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Archive for June, 2013

Debunking the official myths about HDB flats (Part 3): Rising prices of HDB flats generate wealth for Singaporeans

Posted by temasektimes on June 27, 2013

MYTH # 3: Rising prices of HDB flats will lead to wealth creation for Singaporeans.

TRUTH: It will have a negative wealth impact due to higher financial liabilities according to a NUS study done by Abeysinghe and Gu Jiaying

In a reply to question from a MP who asked if a cap should be imposed on rising HDB resale prices during a Parliamentary session in July, Senior Minister of State for National Development Grace Fu noted that HDB flats remained affordable to Singaporeans.

She said:

“‘HDB flat prices should be a reflection of Singaporean’s wealth and it is “not a bad idea” for prices to increase steadily, especially for those holding onto negative assets bought in the previous market peak in the mid 1990s.’”

The ruling party has never failed to remind Singaporeans that it has brought about high home ownership and rise in asset value under its rule.

During a speech given to Kim Keat residents in 1995, then Prime Minister Goh Chok Tong said:

“By how much have we increased the value of your assets? At the start of the upgrading, 3-room flats in the precinct commanded less than $80,000 in the open market. Today, I am told, housing agents are offering as much as $160,000. Your assets have doubled in the last three years. All of you made the right decision, by supporting the upgrading programme and voting strongly for it.”


Now, a 3 room flat in Kim Keat is fetching as much as $300,000, nearly double its value ten years ago. Has the government created wealth for Kim Keat residents? If only things are as straight-forward on paper as in real life.

Suppose a Kim Keat resident bought his original 3 room unit at only $100,000 from HDB. He had borrowed a 80% loan of $80,000 from HDB and has almost completed repaying it.

He would have made a handsome gross profit of $220,000 if he sells off his flat now. However, in today’s market, he will need to fork out at least $220,000 or more for a similiar 3 room flat which means that not only is he unable to capitalize on his gains, he will be plunged into greater debts.

Of course, this is a superficial way of looking at things. Common sense tells us that in an inflationary market like this, everything is getting more expensive which puts a limit to the amount of wealth one can generate from selling off his assets.

A study done by two NUS economists, Tilak Abeysinghe and Gu Jiaying, shows that “past episodes of house price escalations have led to a substantial erosion of housing affordability” especially in the private sector. (source: NUS SCAPE) Higher property prices does not necessarily translates into higher wealth for Singaporeans.

Abeysinghe and Choy in their book – “The Singapore Economy: An econometric perspective (2007)” have examined the wealth effect of property prices on consumption in Singapore and found that the wealth effect is very much absent.

In the absence of cheaper suburbs which offer quality living, the only way for Singaporeans to unlock property values is, apart from emigrating, to downgrade to smaller units. This does not seem to be occurring on a large scale which explains why the ‘housing wealth effect’ on consumption is insignificantly small.

Higher property prices, instead of creating a wealth effect, exert a significant and negative “price effect” on consumption expenditures leading to a fall in the average propensity to consume.

As house prices go up, the increase in the value of housing assets is accompanied by a concurrent rise in the financial liabilities of households, in the form of higher downpayments for purchase of residential properties and burgeoning housing loans.

Due to the limited avenues for liquidating property assets, households have to build up sufficient financial assets to smooth the profiles of their lifetime consumption of non-housing goods and services leading to a diminishing in domestic purchasing power.

It is a common perception that Singaporeans living in HDB flats are leaving “enhanced assets” to their children. This does not appear to hold true as HDB flats are 99 year old leasehold properties – their value will decline with time.

Regression estimates for HDB 4-room flats transacted between May and July 2008 show that a 10-year gap between two flats lead to about 12% price difference with the older one selling cheaper.

If the 99-year lease effect also comes into play, the prices may drop substantially, perhaps to the discounted present value of the remaining stream of rental incomes, and such properties may not generate much bequest value to children.

Not only will “asset inflation” not generate wealth for Singaporeans, it will lead to a vicious cycle, plunging more and more people into lifelong debts.

Mr Paul Yip, Nanyang Technological University (NTU) associate professor of economics issued a recent warning that Singapore risks ’severe asset inflation’ during the economic recovery and urged the government to act now to control the prices of HDB flats. (source:Straits Times)

Prof Yip noted that the US government has lowered interest rates and expanded its money supply in a bid to avoid a repeat of the Great Depression.

But post-recession, the government may fail to shrink the money base back to pre-downturn levels, he said. In that case, excess US dollars would flood the market.

‘For Singapore, there may be an inflow of money from the US, increasing the money base and therefore the money supply… When the recovery comes, there will be wage inflation and consumer price index inflation, and this will fuel asset inflation……’Rents will rise and then people will be able to charge even higher rents, causing a vicious circle,’ Prof Yip said.

HDB flats are meant to be cheap and affordable to ordinary Singaporeans. Whether it generates wealth for us in terms of fixed assets is of secondary importance. It is time for the government to return to the basics and ensures that Singaporeans are not over-committing themselves to their housing loans.



1. The Singapore Economy: An econometric perspective (2007) by Abeysinghe and Choy.

2. Limited income and housing affordability in Singapore (2008) by Abeysinghe and Jiaying Gu.

3. The Economic prospectus of Singapore (2007) by Winston Koh and Roberto Mariano

Note: This article was first published in the old Temasek Review in September 2009


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Debunking the official myths about HDB flats (Part 2): HDB flats are affordable to the most Singaporeans

Posted by temasektimes on June 26, 2013

MYTH #2: HDB flats are affordable.

TRUTH: HDB flats are affordable only to a minority of Singaporeans and is increasingly priced out of the reach of the average worker.

In spite of the relentless rise in HDB prices lately, the government insists that HDB flats remain affordable to the masses.

Recent pronouncements by the Minister of National Development Mah Bow Tan and HDB officers in replies to concerned citizens in the Straits Times Forum have largely sticked to the official stance: that the government will not intervene in the market to bring the prices down.

Minister in the Prime Minister’s Office Lim Hwee Hua maintained that HDB flats are affordable to ordinary Singaporeans as they cost no more than 30% of their monthly pay.

HDB’s deputy director Mr Ignatius Lourdesamy wrote to the Straits Times Forum lately that HDB flats remain affordable to eligible first-time households as they use between 21 to 25 per cent of their monthly income to service their loans on new and resale HDB flats which are well below the international affordability benchmark of 30 per cent. (read letter here)

Though he did not state it explicitly, he is likely to be referring to the average shelter-cost-to-income ratio (STIR) or the proportion of total before-tax household income spent on shelter. The shelter-cost-to-income ratio is calculated for each household individually by dividing its total annual shelter cost by its total annual income. A STIR higher than 30 per cent is conventionally taken as indicating a serious housing affordability.

As I was unable to obtain any international studies published online using the STIR to assess housing affordability in different countries including Singapore, I have to use the Median Multiple which is used widely by international organizations such as World Bank and United Nation to assess housing affordability.

[Please read the addenum to this “HDB flats will be unaffordable using the Median Multiple as benchmark for housing affordability” here]

According to the International Housing Affordability Survey which studies the affordability of housing in Australia, Canada, Ireland, New Zealand, U.K. and U.S.A, the “median house price to median household income multiple” or median index is used to judge housing affordability. (read article here)

Under its rating categories, a median multiple of 5.1 and over is considered as “severely unaffordable” while affordable housing is kept by a median multiple of 3 and below. The annual median income of a Singapore household is $65,760 in 2008 (source: singstat) which means that the upper limit is only $197,280 which is far exceeded by current prices of new and resale flats.

[The above figure is calculated based on the Median Multiple and not STIR which is used by HDB. I was unable to find out how HDB arrived at its figures of 21 and 25 per cent]

The prevailing sentiment on the ground is that HDB flats are becoming increasingly out of reach to the lower income group. Even the middle class will be stretched to their limits to finance the flats at today’s prices.

The crux of the issue is not whether HDB flats are “affordable”, but if they are “easily affordable” to the average Singaporean.

Let us examine the price of a 3-room HDB flat in the 1970s, 1980s and now based on anecdotal evidence (readers in their 40s and 50s will be able to attest to the veracity of these figures).

A new 3-room flat in Toa Payoh cost about $8,000 in the 1970s. The median pay of a graduate then was $1,000 a month. (8 times)

A similiar flat in Ang Mo Kio will fetch about $40,000 in the 1980s. The median pay of a graduate then was $1,600 a month.  (25 times)

Now, a new 3 room resale flat in Ang Mo Kio can cost as much as $270,000. The median pay of a graduate now is around $2,700 a month (100 times).

As we can see from the above figures, the prices of HDB flats have sky-rocketed to more than 30 times while the median salaries of a graduate has only risen by 2.7 times. Are HDB flats becoming more expensive or affordable to ordinary Singaporeans? Maybe they are still affordable by the government’s standards, but definitely not more affordable by the common man in the streets.

The median pay of a Singapore worker is $4,500. 30% of $4,500 is $1,350 which will enable him to afford a flat c0sting costing up to $450,000 assuming a bank interest not more than 2% and 30-year replayment period.

Of course using this figure as the limit is deceptive as a majority of the population will be able to finance the 30 year loan even if they are earning less than $3,000 monthly.

Still, most flats under HDB’s Design, Build and Order scheme have already breached this upper limit. City View at Boon Keng was launched at prices of between $390,000 and $700,000 last year.

Again, the crux of the matter does not lie solely in the affordability of the flats, but whether Singapore households are plunged into greater debts as a result of financing over-priced HDB flats thereby leaving very little savings for retirement needs.

Anything can happen during the thirty year tenure. Retrenchment, unemployment and unexpected death can lead to an abrupt stop in the mortage payments.

A study conducted by NUS shows that housing affordability has decreased over the years, more so for private properties (source: NUS SCAPE)

In 1975, lifetime income of middle-income households with heads aged 30 was nearly 4 times the amount they would have paid for an average-sized private property.

By mid 1980s, their lifetime income was only sufficient to purchase one private property. The trend continued and during the 1994 – 1996 property price escalation, median income households would be in debt if they purchased an average-priced private property during this period. Price escalation since the late 2007 has brought down affordability again.

Comparing median income and property prices for the past nine years, there were five years when property prices outgrew income.

The prices of HDB flats have now reached or exceeded that of the last property peak in 1996 after which the market crashed, plunging many households into debts. Are we seeing another bubble in the formation?

Current prices are unsustainable in the long run due to combination of a few factors: the economy is expected to be sluggish in the near future, rental income has dropped by more than 30%, salaries are not going up by much and companies may have to retrench more workers if the economy does not pick by the end of year. It is kept high by the influx of new citizens and PRs who may sell off their flats should they leave Singapore later thereby increasing the supply of flats.

There will always be demand for HDB flats in Singapore as housing is a basic necessity. As such, leaving their prices entirely to free market forces will only lead to continuous inflation till the market is unable to support the prices any further leading to a precipitous crash.

The government should undertake a comprehensive study to examine the impact on the rising HDB prices on the savings and standards of living of ordinary Singaporeans.

If one has to work 70 hours a week without rest to finance the HDB mortage loan, even if one is able to “afford” the flat, there will be no quality of life to speak of. What’s the purpose of “owning” a flat at the end of one’s working life when one’s savings and CPF have been depleted by the mortage loans leaving very little for retirement needs? Do Singaporeans really want to work beyond the age of 80 till they drop dead?

The predicament of these Singaporeans had led to HDB to introduce a buy-back lease scheme lately for those living in 2 to 3 room flats in which HDB will purchase the flat from the owner at market rate and pay the sum to them in monthly installments over thirty years while the household continue to live in the flat which they now “lease” from HDB.

Affordability is not just an empty figure and more consideration should be given to its wider social implications and impact on the populace such as maintaining sufficient savings in the bank abnd CPF for retirement, domestic spending power, adequate work-life balance and most importantly, the standard of living.

HDB flats are definitely becoming less and less affordable to the masses and it is imperative that the government takes action now to reduce the prices so as to fulfill the original mission of HDB to provide cheap and affordable public housing to the people of Singapore.

Note: This article was first published in the old Temasek Review in September 2009

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Debunking the official myths about HDB flats (Part 1): Singaporeans are ‘owners’ of their HDB flats

Posted by temasektimes on June 25, 2013

MYTH #1: Singaporeans owns their HDB flats.

TRUTH: Singaporeans are merely renting these 99-year leasehold properties from HDB at exorbitant prices.

The Housing Development Board was set up in 1960 during a time when large numbers of people are living in squatter settlements and slums around the city centers.

Under the then indefatigable Minister for National Development Mr Lim Kim San, HDB began the task of solving Singapore’s housing crisis and resettling the squatters.

It built 21,000 flats in less than three years. By 1965 it had built 54,000 flats, exceeding the 50,000 target of its First Five-Year Building Programme.

Today, about 84 percent of Singaporeans live in HDB flats compared with only nine percent in 1960 when HDB was first established.

The ruling party has always prided itself for building homes to house the majority of the population. HDB has become its crowning achievement and the mainstream media never fails to attribute Singapore’s high home “ownership” to the PAP during every elections.

While it is true that most Singaporeans have a roof over their heads, whether they actually own the flats they live in is debatable.

There are three categories of properties in Singapore: freehold, 999 year and 99 year leasehold properties.

Technically speaking, only those living in freehold properties can claim to own them since they are permitted to bequeath the estates to their descendents forever.

All HDB flats are 99-year old leasehold properties which means that the government can reclaim them after a period of 99 years. When Singaporeans purchase HDB flats, they sign a Tenancy/Lease Agreement  with HDB and the usual Sales and Purchase Agreement for private properties. (thanks to reader Ang Kong Kia)

In a sense, HDB dwellers are only “leasing” their flats from HDB for 99 years, they do not strictly own them though the misconception has been perpetuated for years by the ruling party and the state-controlled media.

Addendum contributed by reader Papsmearer:

[Basically, when you borrow money from the bank to buy your 99 year leasehold HDB flat, you are in effect borrowing money to pre-pay your lease (you can call it rent too) for 99 years.

Normally, when you rent from a landlord, you might be required to sign a 1 year lease agreement which stipulates among other things, the monthly rent. At the end of the 1 year, the landlord may not decide to renew your least. In the case of a HDB flat, by prepaying your lease for 99 years, you avoid the uncertainty of the normal lease.

Secondly, people claim that they own the flat because they make a profit when they sell it. What they are actually selling is their interest in the pre-paid lease, not the actual flat themselves, because they don’t own it. They are selling the right to live in that unit, and basically, assigning their rights as tenants to another individual for a fixed price.]

Furthermore, there are some restrictions placed on the sale of HDB flats: e.g. one must live in it for a period of 5 years before they can be sold; the ethnic quota must be maintained in the process, previous HDB subsidies will have to be returned and a hefty resale levy is slapped on the seller which can be as high as $50,000.

If Singaporeans are really owners of their HDB flats, then they should be allowed to sell them to anybody at any time like in the private property market without being subject to these restrictions imposed by HDB.

Besides, most of them have to take up a bank loan to finance the purchase of the flats. In the event that they are unable to service the loan, the bank will repossess the flats.

The reality is, Singaporeans do not own their HDB flats. They are merely renting it from HDB for a maximum period of 99 years and paying a pretty high monthly “rental” at that.

When old flats are demolished by HDB for redevelopment, its inhabitants are not paid at prevailing en bloc rates. Instead, they are given discounts for new flats built to replace them.

The remarkable success of HDB in transforming the landscape of Singapore lies in the small size of the island and population. Given that almost all land is owned by the government, HDB has no difficulties in acquiring land, much of which is undeveloped to build new towns.

Post-independence Singapore has a small population which makes it easier for the government to relocate them to the newly built HDB flats. The feat will almost be impossible to replicate in an already densely populated city like Hong Kong or in a larger country like Malaysia.

The government deserves credit for ensuring that the majority of the population has a roof over their heads, but to claim that Singapore has one of the highest home ownership in the world when its citizens are merely renting leasehold properties at exorbitant prices from HDB is stretching one’s imagination to the limits.

It is time for Singaporeans now and the future to realize the truth – that they do not own the HDB flats they live in and they belong ultimately to the government which retains the right to acquire and demolish them anytime they wish.

Note: This article was first published in the old Temasek Review in September 2009.

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