Making resale HDB flats more affordable in Singapore

Pricey Housing Development Board (HDB) resale flats seem to be a hot topic among Singaporeans these days. Recent news that some HDB flats were sold for more than one million dollars is further fuelling unease of first time HDB buyers as well as upgraders, as their dream flats appear to be moving further and further from their financial reach.

In my line of work, we often look at property trends and propose solutions. Our clientele typically consists homebuyers looking for value-for-money properties. However, using our understanding of the Singapore property market, we thought that it would be interesting to share our views on how we think public housing can be more affordable.

Understanding the pricing mechanism

If you have ever bought a resale HDB flat and/or a resale private property before, you may realise that the pricing mechanism for the 2 assets are actually quite different.

In principle, valuation is supposed to be a third party’s (i.e. bank or financier) independent assessment on the asset price at prevailing market conditions. If applied effectively, there should not be a need for an additional cash component over and above the valuation.

The private property market by-and-large functions in this manner and most resale private properties are transacted close to valuation price.

In comparison, prices for HDB resale flats are made up of 2 components – a valuation and a Cash-Over-Valuation (COV) component. In a resale flat’s case, the valuation is more reflective of what HDB or banks are prepared to lend the buyer for the purchase of the asset and it is independent of the seller’s asking price.

In a depressed resale HDB market, like what was experienced during the mid 2000s, resale flat owners who were anxious to sell their units would have asked for prices on par or less than valuation. Conversely, in an exuberant market, flat owners would ask for higher COV, as they believe that buyers would be willing to pay a high price for their flats.

The government’s dilemma

When it comes to managing the property market, governments around the world face a Catch 22 situation. If they force a property market crash, existing property owners would be unhappy, as the drop in asset value would affect them financially. On the other hand, if property prices were to increase unabatedly, new homeowners and upgraders would be unhappy, as they may not be able to afford a home.

The ideal scenario would be for prices to grow in a sustainable rate with as little volatility as possible. In this way, owners can still see moderate price appreciation while buyers would still find properties affordable. While I am not privy to the formula behind resale HDB flat valuation, I reckon that HDB valuation is likely to be more sustainable as compared to the COV component.

From anecdotal evidence, the 2 most recent million-dollar deals saw the buyers paying high COV (more than $150,000) for the units. Hence, if we manage to rein in COV, we could potentially arrest unsustainable HDB prices as well.

While there are many ways to managing COV, I opine that one good way would be to implement a COV tax paid by the buyer. The COV tax would only kick in if a buyer pays above the resale flat’s valuation.

There are several benefits in having such a tax. Firstly, it does not significantly deviate from how business is currently done and buyers as well as sellers can still transact with a COV component. However, buyers would now have to think twice before agreeing to pay high COV demanded by the seller, that in turn may moderate property prices and bring it closer to the more sustainable valuation price.

Secondly, this does not penalise the sellers who want to sell their units on par with valuation, instead such a tax could potentially discourage cash rich individuals from entering into the public housing market and paying a premium.

Such a tax could potentially channel some of these cash rich buyers to the EC or private residential market instead. Thirdly, this could be a way to distribute wealth between the cash rich buyers and first time homeowners as the COV tax collected could be used to give first time HDB buyers a larger grant.

I concede that this is a very superficial discussion of a very complex issue and many issues have not been addressed. Moreover, the government’s current strategy of launching wave after wave of new BTOs has so far been quite effective in addressing some concerns. The few million-dollar HDB flats that were recently reported in the media could also be anomalies and should not be a cause of concern.

However, with a third round of quantitative easing in the United States, the global financial systems would be flushed with cash and it is plausible that high COVs and million-dollar resale flats may become the new norm.

With so much liquidity fuelling resale HDB prices, only time will tell if the building of more BTO flats is sufficient to arrest the price increase. Nonetheless, Albert Einstein once said, “insanity is doing the same thing over and over again and hoping for different results.”

If resale HDB prices remain insanely high, a different approach would definitely be needed if we want to see different results.