How affordable are HDB flats?

Source : Straits Times - 25 Oct 2008

Public debate sparked by prices of over $600,000 for some new premium units

STANDING almost at its full 50-storey height today, the Housing Board’s iconic project Pinnacle@Duxton cuts an impressive figure in Tanjong Pagar’s urban landscape.

But more than just assembled steel and concrete, it symbolises a new era in Singapore’s public housing. The tallest HDB flats ever built, they come with premium finishes, and will be even more eye-catching once the criss-crossing of green sky-bridges linking its seven blocks is completed.

In many ways, the project represents HDB’s journey from a fast-and-furious builder of basic housing in the 1960s to one that provides homes catering to the higher aspirations of Singaporeans today.

But high aspirations also mean high prices.

Last month, the project smashed the record for the most expensive new HDB flats ever to be sold, sparking public debate over the affordability of HDB flats.

Prices for the project’s 111 five-roomers at the board’s balloting exercise started at $545,000 and went up to an eye-popping $645,800 for a 49th-storey unit. Out of the 111, 44 were priced at more than $600,000 each.

Prices for the four-room units ranged from $457,000 to $555,000 each.

When the project was first launched in 2004, all units were priced at between $289,200 and $439,400 each.

Excluding the condo-style flats built by private developers under HDB’s Design, Build and Sell Scheme (DBSS), the previous record for a new flat was a five-roomer in Toa Payoh for $531,500.

Despite the high prices, HDB has said that the Pinnacle units are ‘below the market prices of similar flats in the resale market’.

It pointed out that average resale prices of five-room flats from January to July hit $622,400 in Queenstown, and $576,800 in Bukit Merah.

But The Straits Times’ Forum page received a flurry of letters following the launch, many expressing shock at the high prices.

One writer, Mr Gilbert Goh, questioned HDB’s ‘market-based pricing approach’. He said those buying at the ‘high end of the market trend would lose heavily when the market goes south’.

As a comparison, he said he bought his new executive flat from the HDB 15 years ago for $143,000 and paid less than $500 a month servicing the loan. He sold it ‘a few times over’ the price he paid when the market was booming.

First-time buyers used to be able to earn a premium by buying and selling their first new HDB home as new flats were usually priced much lower than their eventual resale value - but ‘gone are those days’, he said.

Meanwhile, HDB has maintained that it uses a market-based approach, which it adopted in the mid-1990s, ‘to reflect the true subsidy that buyers enjoy’.

The method determines the market value of a flat, based on its location, finish and other attributes. HDB then sells the flat at a discount to the market value.

Likewise, when buyers sell their flats on the open market, they do so at the current market value.

The impression that HDB flats are now beyond the reach of many was also partly fuelled by the high prices of DBSS flats launched this year by private developers.

Units at HDB’s two recent DBSS projects - City View@Boon Keng and Park Central at Ang Mo Kio - ranged from $400,000 to $727,000 each.

Although sale proceeds go to the developers and not the Housing Board, the perception that these are ‘HDB flats’ sticks as buyers are subject to its rules and conditions.

Buyers still have to ballot for a flat and queue to select one. Their household income cannot exceed $8,000 and they must fulfil other requirements such as a minimum occupation period of five years.

Some questioned why these ‘hybrid flats’ come with condo prices, but with public housing rules.

Mr Colin Tan, head of research and consultancy at Chesterton Suntec International, said that by calling them public flats, HDB might have to be prepared to accept less money from developers for the land.

This would allow them to price these units lower than the current level now.

Home-buyers’ gripes over price hikes of new HDB flats, however, have gone beyond the Duxton project and DBSS flats.

Another ST Forum letter writer said he was ‘astounded by the high prices’ of some five-room premium flats in Punggol, which were selling at between $330,000 and $400,000 each in June.

‘These prices are $100,000 more than flats in the same location two years ago and comparable to new flat prices in mature estates then,’ said auditor Ho Koon Woei, 31.

Wages have not risen at that pace, he added.

In a reply, HDB explained that prices had risen in tandem with the last two years’ property bull run and a surge in construction costs.

It also pointed out that premium flats commanded a higher price because of better flat finishes.

Still, its pricing structures led some to accuse the board of ‘further stoking the inflationary trend of home prices’ and ‘causing new flat prices and resale flat prices to chase each other in an upward spiral’.

So do these accusations have a basis?

National University of Singapore’s (NUS) real estate department deputy head Sing Tien Foo said there are a few ways to calculate housing affordability.

This includes income-based methods (such as house price to income ratio); expenditure-based methods (housing expenditure to private expenditure ratio); and financing-based measures (debt service to household income ratio).

HDB often cites the latter method. It has said that on average, first-time buyers need to use about 20 per cent of their monthly household income to service their housing loan. This is below the 25 to 30 per cent proportion commonly used as the international benchmark for affordable housing.

Dr Yu Shi Ming, NUS’ real estate department head, felt that while the upper end of HDB’s housing spectrum could adopt a market-based pricing, lower-end housing should not.

‘Wages of people in the lower income brackets have not risen in tandem with Singapore’s economic growth, and they might make flats increasingly unaffordable,’ he said.

His observation, however, cannot be verified as HDB does not release data of buyers of new flats.

Academics and analysts alike have said it is hard to gauge Singapore’s housing affordability unless the organisation released such information.

Chesterton’s Mr Tan said: ‘If there was more transparency in HDB’s pricing techniques and data, and there are sound policies, even critics will defend it.’

HDB, however, told The Straits Times that it was ‘monitoring the affordability of its flats’. It added that the average proportion of household income used to pay for a home in new estates is around 21 per cent.

Detailed interviews with 20 industry experts, academics, home buyers and owners found them divided on the issue.

One group felt strongly that prices could be much lower.

Ms Moushumi Ghosh, 38, a newly-wed home buyer, tried balloting for a flat four times without success.

She added that prices got higher with each launch and became increasingly unaffordable.

Mr Tan added: ‘It does not take a market expert to know something is seriously amiss when a subsidised public flat can be priced at above $600,000.

‘When the minimum five-year occupation is over, will the flat be worth more than the purchase price? My gut feel says no for most of the flats. The best ones, maybe.’

Retiree See Leong Kit said HDB’s pricing of new flats below market rates ‘does not make it affordable’.

‘As a low-cost public housing developer, HDB owes Singaporeans an explanation why it is not passing down economy-of-scale cost savings in its developments to flat buyers through a cost-based break-even basis,’ he added.

To this, HDB maintained that its market-based approach has enabled it to price its flats affordably despite the sharp escalation in construction costs.

A new four-room flat can cost close to $300,000 to develop, but is priced at about $200,000 to $260,000 in locations such as Punggol and Sengkang, said the board.

‘There is no basis to the claim that HDB’s pricing had led to a pricing spiral as new HDB flats are always priced below comparable market prices.’

It added: ‘The primary market for new flats makes up less than 25 per cent of the entire public housing market.’

PropNex chief executive Mohamed Ismail pointed out that pricing new flats ‘too cheaply will dampen resale flat prices, and this can cause other forms of resentment if home-owners can’t sell their resale flats at a desired price’.

He belongs to the other group who feels that new flat prices are high only for a select number of units. This group believes that flats are still generally affordable for first-time home buyers.

NUS’ Dr Yu said: ‘Some buyers can be very fussy and choosy. They want a good location, yet want it very cheap.

‘There are still affordable flats in suburban areas like Jurong and Bukit Panjang.’

For example, a four-room flat in Bukit Panjang was priced at $211,000 to $270,000 in HDB’s recent build-to-order sales exercise in August, while a five-roomer in Jurong West this month is going for around $250,000 to $280,000.

Meanwhile, despite the high prices for premium flats in Punggol or at Pinnacle, analysts pointed out that there was still high demand for them, proving that many Singaporeans found them affordable.

At the close of HDB’s ballot, Pinnacle’s 317 four-room flats attracted 2,291 applicants, while 111 five-room flats received 825 bids.

Brand development consultant Pearly Quek, 24, is one first-time home buyer who applied for the Pinnacle flats.

‘Frankly, I thought half a million for an HDB flat was ridiculous. But the location for me is important so I decided to apply,’ she said.

Besides, the value of flats in good locations rarely goes down, she argued. She plans to buy a four-roomer on a low floor so it will be ‘just slightly cheaper than $500,000′.

Still, it remains to be seen if the high number of applications for the expensive Pinnacle flats will translate into a high take-up rate.

Executive director Eric Cheng of HSR Property Group said that considering the location and features of the flats, the price was ‘pretty reasonable’. Condo units would cost more than twice the price in that area, he added.

IT manager Terence Ang is one home buyer who considers himself lucky: He bought a sixth-storey five-room unit at the Pinnacle for just below $400,000 when it was launched four years ago.

‘At today’s prices, I couldn’t have afforded it,’ said the 33-year-old.

Account manager Jason Xu, 27, however, did not get a chance even if he could have afforded it as he failed to be selected in the three ballots he applied for.

Such balloting exercises are hugely popular as flats offered are typically in a ‘move-in’ condition.

In the end, he bought a four-room resale flat in Bukit Merah for $525,000 with a $40,000 grant from the HDB.

‘Nobody’s forcing us to buy expensive new flats,’ he said. ‘It’s up to individual buyers to work out a financial plan, and decide if they can maintain a level of income for the next 20 years.

‘There are also cheaper options. Buyers have to exercise their own prudence.’