SURGE IN RESIDENTIAL PROPERTY PRICES

Mr Chia Shi Teck asked the Minister for National Development if he will explain the surge in residential property prices and whether the current selling prices of public and private residential units are realistic and sustainable.

Mr Chia Shi Teck (Nominated Member): Sir, may I first declare my interest as a director of a property company. Question No. 2.

Mr Lim Hng Kiang (for the Minister for National Development): There are two categories of residential units in Singapore: firstly, new HDB flats sold by HDB, and secondly, HDB resale flats and private housing units sold on the open market.

Let me first address the first category. New HDB flats are priced to reflect the construction and land costs, premium factors such as good locality, storey height, and so on, as well as design improvements.

In the last nine months, from July 1992 to April 1993, construction costs for HDB flats have been stable. As a result, price increases for new HDB flats have averaged only 1.8%. HDB expects the price adjustments for 1993 to be minimal. If construction and land costs continue to remain stable, purchasers of new HDB flats need not worry about higher prices.

Let me now turn to HDB resale flats. Although there are restrictions on the sale and purchase of HDB resale flats, their prices are largely determined by market forces. HDB's records show that resale prices have increased by about 5-10% since HDB announced on 23rd March this year that it would increase the amount of mortgage financing it provided to buyers. One possible reason for this increase is that the larger HDB loans have made buyers more willing to pay higher prices for a flat of their choice. HDB expects the increase in resale prices due to this reason to be a one-off phenomenon.

Another reason why prices of HDB resale flats will stabilise is the bigger expected supply of resale flats. Because HDB is building more new flats and a higher proportion of the purchasers are upgraders, more flats will be offered for resale. This will dampen further increases in the resale prices. In 1993, more than 20,000 purchasers will take delivery of their new HDB flats. Of this number, 45%, or 9,000, are upgraders. They will put their existing flats on the resale market. In comparison, in 1991, the corresponding figure was 6,800 and in 1992, this was 8,300. So the number of flats going into the resale market, because of upgrading, will increase.

Let me now turn to private residential properties. Prices of private residential properties are determined by the developers' calculations and what buyers are prepared to pay. Residential property prices have increased because of many factors. They include a growing economy, greater investor confidence, rising incomes, low interest rates, and the easing of some CPF investment rules. In addition, perceptions and expectations of sellers and buyers of properties and the booming stock market also play a part in the rising prices.

Over the long term, property prices in Singapore will almost surely rise in step with economic growth and prosperity so long as the fundamentals of the economy are sound. But our property market is also subject to short term cyclical ups and downs, like property markets everywhere. Thus, while current selling prices may reflect supply and demand in the present circumstances, we cannot assume that present prices are sustainable, or predict when the property market will cool down.

Let me turn to the different types of property buyers. There are many types of property buyers. Some wish to upgrade their homes or buy new ones to live in. When these buyers choose to make their purchase is their personal decision. However, such buyers should not panic into buying their homes because they are worried that there will be a shortage of supply.

Potential house buyers should take note that the supply ofnew private properties will increase substantially. Over the next eight years, URA's Real Estates Statistics Quarterly show a potential supply of 52,340 dwelling units or an average of 6,500 per annum. For the years 1993 and 1994, the estimated supply coming onstream is 7,366 and 9,468 dwelling units respectively. This is much more than the average historical demand of 3,900 dwelling units per annum and supply of 4,200 units per annum over the last 10 years. Indeed several real estate developers have expressed their concern to the Ministry of National Development that we may be heading for an over-supply of private properties.

There is sufficient land in Singapore for both private and public housing. Government plans to release land for development of 3,000 dwelling units a year, and will release more if the demand justifies it. This is in addition to the supply of housing land available in private hands.

Let me now turn to another group of property buyers. These are the ones who buy expecting property prices to rise, whereupon they will sell at a profit. Such speculation is a normal part of the free market, provided it is not fuelled by excessive lending from financial institutions. Persons who derive regular income from such property transactions must of course declare and pay tax on this income. However, their greater exposure is to the risk that the market will turn, catching them with unsold and overpriced properties. In every property boom, sooner or later this happens.

Mr Chia Shi Teck: Sir, with the recent rises in URA's land tender prices, how would that affect HDB's pricing? As the Minister has said, the price of land is one big determinant and now the tender prices of URA's land would definitely move up the land value?

Mr Lim Hng Kiang: HDB purchases land from the Government at a price determined by the Chief Valuer. The Chief Valuer, in setting the prices for sale of land to HDB, takes the transactions of land in the market as one of the factors for consideration. If the land prices that are transacted, both in the sale of Government land as well as other private transactions, show a clear trend of increases, then of course this will be factored in by the Chief Valuer. If this is a sporadic and unusual occurrence, then the Chief Valuer may well ignore this price increase.

Mr Chia Shi Teck: Under such circumstances, in the current speculative mood of driving the prices up and land prices have moved up, inadvertently HDB prices will move up and this will be a trend. How is the Government going to assure, as the Minister has said before, that the new entrants into the workforce can afford to buy future houses, especially when the tender prices of land are low, the Government may withdraw the sale of land?

Mr Lim Hng Kiang: Just to give an example. Even though the private developer may tender for a piece of land at $3,000 per square metre, HDB continues to purchase land from the Government, as valued by the Chief Valuer, at $1,800 per square metre. So the price that HDB pays is determined by the Chief Valuer and, over the years, this has been fairly stable and it is not reflected in the escalating cost of HDB prices. The main parameter for the pricing of HDB flats is the construction costs and, as I have said, in the last nine months, construction costs have remained stable and, as a result, HDB prices have also remained stable. For 1993-94, we hope that the construction sector will not be overheated and we expect the tender prices for HDB flats to remain stable. Therefore, we do not see major price increases for HDB new flats.

Mr Chia Shi Teck: Sir, could I take the Minister's earlier answer to mean that they will leave speculators alone, as the Minister has said that there will be more than enough houses to go around and genuine house buyers need not panic into rushing to buy their houses?

Mr Lim Hng Kiang: There are two aspects to my answer. The first aspect is that there is a substantial supply coming on. Genuine home buyers should take note of this substantial supply and make their decision accordingly. My answer did not say that speculators will be left alone.

Let me clarify the Housing Developers Rules. Over the years, the Government has put in place a comprehensive set of rules called the Housing Developers Rules. These rules are intended to regulate the practices of housing developers so that the interests of home buyers are protected. In particular, the Housing Developers Rules provide guidelines on booking fees, impose partial forfeiture of booking fees if a purchase is aborted, and also disallow transfer or assignment of option to purchase. These rules strike a balance between safeguarding the interests of genuine home buyers and deterring speculation. These rules are vigorously enforced by the Controller of Housing.

Let me also explain what these rules mean so that we do not go away with the idea that it is very easy to buy an option and speculate. The first rule is that you must pay not more than 10% of the price in your booking and that gives you the right to exercise the option three weeks after the sale and purchase agreement is given to you. So whoever books gets an option and he has three weeks to exercise the option. He exercises the option by paying 20% of the purchase price. It is only after that stage that he is allowed to assign his option to a subsequent purchaser. So it is not true that somebody can book today and sell off tomorrow. He cannot sell it off to another person tomorrow. The developer would not allow it. The developer will only sell the unit to somebody who has booked it and he will only sell to that particular person whose name is in his register of booking and only after he has paid up 20% of the purchase price. After that stage, the initial option holder can then assign his option to somebody else. The Controller of Housing monitors the booking register of every developer and compares the names in the booking register with that of the sale and purchase agreements to make sure the developer does not sell the option to somebody else and a different person has bought the unit. This is vigorously enforced.

Just to give an example. In a recent development of about 300 units, 14 option holders in the end failed to exercise their options and have to forfeit their booking fee. One was successful in a resale later on, 10 weeks after the option. There was one case of transfer of option, but this was because the lady who booked could not get a bank loan for some reason and she applied to the Controller of Housing to allow her option to be transferred to her daughter who could get a housing loan. So the Controller of Housing exercised his authority and allowed the transfer. Otherwise, no transfer of such option is allowed under the Housing Developers Rules. So it is not that we do not bother about speculation. We control and enforce the rules.

Dr Toh Keng Kiat (Nominated Member): Sir, may I ask the Minister whether the Government has considered some form of capital gains tax in order to dampen speculation in the private property market?

Mr Lim Hng Kiang: This has been considered and obviously it is not in our law books.

Mr Chia Shi Teck: The Minister has said that options are not transferable but, from what is happening, we see people queuing up and the very next day they are already selling the units. The other question is whether the forfeiture is a bit too low and that people who are looking at the gains that they can get out of selling may think it is worth taking a small risk.

Mr Lim Hng Kiang: Whether people take risk or not, I leave it to their personal decision. But let me just illustrate an example. For a unit going for half a million dollars in the market, you have to pay 10%, which is $50,000, to get the option. That gives you a three to five weeks' window before you exercise the sale and purchase agreement where you have to pay the 20%. If you fail to book, you forfeit 10% of the $50,000, which is $5,000. So effectively, you are putting $5,000 for the period of three to five weeks. What happens in the market is that somebody books and he hopes to be able to assign to another person during these five weeks. That is not recognised by the developer, nor is it recognised by the Controller of Housing. So what the option holder does is that he has a side agreement with the subsequent purchaser. The subsequent purchaser must foot the 20% of the purchase price for him to make the option valid. After that, he can assign to the second purchaser.

During this period, there is a sub-deal between the option holder and the purchaser. It is not recognised by the Controller of Housing and it is not recognised by the developer. The developer cannot accept the second person's name. So if anyone of them reneges on the deal, that is up to him. Anybody who enters into this agreement must do so with his eyes open. First, the prospective speculator knows that he has to forfeit a substantial amount if he forgoes the option fee. The subsequent purchaser, if he enters into a side agreement with the option holder, does so at his own risk because he would not get any protection from the Controller of Housing or from the developer.

Dr Wang Kai Yuen (Bukit Timah): I would like to find out from the Minister whether such rules that he has enunciated also apply to the developer of overseas properties which are marketed in Singapore.

Mr Lim Hng Kiang: Let me take this opportunity to also sound another word of caution. All property developers in Singapore are only allowed to market their properties if they have a licence to sell before completion. To obtain the licence to sell before completion, he has to follow fairly stringent rules in terms of approval of building control plans and collection of downpayment and instalment payments. Singaporeans who buy from local developers within the ambit of such rules are fairly well protected. Singaporeans who buy from overseas developers who advertise in Singapore will not have such a protection. So let buyers beware. If you buy and you are hoping that your developer from another country will deliver to you as promised in the advertisement, it is not the job of the Controller of Housing in Singapore to control such development because it is outside his purview.

Mr Chia Shi Teck: Could I take the Minister to mean that he is quite happy with the current controls and that he is also quite happy with the current state of affairs?

Mr Lim Hng Kiang: The Controller of Housing monitors all transactions in the booking register and the sales and purchase agreements. This recent spate of so-called speculation has yet to play itself out because the recent developments put on sale in April or May have not seen the expiry of the option period yet. So we are still monitoring the names in the booking register and we are making sure that the names which are subsequently entered in the sales and purchase agreements are the same persons. If not, we will go for the developer and he will lose his licence to sell before completion. I am not saying that I am happy with the present situation. My concern with the present situation is that genuine purchasers ought not to be carried away by these sentiments. They ought to look at the numbers coming on-stream and make their own personal decision when they want to enter the market. My Ministry is also looking at these rules. If we find it necessary, we will tighten the rules to make them even more difficult for speculation to take place.