Archive for September, 2009

Why we peg to market rates

September 27, 2009

I refer to the letter “Why we peg to market rates” published in Today on 25 Sept 2009.

Mr Lourdesamy wrote that the HDB incurred an average deficit of $1,045 million a year on home ownership programmes. However, if we refer to Page120 of HDB’s 2008 annual report, $625,102,000 was spent on “upgrading, improvements and demolition”. Surely upgrading doesn’t count as home ownership but perhaps home improvement instead? It gives the false impression that the HDB is subsidising new homes at a cost of $1,045 million when in actual fact the amount is much less.

On the same page is another $783,757,000 item called “provision for loss for properties under development / for sale”. Presumably, HDB foresees the price of unsold HDB flats to fall short of construction costs by $783,757,000. But by claiming to price HDB flats at market levels, its hard to imagine how HDB can foresee prices of unsold HDB flats to dip below costs by so much.

If we put these two items aside, HDB actually made a profit of $363,859,000 instead.

Instead of repeating its market pricing rationale yet again, it would be more helpful if HDB can address the issue of positive feedback between resale flat price and new flat price. As market price of resale flats soar, so too does the price of new HDB flats since the latter are pegged to market prices. But the increasing price of new flats makes them less attractive to buyers and does nothing to abate the demand for resale flats and so demand for resale flats continues and the whole cycle repeats itself.

The price of many resale flats have jumped by $100,000 in a matter of one, two years. Can HDB explain why the $30,000 government subsidy is considered ‘significant’ compared to a typical $100,000 rise in flat prices? HDB claims that market pricing allows all to receive similar subsidies regardless of market movements. But the $30,000 subsidy is not even enough to make up for the loss incurred by a would be buyer when the market goes up by $100,000.

HDB claims it is illogical for Mr See to attribute property price increases to the HDB because the recent asset appreciation is not unique to Singapore. This is like saying that the banks in Singapore are not responsible for losses arising out of the recent Lehmann Brothers collapse since similar losses have occurred elsewhere too. But banks here have been ordered to put their houses in order. Surely there is something that the HDB can do as well?

HDB should explain what being below the international benchmark of 30% means in terms of how much one gets to keep in one’s pockets. For example, HDB has demonstrated that a 3-room flat costing $150,000 and sold to a household with income of $2,000 only requires a monthly instalment of $460 and a resulting ratio of 23%. But for a typical family of four with a monthly sustenance need of $500 each perhaps, the total cash required is already $2,000. Where is the family going to find money for the $460 monthly instalment? So the 23% ratio is meaningless as far as one’s own pockets are concerned


How family’s fortunes have grown over the years

September 26, 2009

I refer to the letter “How family’s fortunes have grown over the years” by Ms Mabel Tan dated 26 Sept 2009.

Ms Tan’s bemusement is understandable. She is bemused because she and her family are totally unencumbered by the recent sharp increases in property prices. Like the person watching a fire from the safety of the opposite bank of a river, she feels neither anxiety nor pain.

She shares with us her good example of being able to stay with her in-laws for 8 years and so she expects everyone else to be able to do so. But I know of a colleague whose husband slept in the living room of his parents’ flat before their marriage because his family was too big. Does Ms Tan expect my colleague to sleep in the living room of her parents-in-laws’ flat? Ms Tan shouldn’t have moved out after 8 years but should have continued to stay with her in-laws to uphold the example she had been setting.

Ms Tan claims that her family’s fortunes have ‘grown’ over the years, but she provides no details as to how it has actually grown. Let’s see, there is no doubt that from a one-room flat to a four-room flat, Ms Tan’s parents have benefitted from asset inflation. But has Ms Tan’s extended family benefitted as a whole? Let’s say for simplicity’s sake, Ms Tan’s parents’ flat appreciated from $30,000 to $300,000, that’s a cool $270,000 that Ms Tan’s parents pocketed over the years without doing anything. But what about Ms Tan and her siblings? If the price had stayed at $30,000, Ms Tan and her siblings would have been able to snap up units at $30,000 each only. But because of asset inflation, Ms Tan and her siblings now have to fork out $300,000 each. In fact, Ms Tan and her two siblings would have to fork out a total of $900,000 instead of $90,000. Collectively, they would have paid $810,000 more. The extra burden of $810,000 that Ms Tan’s generation has to bear far outweighs the gain of $270,000 that her parents pocketed.

So that is the truth behind the fallacy of asset appreciation. We can of course adjust all prices for inflation but what this simple example illustrates is this: the so-called gain from asset appreciation of one generation will be borne by the future generation. It becomes a debt for the future generation to bear. Unless salaries can keep up, that debt will keep increasing and increasing until it becomes totally unbearable.

People should be free to decide what a flat is worth: HDB

September 17, 2009

I refer to the letter “People should be free to decide what a flat is worth: HDB” dated 14th Sept 2009.

HDB claims to be responsible for sustaining flat prices over the long term. Looking at resale flat prices from 1990 to the present, sustenance of flat prices hardly needs worrying about as increases in flat prices have far outstripped increases in peoples’ incomes. Conversely, shouldn’t it be HDB’s responsibility instead to ensure that increases in flat prices do not outstrip the people’s capactity to pay for them?

The title of the letter itself suggests a misconception surrounding the myth of “willing buyer, willing seller” so often perpetuated by the HDB. The fact that HDB is claiming to be responsible for sustaining flat prices means that it has the means to influence the overall price level of HDB flats. That is the crux of the issue. While people are free to decide how much to price their flats, their decision cannot deviate significantly from market conditions that are largely controlled by the HDB itself, through such mechanisms as controlling the amount of land that it releases to the public and the number of new flats that it builds. Ask ourselves, how can we sell our flats at a premium when the govt is building one exactly the same right next door to be sold at cost? It is because the govt isn’t building them or isn’t pricing them at cost or is choosing to release the land for private condominimums for example that resellers are able to command the premium that they are getting.

The situation is not unlike the case of a sole importer monopolising the rice trade. If he opens up all his warehouses and distributes the rice to all the shop keepers, there will be plenty of rice for everyone and no one will have to pay a premium for rice. But the moment the importer restricts his supply of rice such that supply barely meets demand, people will start to fight over rice and the shop keepers will now be able to command a high price for rice. That is exactly what is happening to our HDB resale market. By not supplying enough new flats, the HDB creates the conditions for the resale market to heat up.

The HDB claims that the total number of bookings for HDB flats with grants amounts to 13,000 to 15,000 units each year, which far exceeds the 8,000 new flats HDB is building this year. So isn’t this clear evidence that the HDB is not building enough new flats to satisfy demand?

The HDB claims to have enabled 80% of the population to own their own homes. But going by the exhorbitant price people have to pay for house ownership, house ownership becomes a terrible liability rather than a proud asset that the people can be proud of.

Within a family’s reach

September 16, 2009

I refer to the HDB’s letter “Within a family’s reach” dated 12 Sept 2009.

The HDB claims that one of its key responsibilities is to sustain flat values over the long term. The first of HDB’s four mission statements is to “provide affordable homes of quality and value”. There is nothing in that statement that says that it is HDB’s responsibilty to sustain flat values over the long term. In fact, none of the four mission statements or even the vision statement remotely suggests that it is the HDB’s duty to sustain flat prices over the long term. So where did HDB get its mission of sustaining flat prices over the long term?

Next, sustaining flat prices over the long term is different from letting it rise faster than salary increases because clearly, salary increases hasn’t been keeping up with increases in flat prices.

The notion of generous housing subsidies is unconvincing. In the span of months, HDB prices shot up by $100,000 easily across the island. Can the $30,000 HDB subsidy make up for $100,000 increase in flat prices?


The HDB claims that it is reasonable for a couple earning $4,000 to pay for a flat costing $300,000 with a monthly instalment of $920 + $81 = $1,001. Let’s see if this sum is truly reasonable by taking into consideration the daily as well as retirement needs of a family of four.

Suppose each member in a family of four requires $500 for basic sustenance. That will take $2,000 away from the monthly income. Take $1,001 HDB housing loan away from the remaining sum of $2,000 and we are left with $999. If both husband and wife were to set aside $500 each for retirement purposes, they would have perpetually nothing left for utilities, education and all other purposes. Is this HDB’s so called “affordable”? Seems like HDB’s so called “below the international benchmark of 30%” means having absolutely nothing left over for spending. No wonder Singaporeans have little to spend or if they spend, have insufficient funds for retirement.

Only new flats count

HDB says that the figures quoted by me is not reflective of Singapore’s situation. According to the HDB, the true figure should only be based on the price of new HDB flats. In other words, HDB is saying is that housing affordability in Singapore should solely be judged by the price of new HDB flats only, the prices of resale flats and condominiums don’t count. Is this a reasonable assumption?

According to the HDB website, there were 16,630 resale flat transactions in the first half of the year. Assuming the same number will be transacted in the later half of the year, the total number of resale flats to be bought this year would amount to 33,260 units. This is more than four times the number of new flats that will be built this year. In other words, HDB’s definition is only confined to less than 20% of Singaporeans’ needs for HDB flats. Yet HDB is claiming that that this 20% reflects the true housing affordability in Singapore. This is akin to picking out the poorest 20% of Singaporeans and saying that that they represent the general income situation in Singapore.

While no one is disputing that DSR is simple, no one can appreciate where Singapore stands unless Singapore is ranked against other developed countries using the DSR. Also, HDB shouldn’t only compare the DSR of the cheapest 20% of Singapore’s houses against the DSR of all houses in other countries. That simply wouldn’t be comparing apple to apple. If HDB is bent on comparing so-called new HDB flats only, then comparison should be made against similarly “subsidised” housing in other countries.

Flat supply

HDB claims that it is responsive to rising demand due to immigration and new marriages. But it still hasn’t shown us how the 8,000 new flats to be built this year is sufficient for Singaporeans when the number of resale flats bought in the first half of this year is already 16,630.

Having admitted that the HDB cannot build sufficient flats where and when citizens want them, the HDB should then refrain from always saying that resale flat prices are determined by “willing buyer, willing seller” since the willingness of buyers will always be constrained by the inability of the HDB to build new flats where and when citizens want them.

The HDB says there are plenty of resale flats available in mature estates which are affordable. This is again another myth. Are there hundreds of thousands of empty resale flats waiting for people to buy and occupy? Obviously not. For every resale flat that is sold, another house has to be provided for unless the occupant is emigrating from Singapore. So the fact that there are hundreds of thousands of HDB flats in Singapore doesn’t mean that there are hundreds of thousands of HDB flats available for people’s choosing. Just like there are 400,000 cars in Singapore doesn’t mean that there are 400,000 second hand cars available for people to choose and buy from.

How HDB keeps it affordable

September 2, 2009

I refer to HDB’s letter “How HDB keeps it affordable” dated 31 Aug 2009.

HDB claims that flat prices are determined by “willing buyers, willing sellers”. But in the context of land scarce Singapore, “willing buyer, willing seller” has little or no meaning. Suppose I want to buy a flat in Ang Mo Kio to stay close to my parents and the HDB is not building any new flats there, what choice do I have but to buy from resellers in Ang Mo Kio? Suppose I need to set up a family now and cannot wait for BTO, what choice do I have but to buy from the resale market? So “willing buyer, willing seller” doesn’t depict an honest picture of what’s happening now. If there is an abundance of new flats available for people to choose from where and when they like, who would be “willing” to buy from the resale market? So we should recognise that “willing” buyers actually stem from the HDB not building enough new flats where Singaporeans want them.

The statement that the market value of flats is determined by professional valuers is also meaningless. How do valuers value flats? They base their valuations on recent transactions, which is as good as being determined by “willing buyer, willing seller” with all its associated problems as explained above.

While HDB has claimed to be supplying new flats, they should also furnish the public with the number of immigrants Singapore has admitted over this period as well as the number of marriages in the same period. Can supply meet demand is a question unanswered by HDB’s reply.

HDB’s claim that flats are affordable because they are priced well below the international affordability benchmark is also questionable. The international poverty line is commonly defined as $1 per day. If Singaporeans earned $10 per day, can we consider Singaporeans to be well above poverty levels? Clearly, $10 per day is extreme poverty by Singapore standards yet it is well above the international poverty line. So comparing against the benchmark doesn’t necessarily paint the correct picture.

If we refer to international city rankings of property price to income ratios, a similar indicator to what HDB is using, we obtain a more accurate picture of our situation in comparison to other cities. The table below refers to first world cities according to IMF standards. As can be seen, compared to other first world cities, Singapore has one of the most priciest property prices compared to income, comparable to extremely expensive London. We are even more expensive than Tokyo, Toronto and New York.

S/No City House Price To Income Ratio
1 Seoul, South Korea 21.29
2 Hong Kong, Hong Kong 21.19
3 Paris, France 16.15
4 Athens, Greece 15.97
5 Ljubljana, Slovenia 15.2
6 Rome, Italy 15.13
7 Bratislava, Slovakia 15.1
8 Prague, Czech Republic 14.89
9 London, United Kingdom 14.73
10 Singapore, Singapore 14.35
11 Tel Aviv-yafo, Israel 12.4
12 Tokyo, Japan 10.5
13 Barcelona, Spain 9.32
14 Milan, Italy 9.24
15 Dublin, Ireland 8.25
16 Helsinki, Finland 8.22
17 Toronto, Canada 8.03
18 New York, United States 7.88
19 Geneva, Switzerland 7.87
20 Lisbon, Portugal 7.75
21 Lyon, France 7.4
22 Oslo, Norway 7.32
23 San Francisco, United States 7
24 Rotterdam, Netherlands 7
25 Sydney, Australia 6.52
26 Vienna, Austria 6.36
27 Stockholm, Sweden 6.33
28 Amsterdam, Netherlands 6.24
29 Montreal, Canada 5.29
30 Zurich, Switzerland 5.09
31 Brussels, Belgium 4.28
32 Nicosia, Cyprus 3.97
33 Copenhagen, Denmark 3.21
34 Berlin, Germany 2.7