policy, National Development Minister Khaw Boon Wan floats another talking-point suggestion: Do away with the income ceiling for new Housing Board flats.

If he had his way, he would remove the income ceiling for a Build-To-Order (BTO) flat to give everyone a shot at living in them, Mr Khaw said in his wide-ranging interview.

Noting that HDB flats are as essential to the Singaporean way of life as national service and hawker food, he said: "I like the idea of every Singaporean, rich or poor, having a stint in HDB living... and not growing up your whole life in a bungalow, for example."

Mr Khaw - who stressed it was just his personal opinion that he was throwing in for discussion - was explaining the effect of the income ceiling on HDB's market share.

About 80 per cent of residents in Singapore live in an HDB flat.

The higher the income ceiling qualification to buy one, the more people can qualify for a flat.

A household cannot earn more than $10,000 a month to qualify for a BTO flat, and not more than $12,000 for an executive condominium.

When Mr Khaw moved over from the Health Ministry to his new post in 2011, he raised both income ceilings that very year from $8,000 and $10,000 so that more young couples could qualify for new flats.

The $8,000 limit had been kept unchanged since 1994 by his predecessors in a bid to naturally shrink HDB's share of the property market as incomes rose.

"The ceiling was not adjusted because at that time, they thought we should not expand any more of our market share," he recalled. "But I came in, I adjusted (because) I have a slightly different view."

This is that living in HDB flats would give people more chances to interact with others of different races and incomes, although the more disadvantaged would still receive a higher housing grant from the Government.

But Mr Khaw is quick to clarify that this sentiment does not mean that the HDB should aim to provide 100 per cent of Singaporeans' housing needs.

Referring to the current 80:20 split between public and private housing, Mr Khaw said: "Do we need to grow further? I don't think so. That we leave to the market."

But his philosophy is that "if a rich man's kid wants to apply for a BTO flat, provided he stays the five-year minimum occupation period, there's nothing wrong with that to me".

Civil servant Thor Zhi Ling, 23, was concerned. "A lot of people are getting married later nowadays, more established in their careers, and also earning more," she said. "Opening the market to these people would increase the demand for HDB flats, which may or may not be good."

But her fiance, research officer Matthew Tay, 24, saw nothing wrong with the idea.

"It's not going to result in that much more competition. Most of the people applying for these flats are young couples and there are very few with very high incomes," he said.

They successfully balloted for a BTO flat together in 2011.

For his part, Mr Khaw said of his suggestion: "That's one view. Whether ultimately we decide that it's good, we'll see.

"We can discuss it with Singaporeans."

The big housing review
National Development Minister Khaw Boon Wan speaks to Rachel Chang and Daryl Chin about his plan to involve Singaporeans in designing HDB policies for the future, and what this could mean for home owners and buyers' chief concern - price.

The Straits Times, 13 Apr 2013

NATIONAL Development Minister Khaw Boon Wan is not one to dither. Now that he has ticked off one goal of delinking the prices of new HDB flats from the heated resale market, he is upping the ante on new targets in his sights.

After 18 months of stable Build-To-Order flat prices, Mr Khaw declared in Parliament last month that he wanted new flats in non-mature estates to cost four times the annual median salary of a buyer - down 30 per cent from the current 5.5 times.

This would return prices to what they were before the property bull run of the last six years, he said.

But in an exclusive interview with The Straits Times on Thursday, the minister-in-a-hurry picked up the pace even further.

BTO pricing will be brought down to four times annual median incomes "quite soon", he says. "It's not something for the next century."

Referring to the just-started latest round of the Our Singapore Conversation, which will have housing policy as one of the discussion points, he says: "We only have two months to discuss this thing, otherwise the topic becomes quite stale. And then we come to a conclusion, so that our lives can move on, can go on to do something else."

The cheaper flats would have to come with restrictions to differentiate them, so that current flat owners would not see their values plummet overnight.

In 10 sessions over the next few months, Singaporeans will also be asked to chime in on the path that the Housing Board should take in the coming decades. Should flats be an appreciating asset or a public good? How can it meet the silver tsunami of retiring baby boomers and the higher housing aspirations of younger Singaporeans at the same time?

In his interview, Mr Khaw did not want to be drawn into discussing the pros and cons of policy options, for fear of influencing the coming conversations.

They are "very open", he emphasises, with only three criteria: "practicality, viability and acceptability".

The Straits Times asked observers and analysts which policy options would fit the bill on tackling affordability and at what cost.

Shorter leases

SELLING a cheaper class of flat on a shorter lease such as 60 years, as opposed to the current 99 years, would be the easiest way Mr Khaw can deliver on his promises.

Any impact on the values of existing HDB flats will be minimal as buyers would be paying 30 per cent less for a flat that is likely 30 per cent less valuable. The idea has been mooted by MPs like Mr Gan Thiam Poh (Pasir Ris-Punggol GRC) and Mr Zainudin Nordin (Bishan-Toa Payoh GRC) in the past few years, as a way to make flats more affordable for low-income families.

But analysts view the move as failing to address the fundamental problem of an overvalued and rising HDB market, and say that it kicks the affordability can down the road.

It is also not a practical suggestion, say observers like R'ST Research director Ong Kah Seng, because of the difficulty of reselling a short-lease flat.

Banks will be unwilling to give large loans for a flat with only 50 years or less on its lease, thus limiting the amount that resale buyers are willing to pay.

Such flats, due to the ticking time bomb of their shorter leases, will appreciate less quickly than the rest of the market, or perhaps even depreciate in value, he notes.

Mr Gan himself has had second thoughts since he first mentioned the idea in Parliament last year.

Residents have overwhelmingly given him feedback that "having shorter leases doesn't solve the fundamental issue, which is that the price of flats is too high", he says.

After a while, as the 60-year flats rise with the market, "it's back to square one" in affordability.

Longer occupation periods

ANOTHER easy option would be for the HDB to extend the number of years that a buyer has to stay in his new flat before he can sell it. This, say observers, could stop people from treating flats as asset classes to flip for profit - thus puncturing the rising market.

The current minimum occupancy period (MOP) for flats is five years.

But observers believe that to "lock in" families to their flats for a period of 10 years, for example, would be unreasonable. "Over such a long time horizon, a family's income, affordability and lifestyle requirements might have changed notably," says R'ST's Mr Ong.

Chesterton Suntec International research head Colin Tan says that a longer MOP could be suitable for centrally located flats in areas like Queenstown, where families will likely want to stay put.

"But less desirable areas should not have too long a lock-in period, as you are effectively forcing people to stay when they can upgrade."

Indeed, the suggestion has already drawn objections from the public.

Forum letter writer James Oh wrote last month that a longer MOP might inevitably cause many young Singaporean couples buying their first flat to purchase unnecessarily large units.

"This results in the economic deadweight loss of empty rooms, over-leveraging and an even higher national level of housing debt," he said.

Selling back to HDB

BEFORE 1971, Housing Board flats could only be sold back to HDB at pre-determined prices. There was no such thing as capital gains from public housing. The astonishing bull run of the resale market since 2007 has led some to hanker for the old days.

In a policy paper last year, the Singapore Democratic Party proposed a system of two classes of flats: open-market ones, and non-open-market ones which are substantially cheaper, but can only be sold back to HDB.

Some worry that creating this new class of flats could lead to the emergence of an "underclass" of flat owners who lose out on the rise of the property market, said Nanyang Technological University economist Walter Theseira.

This is because it would be the lower-income who would go for the non-open-market flats to begin with.

"Public housing which has been regarded as a failure (elsewhere) often concentrates poorer people who have little to gain from the system," he notes. "One of the great achievements of public housing in Singapore is that people by and large do not feel that living in it marks one out as a member of the underclass."

But despite property appreciation's role in the Singapore dream, MP Gan Thiam Poh says that it is not inevitable that only lower-income families would go for such flats.

"There are people, even young people, who want just a home to live in, rather than the capital gains. They will choose this because they can use their money for other pursuits, or not use up so much of their CPF," he notes.

Many experts believe that some form of control on capital gains from public housing should be instituted.

International Property Advisor chief executive Ku Swee Yong says flats can be sold back to the HDB at a price marked up by inflation and gross domestic product growth during the period of ownership. The control comes from the fact that as the gain is linked to inflation and GDP growth, whatever capital gains there are never outpace economic growth.

Assistant Professor Theseira believes that new flats should be allowed to be resold on the open market only if the HDB owner pays a "top-up fee" - the size of the discount he got for the new flat. This would allow HDB to "claw back" some of its subsidies when flat sellers come into capital gains. "For people who intend never to move, then the top-up fee is just irrelevant for them and they can enjoy their discounted flat for a long time."

Housing vouchers

SOME argue that new flat prices should be brought down by 30 per cent only for lower-income buyers. Why should a couple commanding close to the income ceiling of $10,000 have the same access to cheaper flats as those earning half that amount?

A housing voucher could be given to certain buyers to effectively waive 30 per cent of a new flat's price, while the rest continue to pay the standard price.

The HDB already follows this principle in its housing grants, notes Mr Khaw. A first-time buyer earning $1,500 a month or less gets an Additional CPF Housing Grant of $40,000, compared to $5,000 for a buyer earning $5,000. "As an approach, I think there is general acceptance," he says.

Pointing to the failure of the British National Health Service - where the financial burden to the government has ballooned under its public come-one, come-all approach - he says it would be a mistake to "treat rich and poor alike".

"If everybody gets the same subsidy, then that subsidy may be too much for the rich and yet may, because of the heavy (fiscal) burden, end up not being enough for the poor."

But the creeping nature of the grants system is a perennial issue, he notes. "We start off looking after just the poor, the bottom 20, 30 per cent. But over the years, the middle-income are crying out, you have a parent living in a nursing home, it's not cheap. So we've been stretching this subsidy tier to cover the middle-income, which I think is correct and fair. But of course, there's a limit. It cannot be stretched forever." This would be writ large in a housing voucher system, says Chesterton's Mr Tan: "How do you placate those who just miss out on the housing vouchers? It's a political problem: Where to cut off?"

This suggestion, notes SLP International research head Nicholas Mak, also provides the dangerous lure of a "windfall" for buyers when they sell their flats on the resale market; the voucher must come with conditions, he emphasises.

Land costs

THAT the Housing Board pays market rate for the land it builds flats on has long been a bugbear in some quarters.

State land belongs to Singaporeans, goes the argument, and should not be included in the pricing of flats.

Removing or tweaking land costs in the flat price equation is one of the most popular suggestions.

Omitting land costs could cut prices by half, says Institute of Policy Studies researcher Tan Meng Wah.

The HDB could then reclaim the land value from the capital gains of the sale of a flat on the resale market in order to recoup any losses, he argues.

For example, a buyer going for a $410,500 four-room HDB flat could pay about $163,350 in interest for a 30- year HDB loan. Under the proposed model, the buyer need only take a 15- year loan and pay only $38,655 in interest, saving almost $125,000.

Opposition parties have also long advocated for exclusion of land from the Housing Board's costing.

Since the proceeds from land sales go into the national reserves, removing land costs would have limited immediate fiscal impact, proponents argue.

But Mr Khaw disputes this, noting that the value of a piece of land is also largely contingent on its infrastructure.

Land in Tampines for instance, is pricey and popular as the Government has sunk in billions of dollars into MRT lines, roads and other amenities. "Mature estates are mature because of the many years of infrastructure building. So it's not an imaginary cost, but real costs and taxpayers' money that is being put into a piece of land."

Since there is a definite cost to construction and land, the key question to him, then, is necessarily a question of how much in subsidy - made up of taxpayers' money - to dish out.

Moving ahead

WHATEVER emerges from the housing conversations of the next few months, Mr Khaw says that he will, as usual, move with alacrity.

Asked why he is determined to shake up the public housing landscape now after 50 years of unchanging Housing Board philosophy, he says: "HDB is the statutory board, they have to follow the prevailing rules. I'm in politics. I'm minister. I change rules. My job is to decide when to change policies.

"Otherwise, why should I be here in this job?"

HDB THE PRICE-SETTER

Our public housing is a dominant player. If we are led by the private sector, (it is like) a tail wagging the dog. We should be the price-setter.

– Mr Khaw, on delinking prices of new Build-To-Order flats from resale ones

AFFORDABLE BTO PRICES

For a long time, our Build-To-Order prices were about four years. There wasn’t an issue about affordability. The rapid rise in the bubble in recent years has pushed it up now beyond five – which I take as unsustainable. (Four years) is quite a reasonable target to shoot towards.

– Mr Khaw, on pricing new flats in non-mature estates at four times of applicants’ annual salary

OPEN TO SUGGESTIONS

I'm reluctant, even before we start Our Singapore Conversation, to begin to prescribe what is my preference. I'm looking forward to sensible, practical, viable, acceptable solutions coming out. And (if) they are, I will do it.

– Mr Khaw, on how his ministry is likely to bring prices down

Back to basics?
By Daryl Chin and Rachel Chang, The Straits Times, 13 Apr 2013

A HOUSING Board flat is not only the starting point for an aspiring young couple - but also a premium apartment for the "sandwiched" middle class, a source of income for a pensioner or an investor, and a refuge for the elderly.

However, the side effects of this multiplicity, such as rising prices, have led to calls for the HDB to go back to basics, in its original mission of helping Singaporeans own a home.

Mr Khaw has said that this would mean a re-examination of the housing system and its rules, while being sensitive to the many stakeholders involved, as hasty policy changes would invite a backlash from any one of the niche groups that the HDB caters to.

International Property Advisor chief executive Ku Swee Yong is against products that "appease only a very small segment".

Hence, HDB should eliminate its "public-private" hybrid schemes like the suspended Design, Build and Sell Scheme (DBSS) and Executive Condominiums.

These projects, meant for a sandwiched class who earn too much to qualify for Build-To-Order flats but too little to buy private property, have sparked outrage over their high prices.

But they fulfil an important political promise to meet the housing aspirations of all segments.

MP Lee Bee Wah (Nee Soon GRC), who chairs the Government Parliamentary Committee for National Development, believes that the Housing Board should continue "branching out into other areas if demand is there" as private property is out of reach for many.

The Housing Board makes up about 80 per cent of the market, and the private sector the rest.

Mr Khaw says the current ratio of 80:20 is one he is comfortable with.

He has not given much thought to DBSS, but will look to expanding HDB's "toolbox" of products to cater to an ageing population.

In putting opposing stakeholders in the same room, Mr Khaw hopes the forthcoming Our Singapore Conversation (OSC) on housing would yield some clarity.

Those who direct their ire at "HDB landlords" who live in private properties while renting out their flats, for example, may come face to face with a retiree reliant on such an arrangement for income.

"So there will be people who say: 'Hey, it's not fair, right?' But the condominium owners will say: 'No, it's very fair, right?' So let's put them in the same room and let's hear them out," he says.

"I think the purpose of OSC is precisely that hopefully, Singaporeans realise that there are different interest groups. You may not even be a dominant interest group, you may just be a small minority. But even if you're a minority, we cannot simply brush aside your interests."

Related
The Changing Face of HDB
HDB for all Singaporeans -Hri Kumar

Let’s Talk about Housing
Our Singapore Conversation on Housing -Home Sweet Home