Market-based pricing has cost buyers dearly

Source : Straits Times - 7 July 2008

I REFER to the Insight interview with National Development Minister Mah Bow Tan (’HDB neighbours from hell? This minister knows all about it’, June 27).

Private property is mostly beyond the reach of young couples. Even with HDB flats, they are caught either waiting as long as six years for an expensive new flat or paying an exorbitant price for a resale flat.

In the 1970s, graduate starting pay was $1,000. Then, in Marine Parade, a new three-, four- or five-room HDB flat cost $17,000, $20,000 and $35,000 respectively. By 1990, the average price of a new five-room flat was $70,000. Such prices then reflected a ‘cost-based’ approach to pricing.

Now, graduate starting pay is three times higher at $3,000, but prices of similar new flats have gone up by 10 to 30 times.

These massive price hikes were largely due to the HDB switching to a ‘market-based’ approach to pricing, following the 1994 property bull run.

In an ST Forum reply last year, the HDB finally confirmed that ‘the prices of new HDB flats are based on the market prices of resale HDB flats, and not their costs of construction’.

In 2000, the total breakeven cost (comprising construction cost, land cost and other related costs) of a new five-room flat was an estimated $120,000.

However, under the market-based pricing approach, the HDB will first look at the prevailing market price of, say, $260,000 of a five-room resale flat. It will then pick a slightly lower figure of, say, $200,000 as the selling price of the new five-room flat - regardless of its $120,000 breakeven cost.

The HDB will then say the new flat buyer is getting a so-called ‘market subsidy’ of $60,000, the difference between the resale flat market price and new flat selling price. There is thus no actual ‘cash subsidy’ given to the flat buyer.

This market-based pricing approach caused new flat prices and resale flat prices to chase each other in an upward spiral, affecting buyers of both new and resale flats.

It has also caused current prices of 1,000 sq ft four-room new flats to vary so much - from $200,000 in Sengkang to $400,000 in Telok Blangah.

As a low-cost public housing developer, the HDB owes Singaporeans a proper reply on why it does not pass on to flat buyers the economy-of-scale cost savings in its huge developments through pricing new flats on a cost-based breakeven basis.

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