Sunday, September 6, 2009

Affordable housing; Cash over Valuation

Sep 5, 2009
Do the criteria reflect reality?

I REFER to Monday's letter by the Housing Board, 'How HDB keeps it affordable'.

The HDB states that flat prices are determined by willing buyers and willing sellers. In land-scarce Singapore, the notion of 'willing buyer, willing seller' has little practical meaning.

Suppose I want to buy a flat in Ang Mo Kio to live close to my parents but the HDB is not building any new flats there. I have no choice but to buy from Ang Mo Kio resellers.

Suppose too, I need to set up a family now and cannot wait for the build-to- order scheme to kick in, what choice do I have but to buy from the resale market?

So 'willing buyer, willing seller' is not a realistic picture of what is happening now.

If there are sufficient new flats available for people to choose from, where and when they like, who would be 'willing' to buy from the resale market?

Thus, the notion of 'willing' buyers stems from the reality that the HDB is not building enough new flats where Singaporeans want them.

[While I sympathise with the writer of this and the other letters, on this point, if all Singaporeans want to live in Toa Payoh, can HDB build enough flats in Toa Payoh? Not all Singaporeans want that, but more Singaporeans than can fit in Toa Payoh wants to live there. Same for Ang Mo Kio, Queenstown, Bukit Merah, Chinatown area, etc. There will be trade offs. If HDB squeezes more flats into Toa Payoh for example, it would reduce the desirability of the flats as there will be less space, less privacy, and more disamenities. The HDB also has to walk a tight-rope and not "devalue" the homes of existing flat owners. This is a political issue. Maybe this whole HDB flat scheme is a disguised Ponzi scheme?]

The reply also stated that the market value of flats is determined by professional valuers. Is this realistic either?

Valuers base their valuations on recent transactions, which is as good as being determined by 'willing buyer, willing seller', with all its associated problems I have described.

In explaining how it arrives at its criteria for supplying new flats, it would be helpful if the HDB could detail how it takes into account the number of immigrants Singapore has admitted, as well as the number of marriages over the period in question.

The inclusion of these statistics will help answer the question of whether supply can meet demand, which Monday's reply did not address.

The HDB uses the international affordability benchmark to rationalise affordability and concludes that homes are priced reasonably.

The international poverty line is commonly defined as US$1 (S$1.44) per day. If Singaporeans earned US$10 per day, would we consider Singaporeans to be well above poverty levels?

Clearly, US$10 per day is extreme poverty by Singapore standards, yet it is well above the international poverty line.

A more realistic benchmark would be to use international city rankings of house price-to-income ratio which is an affordability measure similar to the one used by the HDB.

As the accompanying table illustrates, Singapore has one of the priciest property markets in the world, relative to income - even dearer than Tokyo, Toronto and New York.

Ng Kok Lim

Sep 5, 2009
Solve key concern - soaring resale prices

I REFER to Monday's letter, 'How HDB keeps it affordable', and wish to highlight the following:

While cash over valuation (COV) is not determined by the Government, rising COV is an indicator that housing demand exceeds supply. Buyers of resale HDB flats are now squeezed by high COV and asking prices demanded by sellers.

Information on recently transacted resale prices on the HDB website may have little relevance since they were concluded three to four months ago. Given the current market frenzy, it is a challenge for today's buyers to find flats that can still be transacted at prices which prevailed three months earlier.

HDB pointed out that first-time buyers used 21 per cent to 25 per cent of their monthly household income to service their loans on new and resale flats respectively in non-mature estates, which is well below the international affordability benchmark of 30 per cent. For a more meaningful comparison, average figures based on mature and non-mature estates should be used, which is more reflective of general affordability.

More important, I urge HDB to address the ultimate concern of current HDB flat buyers - the soaring resale prices.

[But HDB also has to consider the interests of current HDB flat owners - who want prices to go even higher! This would be evidence that HDB creates value for home owners, and translates to votes for the PAP.]

Chew Kim Cheer

'The issue here is cash over valuation.'

MR JASON ZHENG: 'As a young couple, my fiancee and I cannot compete against buyers with access to cash, which is what most sellers ask for now. I have failed in my attempts at half-yearly sales, so the only option is resale flats. The issue here is cash over valuation (COV). The HDB discourages it because of financial prudence, and refuses loans to cover it. Yet most sellers demand substantial COV. Given the situation, why not ban COV? Alternatively, let HDB loans cover COV.'

[If loans can cover COV, you can expect that COV will increase. Effectively, sellers knowing that buyers cannot get loans for this element have to limit their asking COV to what people can realistically be expected to pay or cough up. If they know they can borrow to cover the amount, they would have no limitations.]


'Should the HDB build 19,000 flats a year instead?'

MR STEVEN YEO: 'How did the HDB determine that building 8,000 new flats a year is sufficient to meet demand? There are seven applicants for each new flat. For example, there were about 24,000 marriages last year, which means only one-third of newlyweds will get a new flat. The other 16,000 must buy resale or private property. If 80 per cent of the population qualify for subsidised flats, should the HDB build 19,000 flats a year instead?'

[Good question. Problem is, HDB will build 19,000 flats in places you won't even let your mother-in-law live. Then you won't buy. And HDB will have problems selling the flats for years. And because they have all these excess flats that nobody wants, they won't build new ones in places people want! See letter right at the top about building flats where Singaporeans want them and comment. The problem is everybody wants to live in matured estates. But there are limited supply. So there is a premium on the price. That's the way the market works. If you can increase supply, then it is not a matured estate. A housing estate is like a lady. When she matures all the curves and the assets are in the right place and she is highly desirable. You can further enhance her desirability with some cosmetic and even surgical intervention. But beyond that, she'll start to look like Anita Sarawak. ]

Three-room flat

'What percentage of income will a single Singaporean earning $2,500 a month pay?'

MR LOO FOOK KAY: 'The HDB said a household with a monthly income of $10,000 uses only 15 per cent to service the loan on a $364,000 HDB flat. As the cheapest three-room flat costs about $200,000, what percentage of income will a single Singaporean earning $2,500 a month pay to service his loan?'

[A single Singaporean earning $2,500 probably can't afford to live by himself. In line with Govt policy, he should get married and apply with his wife. HDB offers 3-rm flats for $151,000 to $179,000 in Punggol. ]

Missing factors

'Home affordability fails to factor in opportunity costs.'

MR HOON TZE MING: 'Home affordability, when computed based on a cost-to-income ratio, fails to factor in opportunity costs associated with access to employment, quality of public schools and environmental conditions. For example, a flat in Woodlands may be 'affordable' according to traditional calculation, but opportunity costs like transport cost and travel time are not factored in. The HDB might consider adopting the Massachusetts Institute of Technology Centre for Real Estate's Housing Affordability Index, which takes these factors into account.'

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