03 Apr 2013
Topics Singapore

As the sole provider of public housing, the monopoly by the Housing and Development Board (HDB) allows it to allocate limited land resources, and achieve economies of scale. However, concerns over public housing price increases outstripping income growth have been growing. Dr Tan Meng Wah, Research Fellow at IPS, proposes a pricing model that allows HDB flats to reprise their original role as public housing.

Many early homeowners have indeed benefited from rising HDB prices over the past decades; changes in domestic and external environments suggest that the run-up is unsustainable. A fundamental relook at the existing public housing policies is warranted.

An investment in a HDB apartment may no longer be a sure winner, given the already high resale prices. In the event of prolonged depressed market conditions, homeowners may even suffer losses. HDB resale prices, for example, were depressed for 13 years between 1996 and 2009 before prices recovered to their 1996 high.

The high mortgage payment also means that risk of default increases in times of depressed economic conditions or when incidence of structural unemployment rises. The risks of being hit with economic problems are not limited to only the low income earners. The share of managers, professionals, executives, and technicians among the unemployed has been rising steadily, from 14.7% in 1991 to 27.8% in 2001 and 36.2% in 2011. There is also a rise in the number of unemployed older workers. Given these, asset enhancement should by no means remain the predominant tenet guiding public housing.

Public housing as a public good

One possible solution lies in reconciling the conflicts between the treatment of public housing as public and private goods. New apartments can first be treated as merely a public consumption good at the point of purchase from the HDB and then as a private investment good at the point of resale.

Take, for example, a new $410,500 four-room HDB apartment in a mature estate for a prospective homeowner buying his first HDB apartment at the age of 25. (See Table) Under the current scheme, a $369,450 loan stretching over 30 years would entail a monthly installment of $1,480 and a total interest payment of $163,350.

Under the proposed new pricing model, the payment for the land price, assuming to be 50% of the selling price, will be deferred to the time of resale. Given the lower selling price, the homeowner will need a loan of only $184,725, which he can repay over 15 years with a monthly payment of $1,241. Total interest payment will only be $38,655 giving him a saving of $124,695 compared to the current pricing scheme.

Assuming that the homeowner sells the first unit and buys another fourroom apartment 15 years later, the new scheme again allows him to enjoy interest savings of $208,395. If he chooses to retire in his second home, he can put off paying for the land value of $265,250 until after he passes away and the unit is sold. All in all, his savings from the purchase of the two HDB apartments amount to $598,340 comprising of $333,090 from lower interests payment and $265,250 from the deferred payment for the land value of his second apartment.

This pricing model results in lower monthly mortgage payments, and shorter repayment period of 30 years for two HDB loans, which in turn, lessens homeowners’ risk. This is a contrast to the current picture of ‘asset-rich and cash-poor’ Singapore households that have up to 75% of their retirement wealth locked in housing asset upon retirement compared to the 20t for average American elderly households.

The proposed scheme allows a nest egg for homeowners to fund their retirement without having to downgrade. More importantly, it unshackles the younger Singaporeans from heavy housing loans.

There is also little fiscal impact, as proceeds from land sales go towards reserves. In fact, low mortgage payments leave households with higher savings in CPF and empower them to take care of their own long-term needs with minimal handouts from the Government.

By enhancing transparency, the proposed pricing model helps the Government regain goodwill towards an otherwise well-strategised and executed national housing programme.

by Melanie Chua

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Topics Singapore