Thursday, May 26, 2011

Create cheaper class of flats

Peg price to three times median household income but with shorter lease, stricter conditions
May 26, 2011

Letter from Eric Tan Heng Chong

As the new Cabinet gets down to work pledging a fresh look at existing public polices and an innovative approach to policy-making, I would like to offer a proposal to address the Housing and Development Board (HDB) affordability issue.

The HDB should go back to its roots of focusing solely on providing affordable housing for the majority of Singaporeans, instead of the other current objective of asset enhancement of the flats as a financial asset for investment or retirement.

Firstly, we need to define affordability. The Government's definition of affordability is in terms of 30-year loans; a better definition would be in terms of a price that is pegged to three times the annual median household income. This suggests that a housing loan can be paid off within a 10- to 15-year time frame.

For example, a family with a median household income of about S$3,800 per month or S$46,000 per year would be able to afford a four-room apartment if it is priced at $137,000 (three times annual household income).

At this price, they can take a 15-year loan to pay for the flat and the family will be able to save for retirement, children's education and future medical expenses for the remaining 15 years of their working life. Currently, the average four-room HDB flat is priced at five to six times annual household income, which is in excess of about S$265,000, hence the need for 30-year mortgages.

To solve this problem, the HDB could create a new segment of flats similar to what we have done in the car market, where we have normal and off-peak cars.

For this new segment, the HDB could price its flats at three times the median annual household income of applicants but subject these flats to more stringent restrictions to reflect the price difference from normal flats.

These restrictions, which would be in additional to the conditions that apply to normal flats, could include the following: Owners of such flats cannot own private housing at all; no permanent resident can own these flats; no cash-over-valuation is allowed; and a shorter lease of, for example, 60 years.

In addition, owners could be allowed to sell the flat to upgrade but the prices would be set by the HDB, which would index the price increases to median income increases, to ensure the three-times ratio is maintained. The prices would go up if the median household income goes up.

[This measure to restrict the owner to selling the flat at the same price peg at the time of sale less wear and tear and other disamenities (if the owner had not taken care of the building) or with additional value that the seller may have invested is sufficient. So the owner can only sell it to another low income  applicant (pre-approved by HDB), just like a off-peak car must be sold as an off-peak car. No need shorter lease.]

This list of conditions can be expanded further to make it clear that this segment of flats is subsidised by the state for Singaporeans to live in and not intended as a financial investment for their retirement.

In short, Singaporeans would have the choice of buying a HDB flat at either a higher price based on the existing terms; or a lower price subject to more restrictive terms. This may not be the ideal solution but at least it helps to address affordability issues.


[My concern is that these "subsidised flats" will become ghettoes. Because the owner can never expect to profit from property appreciation, he would not have the incentive to maintain the value of the flat. It would become run-down despite the best efforts of HDB and town councils.]

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