by Mah Bow Tan

05:55 AM Dec 10, 2010

Over the last few months, I have explained in this series of commentaries how the Government provides affordable housing for the majority of Singaporeans, and how these flats are not only a home, but also an asset which grows in value to support social mobility and provide for old age.

Many readers have said they now understand the issues better and agree with the hard choices that the Government has to make. But some others have disagreed with the Government's policy. I welcome this debate on our public housing system. It will help us improve.

But let us do so with an open mind, and a full understanding of the facts. Dr Goh Keng Swee used to quote the Chinese saying, "Seek truth from facts". Let us heed these words of wisdom as we address the people's concerns.



FLAT SUPPLY: HOMES FOR THE MASSES

One of these concerns relates to flat supply: "Why is there a need for the Housing and Development Board (HDB) to build premium flats which are priced higher? Why not just go back to basic flats?"

To answer such questions, let us start with the Government's basic principle, which is to provide affordable public housing for the vast majority of Singaporeans - not just for 10 or 20 per cent, like most countries, but up to 80 per cent of the population.

So the HDB has to build flats that cater to the diverse budgets and aspirations of many - from households earning $1,500 a month at one end to those earning $10,000 a month at the other.

The fact is that demand for premium flats is strong. When the premium project, Waterway Terraces, was launched in Punggol, there were 13 applicants per flat. This was two to three times the application rate seen for standard Build-To-Order (BTO) projects launched in Punggol in the same year.

Nonetheless, premium flats form only a small portion of the flats offered by the HDB. Most of the flats built by the HDB are standard flats, of good quality, and come in a wide variety of sizes and locations. Through the provision of both standard and premium public housing projects, the HDB encourages Singaporeans from a wide spectrum of incomes and backgrounds to live together to form an inclusive community.

FLAT PRICING: AFFORDABILITY IN AN EQUITABLE AND SUSTAINABLE WAY

The next area of concern is on pricing of flats. Some have asked: "Why market-based pricing? Is the HDB making a profit at the expense of affordability?"

To answer this, we must remember that another basic principle of Singapore's public housing is to build homes for our people to own, and not rent. Owning an HDB flat gives Singaporeans an asset that grows in value along with the country's progress. We must allow this value to be realised upon the resale of the flat in the open market.

But to ensure affordability for first-time homebuyers, we price new flats at a subsidy. The HDB also helps first-timers buy resale flats of their choice with the CPF Housing Grant. The subsidy must be set relative to market values so that all flat buyers enjoy comparable levels of subsidy.

In contrast, a cost-based system means that the same price would be charged for different flats in the same project, regardless of their location, floor, direction, and other attributes. It would be unfair for the buyer of a second-floor unit to be charged the same price as a 40th-floor unit with an unblocked view, because the latter would clearly fetch a much higher resale value.

For equity and the efficient allocation of resources, the selling price of flats must therefore be linked to their value, not their cost.

Some have contended that with the market-minus pricing, the HDB is making money from Singaporeans. This is quite wrong. Every year, the HDB publishes its audited financial accounts. In these accounts, the HDB's proceeds from the sale of new flats are shown to be far below what it costs the HDB to build them. Over the last three years, the average loss on the sale and development of HDB flats was about $600 million a year.

For example, for standard BTO projects like Punggol Spectra and Fernvale Crest, the cost subsidy per family averaged $40,000 to $60,000. If we add other housing subsidies such as the CPF Housing Grant and Additional CPF Housing Grant (AHG), the HDB's total subsidy for first-time buyers comes to $1 billion a year. This is a real subsidy which has to be paid by the State.

Besides providing extensive subsidies, the HDB also offers a range of flat options to cater to different budgets. As shown in the table above, buyers at each income level can choose from a wide range of flat types that are affordable to them.

More importantly, what is the reality on the ground? Here are the facts. More than eight in 10 Singaporeans live in HDB flats. Of these, 90 per cent own their flats, and the rest rent. Of those who own, 40 per cent have fully paid for their flats.

An average of 15,000 first-timers buy new or resale HDB flats every year with a Government subsidy. New flat buyers use only 20 per cent to 25 per cent of their income to pay for their loans; and more than 80 per cent rely only on CPF and no cash to finance their loans. Among new BTO flat applicants, about 35 per cent apply under the Fiance/Fiancee scheme, and the median age of these young couples is about 26 years old.

Is there any other major city or country that is doing this for their young people?



NO EASY ANSWERS

I totally understand the concerns about housing supply and affordability, given the recent run-up in property prices. This is a problem of success. Prices have risen because the economy has improved, people have good jobs, and there is confidence in our future.

When flat prices appreciate, homeowners benefit but homebuyers worry. To help first-time homebuyers, the HDB has increased the supply of new flats and given out generous housing subsidies. Can we increase housing subsidies further? And should we? Increased subsidies come at a cost; what would Singaporeans have to give up?

Some have suggested cutting the defence budget. Others say we should under-price the land for public housing. But will these moves have serious repercussions on stability and the security for our children? Given the limited space in Singapore, will artificially under-pricing land encourage excessive consumption and reduce what future generations can enjoy?

As a responsible Government, we must look after Singapore's long-term interests and guard against easy and populist suggestions. If we adopt short-sighted measures, we undermine the fundamentals that have brought us stability, prosperity and progress. This is what we really cannot afford.

The writer is the Minister for National Development.

Source: www.todayonline.com

Recently, the Housing and Development Board was conferred the UN-Habitat Scroll of Honour Award - the most prestigious human settlements award in the world. In recognising Singapore's achievement, the UN-Habitat Chief of Information Services said: "It's really quite impressive for a country to provide adequate shelter and home ownership for so many."

Ask most housing experts and observers, and they will say that HDB flats remain within reach of the majority of Singaporeans. After all, HDB builds and sells flats at heavily-subsidised prices to ensure affordability. This has made it possible for an average of 15,000 young couples every year to join the ranks of homeowners.

Most of these couples buying new flats use just 20 to 25 per cent of their monthly income to pay for their flats. With their CPF contributions, few have to pay any cash for their mortgage payments. In total, more than 80 per cent of Singaporeans live in 900,000 HDB flats today. Yet, people still worry that HDB flats are not affordable. Why are there such sentiments?

Indeed, housing affordability - whether a flat is within financial reach - is not a straightforward issue. Different people have different notions of what is "within reach". Some argue that a 30-year housing loan is too long for a flat to be considered affordable. Others say that flat prices are much higher compared to their parents' time. The debate is further complicated by rising aspirations - whether housing is "within reach" also depends on what we aspire towards.

For a meaningful discussion on affordability, we need objective and commonly accepted yardsticks. So, what are the measures of affordability? How does HDB ensure that flats remain within reach of Singaporeans?



MEASURES TO ENSURE AFFORDABILITY

Focus on first-timers. To ensure that first-time buyers have access to affordable housing, we do several things. First, HDB prices its new flats below market value, taking into account the income of homebuyers. Hence, first-timers enjoy a substantial subsidy when they buy new flats from HDB.

Next, for first-timers who cannot wait for a new flat or wish to buy a specific flat in a specific location, HDB provides a CPF Housing Grant of $30,000 (or $40,000 if they stay near their parents) to buy a resale flat. Beyond that, new and resale flat buyers can apply for a concessionary loan. For a $200,000 loan over 30 years, the interest subsidy amounts to about $30,000.

Help according to income. For households earning $5,000 or less a month, an Additional CPF Housing Grant of up to $40,000 is provided for their purchase of new or resale flats. In other words, a family earning $1,500 can get as much as $80,000 in housing grants. Families earning more, between $8,000 and $10,000, can now buy new flats under the Design, Build and Sell Scheme (DBSS), in addition to Executive Condominiums, and enjoy a CPF Housing Grant of $30,000.



MEASURES OF AFFORDABILITY

I have been discussing affordability in layman's terms. Let me now get into the technical stuff. In particular, how do experts determine housing affordability? There are a few generally accepted benchmarks.

Income affordability. One is the housing price-to-income ratio (or HPI), which compares median house price to annual household income.

In a Straits Times article in February 2010, two NUS professors, Tu Yong and Yu Shi Ming, noted that Singapore's HPI for resale flats in non-mature estates is 5.8, compared to Hong Kong's 19.8 and London's 7.1. That means Singaporeans generally need 5.8 times of their annual household income to buy a resale flat in non-mature estates, whereas a Hong Kong resident needs more than three times that amount.

If we take Department of Statistics 2009 data on the median income of younger households - those aged between 25 and 35 years old - who are likely to be first-timers, their HPI is even lower, at 4.5 for resale flats and 3.8 for new flats. This is because they have higher incomes than average households.

Financing affordability. While the HPI is relatively easy to understand, it does not consider factors like loan availability and financing costs, which are important for many deciding to buy a flat. Therefore, another widely-accepted measure is the debt-service-ratio (DSR), which looks at the proportion of the monthly income used to pay mortgages.

The DSR for new HDB flats in non-mature estates, based on an industry norm of a 30-year loan, averaged 23 per cent this year. This is well within the 30-35 per cent international benchmark for affordable expenditure on housing.

Depending on flat type, the DSR ranged from 11 per cent for standard flats to 29 per cent for premium projects like the Punggol Waterway Terraces, which cater to higher income households.

We must also remember that CPF savings can be used for the initial downpayment and monthly instalments. Hence, more than 80 per cent of new flat buyers pay for their housing loans entirely out of CPF, without having to touch their take-home pay.

Whichever objective measure we choose, it is clear that there are enough HDB flats within reach of today's homebuyers. They range from smaller, no-frills flats in non-mature estates to premium flats in mature estates, catering for different aspirations and budgets (see table above). I hope buyers choose carefully, taking into account their budgets and aspirations. Housing affordability is decided not just by the options offered by HDB but also the choices of homebuyers.


BALANCING HOMEBUYER AND TAXPAYER INTERESTS

I can understand the anxiety among young couples wanting to buy a flat of their choice, within their budget, and as soon as possible. HDB has ramped up supply significantly and recently introduced more measures to temper excessive exuberance in the market and to moderate prices.

HDB also regularly reviews its subsidies to ensure affordability. But I must caution that there are limits to how much we can increase subsidies, without compromising other interests.

In other words, we must also consider affordability from a national standpoint. If we increase housing subsidies, what would we have to give up? The quality of education for our children? Healthcare services for our parents? Or do we impose a higher tax burden on Singaporeans?

There are no easy answers. Ultimately, we need to balance the interests of affordability for homebuyers and the burden on taxpayers.

by Mah Bow Tan
05:55 AM Nov 12, 2010


The writer is the

Minister for National Development.


Source: www.todayonline.com