As large supply comes on stream, ownership curbs will need revising
By Chua Mui Hoong
IS A Housing Board (HDB) flat an asset or a home?
This issue has come to the fore again, following recent moves to bar buyers of HDB resale flats from owning private property. From Aug 30, those who buy an HDB resale flat must dispose of any private property - in Singapore or overseas - within six months. They must also live in the flat for five years before it can be sold or leased out.
The rationale? HDB flats are 'meant for long-term owner occupation' and the changes are meant to 'dampen demand from those who are not in urgent need of housing', said HDB.
So, is an HDB flat meant to be a long-term home?
It certainly began that way. But over the years, the message shifted. From 1971, HDB flats could be sold on the resale market. From 1989, permanent residents (PRs) could buy resale flats and HDB owners could own private property. The biggest change came in 1993, when HDB relaxed financing to allow borrowing for up to 80 per cent of the market value or sale price of a flat.
Within a few years, the HDB resale market roared. By the 1990s, the Government was encouraging Singaporeans to view an HDB flat as an asset. Programmes to improve interiors and exteriors were part of the 'asset enhancement' scheme.
[Pitching the HDB flat as an asset and a way for flat owners to feel rich was of course a political message - PAP made you wealthy, vote for PAP. However, as this article shows, there are negatives to treating your flat as an asset. And implications for public policy.]
Today, a new subsidised HDB flat is both a newlywed couple's first home - and also their ticket to asset enhancement. Often, the flat can be sold for a tidy profit, and the couple can move on to another home, or to private property.
[This is a way to transfer wealth from the haves to the have-nots.]
The churn in HDB flats has created an active market for resale flats. Given their relatively low prices and high rental income due to the influx of foreigners, many have been tempted to buy a resale flat, stay for the minimum occupation period and then rent it out. A three-room flat costing $250,000 can be rented out for $1,500 a month, a yield of 7.2 per cent.
But when it becomes too attractive an asset - as now - and the price gets out of reach of home buyers, then the Government has to step in to cool the market.
The Government has always had to strike a careful balance between treating the HDB flat as a home and an asset. Seen in this context, the latest series of measures can be interpreted for what they are: Short-term measures to cool an overheated market.
The rule 'Thou shalt have no other property except HDB' is aimed precisely at that small segment of the market most responsible for the froth. This is the group of cash-rich buyers - either PRs or Singaporeans with private property - who can afford to pay $100,000 or more in cash-over-valuations. Agents tell me some pay for their purchases in cash, without a bank loan.
Why should this small group be curbed?
Some argue that HDB flats sold on the resale market are not subsidised, if the buyers do not take up a subsidised HDB housing loan. What is the policy justification for imposing ownership restrictions on this group?
But the counter to that is that there is an implicit subsidy in any HDB flat because of the opportunity cost of the land. The Government would get a lot more for the same plot of land sold for private residential development. If HDB land were priced at levels the market is prepared to bid for, then HDB flat prices - new or resale - would probably go up.
There is another reason: The state does not favour the hoarding of HDB flats as rental-yielding assets by cash-rich buyers who already have a home, when there are young couples who need a first home.
This is a political decision - an understandable one - and a matter of equity.
One reason for high prices now is the supply lag in housing. It takes a flat three years to be built. HDB scaled down its building programme sharply in recent years. The number of dwelling units built was 2,733, 5,063 and 3,154 from 2006 to 2008, respectively.
Unable to get a new flat now, young couples want to buy a resale flat and are vexed to be priced out.
Solution: Temper discretionary demand from those who already own homes, let prices float down to reasonable levels and satisfy pent-up demand.
This is precisely the objective of the 'only HDB' rule. And in the short-run, perhaps up to three years, that is probably what will happen.
But different considerations would be at play after that. Supply will rise sharply, when the pipeline of flats being planned comes on stream. In all, 35,400 new flats, and another 15,000 executive condo or Design, Build and Sell Scheme flats, will start to be built in the next two years and be ready in three to five years.
That is more than enough to meet demand from the 25,000 couples who marry each year.
Demand for resale flats from first-time buyers will thus fall, and the market will need buyers from other groups - like cash-rich retirees and PRs.
Agents say PRs made up 20 per cent of resale flat buyers in recent months. The Government says those who already own private property make up 10 per cent. These groups will be needed to mop up demand for resale flats.
The HDB resale market depends on marginal demand for churn. There are 883,896 HDB dwelling units. Each year, around 30,000 change hands. Without that 3 per cent churn, there would be little demand for HDB resale flats - and it would truly just be a home for long-term occupation.
[And flats would not have the value implied. If only 3% of owners want to sell their flats, then fundamental economic theory holds. short supply, high prices. Sellers market. So this 3% makes the other 97% think they are very rich because their flat potentially could fetch a high price.
If 30% of owners want to sell their flat, prices would collapse. And we won't feel so rich. And in any case, not every flat can command high prices.]
For now, the HDB flat has to go back to being a home first - to meet immediate demand from aspiring home owners.
It is only when that demand is met that the notion of an HDB flat as a repository of asset value can be touted. And in a society where eight in 10 households live in HDB flats, who can help an HDB home owner realise the value of his asset?
Why, the PR buyer, the cash-rich private property owner who wants the rental yield and the foreigner who seeks to rent an HDB flat.
So the rule that currently curbs such groups from buying or renting out an HDB flat will have to be reviewed.
In fact, I am willing to bet one box of Raffles Hotel's signature snowskin mooncakes with champagne truffle and ganache that this rule will have to be refined within the next three years.