Changes to HDB’s flat strategy will bear fruit?

In a letter to Straits Times [1], Mr Eric Lim described the valuation of resale flats as being based on demand and supply of a flat’s location, renovation and surroundings. But demand and supply are very much dependent on government decisions. When the government opens the immigration flood gate, demand is increased; when the government holds back immigration, demand is reduced. When the government builds more flats or releases more land for housing, supply is increased; when the government holds back on flat construction or land release, supply is decreased.

Mr Lim described how his parents profited from downgrading from a 4-room Tampines flat to a 3-room Bedok flat. The median price of a 4-room Tampines flat and 3-room Bedok flat between Sept 2011 and Aug 2012 are $450,000 and $332,000 respectively. So if today, someone were to do what Mr Lim’s parents did, he would pocket around $118,000. But if that someone had used $118,000 from his CPF to pay for his flat, the entire sum has to go back to his CPF leaving him with nothing to spend. Even if that someone already has $118,000 in his CPF, he would still have to top up his CPF to the minimum sum of $139,000 if he were to retire today. He thus has to plough back $21,000 into his CPF, leaving just $97,000 for his spending pleasure. Therefore, how much cash one gets from downgrading depends on how much CPF one has used and in the case of retirees how much CPF one has.

The title of the letter “changes to HDB’s flat strategy will bear fruit” is strange considering that Mr Lim was describing how the current HDB strategy of asset enhancement bore fruit for his parents and how he was arguing for the current system to stay, not to be changed. Moreover, bearing fruit is not the right way to describe the outcome of that strategy since the fruit is not ‘borne’ but taken from another. It is a beggar thy neighbour strategy that transfers wealth from buyer to seller so that the country as a whole gains nothing. One might see this as a neutral strategy since there is no net gain or loss. But that is not the right way to see it. The following table shows the HDB resale price index and the corresponding weighted average HDB price over the last three years:

Quarter HDB resale price index Weighted average HDB resale price
2009 III 145.2 $353,465
2009 IV 150.8 $367,097
2010 I 155 $377,322
2010 II 161.3 $392,658
2010 III 167.8 $408,481
2010 IV 172 $418,705
2011 I 174.8 $425,521
2011 II 180.3 $438,910
2011 III 187.2 $455,707
2011 IV 190.4 $463,497
2012 I 191.6 $466,418
2012 II 194 $472,261
2012 III 197.9 $481,754

The weighted average resale price has increased by $128,289 in three short years. That’s 1 year 8 months of our median household income. Sellers gain an extra $128,289 if they sell in three years; buyers pay an extra $128,289 if they buy three years late. This is clearly not a neutral strategy but one that favours the seller over the buyer. One might argue that there are more sellers than buyers since 80% of our population are HDB owners. Again, that is not the right way to see it. There cannot be more sellers than buyers since every transaction always comprise one buyer and one seller so the ratio is always one to one. Another way to see it is to recognise that the 80% HDB home owners who stand to gain from asset enhancement have children who stand to lose from the policy. Whether more gain or more lose will depend on whether society as a whole has more or less children.

Besides being not neutral, the notion that there is no net gain or loss hides the fact that with each rise in property price, more of society’s money gets locked away in property and becomes unavailable for enhancing quality of life. For example, if A buys at $1 million and sells to B for $1.4 million, A’s gain of $0.4 million is matched by B’s loss of $0.4 million so there is no net gain or loss for society as a whole. But while A had $1 million locked away in property which is released when he sold to B, B now has $1.4 million locked away which becomes unavailable for use until he sells to C. Thus, as property price increases, more of society’s money gets locked away. This eats away at wage increase and decreases our standard of living.

[1] Straits Times forum, Changes to HDB’s flat strategy will bear fruit, 28 Aug 2012, Eric Lim
After my brother and I were married, my parents sold their flat and bought a resale three-room flat in Bedok. As they were downgrading and relocating in an older estate, they could afford to pay off that unit and hold on to some profit.
My brother and I now have our own children. My parents are happily retired, shuttling between our two homes on a half-weekly basis. The Bedok flat has been rented out and provides them with a stable source of income.
The valuation system is based on the demand and supply of a flat’s location, renovation and surroundings.
Why limit agent transaction cost when it is already lower than that of many other places? My friends in other countries say their agent’s fee is as high as 7 per cent of the transacted price. Singaporeans pay a maximum of only 2 per cent when selling.

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