Friday, March 26, 2010

Property Prices

If HDB flats are affordable because the average HDB owners pay less than 30% of their household income as mortgage payments for their homes, then bungalows in Singapore are also affordable because the average bungalow owners pay less than 30% of their household income to pay for their homes.

No, I do not have the statistics on what % of their income bungalow owners pay in mortgages, I was merely trying to illustrate the invalidity of the above argument.

The govt has immense influence over the property price levels in Singapore. It claims it cannot control resale flat prices. That is only true if we are looking at individual transactions. But the general price level of resale flats is largely determined by new HDB flat prices. New HDB flat prices form the base for all property prices. So how does HDB price its new flats? It is based on resale prices. Exactly how, I have not been able to discover. So I shall assume that here that new flat prices is based on resale prices of similar flats in similar locations minus a fixed quantum or a percentage discount.

But what if this discount is less than the resale premium that the market is willing to pay? For example, if buyers are willing to pay $80k more for resale flats because they can get it immediately and have greater choice over the location , floor level etc, but the discount factor for pricing new flats is say $50k, then this would cause a price spiral.

Period 1: new flat prices $200k, so resale prices $280k
Period 2: new flat prices adjusted to $(280-50)k = $230k, so resale prices climbed up to $230 + 80k = $310k,
I suppose this will carry on until the resale premium shrinks to the level of HDB's discount factor before some form is equilibrium is atttained. But it is the market that adjusts to HDB, not the other way round.

Ideally, home prices should move in tandem with wage levels. Unfortunately, property prices are subject to many other forces and do not always track wage movements. But since the govt has absolute control over new flat prices, it should price HDB flats based on wage levels rather than resale prices, thereby providing greater stability to price levels. For example, 3 room flats could track the 30th percentile wage level, 4 room flats the median, etc. And the income ceilings for each type of flat could also track a benchmark wage level.

If we continue to allow property prices to outstrip wage growth, we will see our future generations having to fork out a larger and larger proportion of their income for housing, and life will get progressively harder.


  1. The suggestion to tag prices of HDB flat prices to wage is the best I have come across so far!

    A provoking article with a very clear and reasonable suggestion!

    Keep up the good work Hazel!

  2. Your idea to peg new HDB flat prices to wage is interesting. It may lead to increased/unmatched demand to HDB in housing boom and probably unmatched supply (i.e. no supply) in housing recession. And, it may lead to HDB over-built during boom times and HDB under-built during recession times, and thereby amplify the boom-burst cycle.[a hypothesis]

    Why did I form the hypothesis? I assume that the resale prices depends on the housing stock (i.e. supply) and housing demand. Over-building leads to lower prices in the future; under-building leads to increased prices in the future.

    I perceive that the current high HDB price can be explain from two perspectives: 1) rising demand due to increased wages and increased demand from private properties (or down-graders from private property). 2) limited supply due to limited HDB housing stock.

    I do not agree with your assumption that resale flat prices depend (mainly) on new HDB prices. The resale prices should depend more on the demand and supply forces.

    Now I do not have a short-term solution for the present HDB prices. A long-term solution -- build more houses -- has already undertaken. Your solution is interesting and probably may lead to lowered prices in the short run. However, your solution may backfire in the long run.

    Suggestions should consider both short term and long term outcome. But people seldom consider the long term. In the long term, there is seldom 'free' lunches (i.e. better solution with no downside). Think Greek sovereign crisis, US budget deficit and their health expenditure ...

  3. Property Prices increased in Hazel Poa..According to an informal survey of local realtors, property values have increased big was nice reading your this post and did get good information from here. thanks for sharing and keep posting..