NEW HDB FLATS

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NEW HDB FLATS:

(Affordability): 5.

Mr Liang Eng Hwa asked the Minister for National Development given the high prices of new HDB flats reported in the media recently (a) whether new HDB flats are still affordable; (b) what is the rationale for using a market-based approach in pricing new HDB flats; and (c) whether HDB will consider selling flats based on cost or further lowering the selling prices of new flats.

The Minister for National Development (Mr Mah Bow Tan): Mr Speaker, Sir, I believe that the Member is referring to

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recent media reports on the high prices of a small number of flats at prime locations, especially those at the Pinnacle@Duxton or under the Design, Build and Sell Scheme (DBSS).

When we discuss affordability of HDB flats, one thing that I would like to point out is that HDB homeownership flats cater to a very wide range of flat buyers. In fact, they cater to over 80% of the Singapore population and, in this range, there are buyers with household incomes as low as $1,000 and buyers with household incomes as high as $8,000 a month. So this covers a wide range of buyers in terms of incomes, tastes and aspirations, and that is why HDB has to offer flats of different prices, locations and budgets to meet the different needs and budgets of this wide range of buyers.

For the lower income households, HDB builds smaller 2-room and 3-room flats and these flats range in price from about $77,000 for the lowest-priced new 2-room flat to about $275,000 for the highest-priced new 3-room flat. The prices vary depending on the location. For households at the higher end of the income range, we have the 4-room and 5-room flats, which start from as low as $158,000 for the cheapest 4-room flat and go up to as high as $646,000, again depending on the location. The prices at the higher end of the price range are those located in prime areas such as the Pinnacle@Duxton, or those built by private developers under the DBSS.

I would like to inform the Member that the high-end HDB flats such as DBSS flats make up less than 10% of the total annual supply of new HDB flats. For the vast majority of HDB flat buyers, there is ample supply of lower-priced new HDB flats to meet their needs at affordable prices. More than 90% of HDB's building programme are studio apartments, 2-room flats, 3-room flats, 4-room flats and the lower priced 5-room flats. This constitutes

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more than 90% of the total building programme.

Next, the Member asked why HDB sells new flats based on market price instead of cost.

Let me explain. In pricing a flat, HDB first determines what is its equivalent market price taking into account various factors such as location, finishes of the flat and other flat attributes, ie, its facing, what floor it is on, etc. This market price is determined by actual transactions of similar flats. It is not a theoretical number, but it is based on what people have actually paid for flats in the surrounding vicinity and it is based on professional valuation principles. So, this is what the flat is worth, this is what people are willing to pay on the resale market for such a flat. HDB then sells this flat to eligible flat buyers at a significant discount to the market price, and this discount is the subsidy that is given by the Government.

A market-based approach is the fairest way of pricing new HDB flats because it reflects what the flat is worth at the point of purchase which may have no relation, whatsoever, to what it costs to build. Take, for example, the Pinnacle@Duxton project. Between 2004 when the flats were first released and today, the market price of comparable flats in the vicinity has gone up by about 50%. I am talking about vicinity. I am talking about HDB flats in Cantonment Towers and around Tanjong Pagar area, for example. We are not talking about private developed flats, but HDB flats. So, when the second batch of the Pinnacle@Duxton flats was released for sale, the prices of the balance flats that were released in September 2008 also had to be about 50% higher than the prices in 2004. Nonetheless, the Pinnacle flats are still subsidised flats because they are being sold at lower prices than what they would command in the market.

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The balance flats that were offered for sale recently had an over-subscription rate of over 700%. In other words, for every flat that was put on sale, there were seven buyers waiting to buy the flat. I think this reflects the sense that these flats are actually good value for money.

On the other hand, when the market goes down, new flat prices are reduced accordingly. Members would remember that in the late '90s after the Asian Financial Crisis, the property market suffered a severe downturn. So when HDB sold new flats at that time, the new flats were priced below the market rates. The HDB flat prices moved downwards. So the average prices of 5-room and executive flats, for example, in Sengkang when they were reoffered in 2005, were 30% lower than what they were first offered for sale in 1997 and 1998 because the market in 2005 was much lower than it was in 1997 and 1998. So it is not just the market going up and HDB following, but the market going down, HDB also follows suit, based on the market-based approach.

As HDB does not factor cost into its pricing, under the market-pricing approach, it is able to recover costs only in some projects while incurring losses in other projects. For example, a typical 4-room flat in Punggol or Sengkang today costs more than $300,000 to develop, taking into account current land, building and other costs. This is much higher than the subsidised selling price of between $200,000 and $260,000 for new flats in Punggol and Sengkang. If you take it as a whole, over the last three years, all the flats that HDB has built has incurred an average deficit of $530 million per year for its home ownership programme. So this is the cumulative sum of all the pluses and minuses for the whole building programme over the last three years, and this figure is published every year in its annual report.

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Finally, the Member asked whether HDB flats are affordable. A well-accepted and reliable measure of affordability is how much a household has to pay for its mortgage instalments, relative to its household income. Based on this, HDB flats have remained affordable, even though property prices have risen over the years in tandem with Singapore's economic growth.

Currently, HDB flat owners' mortgage payments are on average below 25% of their monthly household income. This is within the international affordability benchmark of 30%. What is more encouraging is that 70% of new flat buyers service their mortgage instalments entirely using their CPF monies without having to touch their cash. We have achieved one of the highest home ownership rates in the world, at 80% of the population. This would not have been possible without generous Government subsidies to ensure affordability of HDB flats.

Mr Low Thia Khiang (Hougang): Sir, based on the Minister's answer, would the Minister clarify that for first-time buyers who bought a flat directly from HDB, they may also suffer a loss when the market is down?

So, if that is the case, what is the subsidy that the Minister is talking about? For instance, a first-time flat buyer who bought a flat at $600,000 with a subsidy of $30,000 from HDB, when the market is down, the flat may be only worth $400,000. So, where and what is the subsidy?

Mr Mah Bow Tan: Sir, the HDB market, like the private property market, will go through ups-and-downs in the short term. Property cycles are well known in the property market and HDB flats, if they are

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resold on the resale market, have to follow these property cycles.

The Member asked, where is the subsidy? As I have explained, when the Government sells a $600,000 value flat at, say, $500,000, that is a subsidy of $100,000. If it sells a $400,000 flat at $300,000, that is another $100,000 subsidy. It does not mean that the $600,000 flat will always be priced at $600,000. In the short term, there may be fluctuations. But in the long run, as Singapore's economy grows, and the Government continues to maintain a stable property market and pumps in money to upgrade the HDB estates, the HDB flat value will go up over time. The HDB flat is not a short-term speculative investment which people buy today and then sell, say, in five years' time when the minimum occupation period is up.

It is meant as a long-term store of value. And as a long-term store of value, I have every confidence that the HDB flat price will go up over time as Singapore's economy grows. That is the reason why the Government subsidises HDB flats, so that people can have a stake in this growth in Singapore's economy. The subsidy is what will help Singaporeans to buy their first flat. Whether you are a $1,000 household income or a $8,000 household income, you will be able to afford a flat commensurate with your income. That is the first starting point. Then you will find that, over time, the value of your flat will grow. And, hopefully, when you retire, you will have this substantial store of value.

This is not just rhetoric, this has been proven. The store of value today collectively for all HDB flats is well over $100,000, and this is the value which they are able to cash out on when they retire one day.

It is a real subsidy that we are talking about. It is not a paper subsidy. It is a

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very real subsidy that all Singaporeans enjoy when they buy a HDB flat.

Mr Seah Kian Peng: Sir, given the current economic climate and from the cases that I see at my Meet-the-People sessions, it seems to suggest to me that lower-price flats are in demand. So my question to the Minister is whether indeed this is the focus and the priority of HDB in its building programme going forward. And I would like to suggest, at least from my experience, to focus more on building smaller flats where the price consideration is a major factor.

Mr Mah Bow Tan: The Member is absolutely right. The focus for us is to build more smaller flats, not just to allow more of the low-income families to own flats but also, to a certain extent, to allow some of the families who are facing financial difficulty to downgrade to the smaller flats. So for both these very good reasons, we are indeed building more of the smaller flats. In fact, for the first time, we are building 2-room flats and have also restarted building 3-room flats in the last couple of years. So the Member will be pleased to know that in the course of the next year, these new 2-room and 3-room flats will come onstream, and they will be able to provide a very useful outlet for some of the lower-income families.

I just want to reiterate the point that I made in my answer – the bulk of the HDB housing programme is really concentrated on the 3-room and the 4-room flats. Most Singaporean flat buyers would be interested to buy the 3-room and the 4-room flats. The 2-room flats are a small portion because they only cater to a very specific niche in the buyers' market, as are the high-end flats like the DBSS and the Pinnacle-type flats. They also cater to a very specific niche in the market. So the bulk of the flats are in the 3-room and the 4-room category.

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Mr Low Thia Khiang: I have two supplementary questions for the Minister. The Minister said that the HDB flat, in the long term, will sure to appreciate. I would like to ask him, what is the "long term" that he is referring to – five years, 10 years or 20 years?

Sir, second clarification: the Minister said that these are real subsidies, so I would like to ask the Minister what does he mean by "real". Real subsidy, to me, means that you can really benefit when you sell the flat. In the case where a first-timer who bought a flat from HDB, got a subsidy from the Government and he sold it five years later at a loss, he actually did not get any subsidy in real terms from the Government. So how is it "real" and what does he mean by "real"?

Mr Mah Bow Tan: I think I have already answered the second question. The subsidy is the subsidy given as at that point in time. It is the difference between the market price and what he actually paid for it. If Mr Low goes and buys himself a flat from the private market – I do not know what he would like to buy – let us say a condominium somewhere in Hougang and it is worth $1 million, and the developer tells him, "For you, Mr Low, because you are the MP in this area and you have done such a good job, I will sell it to you for $900,000", do you not agree that that is a $100,000 subsidy? If subsequently that $1 million flat goes down to $800,000, does it mean that the subsidy of $100,000 has disappeared? Surely not. He was given a subsidy as at that point in time because that was the difference between the market price and what he paid for it. That is a real subsidy; he saved $100,000. So to say that it is not a real subsidy, I think he is just trying to make a political point. I understand. [ Interruption. ] Let me finish answering his first question. The first question is: what is long term? I think it is very difficult to determine what is long term. It depends on each individual family circumstances.

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But my advice to flat buyers is always: if you buy a flat suitable for your family, stay in it for the long run. Have your children there, see them grow up and even, preferably, retire there. And this is what majority of HDB flat buyers do. The phenomenon that we saw in recent years, or at least in the 90s or early 2000, where people bought and sold flats very frequently, I think those days should not come back. People should buy a flat that they can afford. If their family circumstances improve and they want to upgrade, by all means. Upgrade if they can afford to do so. But please consider your flat as a long-term investment and also a long-term place for you to raise your children and to retire in, not for you to go and buy and then sell five years later, and then after that, buy again five years later. That is not the purpose or the objective of the public housing programme.

Mr Speaker: Dr Faishal, last question. [ Interruption. ] Mr Low, we have dwelt on this question too long enough. Unless it is a different line of questioning, you will get the same answer.

Mr Low Thia Khiang: Sir, I think it is a clarification.

Mr Speaker: Carry on.

Mr Low Thia Khiang: Thank you, Sir. If the Minister says this is a subsidy, then, perhaps, there is no need for HDB subsidy. What one needs to do is to buy a flat at a lower market price, and when the market goes up, he makes a gain, and that is subsidy. So there is no need for Government subsidy. Is it real subsidy?

Mr Mah Bow Tan: Just for the Member's information, if he were to go and buy a HDB flat in the resale market at any time, whether the market is up or down, I will still give him a subsidy. That

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is a real subsidy. If you want to buy a flat near your parents, I will give you $40,000; otherwise, I will give you $30,000, over and above the price that you are paying in the resale market. So, as in the resale market where we have the CPF Housing Grant, which is a real subsidy, in the same way, when you buy a new flat, we are also giving you a subsidy, which is also a real subsidy.

Mr Speaker: Dr Faishal, last question.

Dr Muhammad Faishal Ibrahim (Marine Parade): It is about the 80% home ownership rate which the Minister mentioned earlier. I would like to know whether this 80% is sustainable in the short and medium term, and what is the Ministry's home ownership target rate in the short and medium term.

Mr Mah Bow Tan: Is the Member asking whether it should be higher than 80% or lower than 80%?

Dr Muhammad Faishal Ibrahim: The Minister mentioned earlier that it is 80%. In view of the economic uncertainty in the years to come, I would like to know if this 80% is sustainable. And, secondly, I would like to know what is the Ministry's target rate of home ownership among Singaporeans.

Mr Mah Bow Tan: The 80% home ownership rate that I was talking about refers to the HDB home ownership rate. Eighty percent of Singaporeans own HDB flats. This is of course a reflection of the kind of eligibility criteria that we set. When we set the family income eligibility criteria at $8,000, that corresponds to about 80% of the number of Singaporean households. So if the Member is asking about the home ownership target for HDB flats, my answer is that there is no intention to vary that at the moment. I think it is a very large coverage, as it is, to have a public housing programme that covers 80% of the population. By any

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account, in any country in the world, it is an extremely wide and a generous one. So I do not think that there is intention to widen that even further.

On the other hand, there is also no intention for us to change it such that less people are eligible for HDB flats. There is no intention to do that either.

Just to add, affordability actually has no relationship to the home ownership rate because when we talk about affordability, we will price our flat such that these people within that 80% range will be able to afford a HDB flat. So if you are a low-income family earning, say, $1,000 to $1,500, you will be able to afford a 2-room flat because it will be priced such that you can afford the 2-room flat. And, similarly, if your income is $5,000 to $6,000, you will be able to afford a 5-room flat because the price of the 5-room flat will be affordable to you.