Monday, January 14, 2008

A monster in the making?

Jan 14, 2008

By Chua Mui Hoong

THE push by the Housing Board to get private-sector developers to build and sell HDB flats was always a bold but risky move.

When it was first announced in March 2005 in Parliament, the proposal drew only muted responses from parliamentarians.

Nearly three years on, the Design, Build and Sell Scheme (DBSS) has gained acceptance. Under this scheme, private companies develop and sell the flats, but only those who fulfil the Housing Board's income and other criteria can buy the flats.

It has won buyers' support, with over 6,000 applicants for 616 flats for the first project in Tampines launched in October 2006.

The second project at Boon Keng launched on Jan 5 attracted over 1,100 applicants on Day 1 of its launch despite average prices of $520 psf, high by public housing standards.

Buoyed by the positive response, HDB has set aside four more plots - in Bishan, Simei, Toa Payoh and Bedok - for privately developed public housing.

The DBSS may appear to be a success, given the enthusiastic market response.

But is it?

From a public policy perspective, there is a risk of the DBSS becoming a monster of the market's doing. It is timely to take stock of where the scheme is heading.

Some issues need to be addressed.

The first is whether the new breed of DBSS flats - public housing featuring condo-style finishes - can be considered 'public housing'. This has been aired in The Straits Times and The Sunday Times.

But to me, this is mere semantics. Whether you call such flats 'public housing' or 'hybrid housing', the fact is that it has the same ownership and income restrictions as Housing Board flats. To that extent, it's clearly 'public housing'.

But it's not 'public housing' if you think public housing means highly subsidised HDB flats.

Some Singaporeans may baulk at this suggestion, but I think it is perfectly acceptable to have 'public housing' devoid of public subsidies.

An analogy from health care suffices. Public hospitals here offer a range of services to patients: from highly subsidised C-class wards to less subsidised B-class wards, to A-class wards which are charged at full cost with no government subsidy. Patients choose according to their means and desired comfort level.

It is no bad thing if public housing evolves likewise, allowing people to choose flat sizes according to their means and desired comfort level. At the top end, those who want public housing with plush finishes can have them - without state funds to subsidise their penchant for trimmings.

The other pertinent issue about DBSS is affordability. With prices at City View@Boon Keng averaging $520 psf, and three-bedroom units heading north of $700,000, concern has been raised about whether public housing remains affordable.

Here, it's critical to keep an eye on the big picture: the total supply of HDB flats available.

In other words, to keep flats affordable, HDB will simply have to make sure there is ample supply of low-cost, subsidised flats to cater to those who need it, even while it offers high-end flats with costlier finishes. So DBSS flats with condo-style finishes should not constitute the majority of public housing.

In November 2007, HDB announced that there would be a supply of 7,000 new flats available from then to June 2008.

Another 3,200 flats will be built under the DBSS and executive condominium schemes. In other words, 'hybrid' or high-end 'public housing' flats will make up about 30 per cent of the new flats. That still leaves 70 per cent of traditional, subsidised HDB flats.

The Ministry of National Development (MND) and HDB will have to figure out if a 70-30 per cent mix of subsidised and high-end public housing is the right mix at this time. If not, it will have to recalibrate supply.

So HDB will have to manage the supply of new HDB flats, and make sure prices for subsidised flats are affordable.

Beyond that, those concerned about affordability should note that there are other HDB flats to choose from, which are quite a bit lower in price than those spanking new flats at Boon Keng.

In October, new four-room HDB flats in Telok Blangah went on sale for $308,000 to $402,000. Assuming sizes of about 1,000 sq ft, that works out to about $300-$400 psf - for new flats close to the city.

Further away from town, new HDB four-room flats can be bought in estates like Yishun and Sengkang for prices of below $200 to about $250 psf.

Five-room resale flats near the Boon Keng area - at Kallang and Whampoa - went for a median price of $423,000 in the third quarter of 2007. Assuming an average flat size of 1,200 sq ft, that's $353 psf - much less than City View@Boon Keng's average selling price of $520 psf.

In fact, some analysts have warned would-be buyers who think they can sell the flats for a big profit several years down the road that the potential upside is limited, given the already high prices.

The above back-of-the-envelope calculations suggest that DBSS flats are fetching a high premium in prices above new and resale HDB flats.

Back in 2005, before the first batch of DBSS flats was launched at Tampines, one analyst predicted that such flats would get 10 per cent more than resale flats in the vicinity. The reality today is that the premium is closer to 50 per cent.

Simple logic tells us the premium is being paid by buyers. But who's benefiting?

The HDB may benefit from higher land tender prices. But probably the biggest beneficiaries are the developers themselves.

A quick look at the numbers is instructive. In January 2006, the first DBSS plot at Tampines was sold for $113.65 psf per plot ratio (ppr). The developer estimated break-even cost at about $240 psf. The units were eventually sold at $300 psf - 25 per cent higher than break-even cost.

The second land plot at Boon Keng was sold for $233.74 psf ppr to Hoi Hup. Analysts calculated a break-even price of $400 psf. Units there are being sold for $520 psf ppr - 30 per cent higher than estimated break-even cost.

The third plot of land in Ang Mo Kio was sold in November 2007 for $212 psf ppr to Greatearth, a unit under United Engineers. Units have not been launched yet - but if the first two projects are anything to go by, this developer will be gunning for similar profit margins.

Question: How desirable is it for developers to be making such profits on even high-end public housing?

The above tour of the DBSS landscape throws up some interesting policy dilemmas.

When public housing is built by the private sector, what is the role of the Government in such a market? MND Minister Mah Bow Tan has said in Parliament that the Government does not want to step in to set prices. But there may be other ways to regulate this new market segment.

The Government will have to try to balance the interests of home-buyers and developers in some ways.

One thing policy-makers cannot do is sit on their hands and point to the robust demand in today's market as proof that the DBSS is a success. The judgment of the market today can hide problems that erupt years later.

Caveat emptor is a good maxim for private transactions in the private market; it does not hold 100 per cent for public goods like housing, especially when policy innovations constantly create new and unpredictable market segments.

In such an environment, the onus is on policy planners to take a hard look at the DBSS and see if there are looming dangers.

If the market turns and negative equity results on DBSS flats, the mess will be in the Government's court in any case.

Provided teething problems are tackled, the DBSS continues to hold great potenial as a way to involve the private sector in public housing development while giving consumers more housing choices.

Three years after its inception, it is timely for MND to do a stock-take of the DBSS and prevent it from becoming a monster of the market's making: with runaway prices, panic demand laced by unrealistic expectations of capital gains, and ever-rising developers' profits.

[Comment: A voice of reason in a time of irrational exuberance. Malaysia has their problem of price control and cyclical panics in the supermarket over rumours of shortages and price rise. Singapore has the problem of excessive and even irrational exuberance, unsustainable euphoria, and market excesses in housing, COE prices, etc. Different problems. Same human nature.]

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