Tuesday, November 16, 2010

Affordability of HDB flats - A Response to Minister Mah Bow Tan's article

[This following entry was first posted at the Reform Party blog: http://votingrp.wordpress.com/ on 14 Nov 2010]

Two measures of affordability were offered by Minister Mah Bow Tan in his article “Are HDB flats affordable?” which appeared in Today Online on 12 Nov 2010. The first was the housing price-to-income ratio (or HPI), which compares median house price to annual household income, and the second was the debt-service-ratio (DSR), which looks at the proportion of the monthly income used to pay mortgages. Let us first consider the HPI. From 1990 to 2009, median household income increased from $2,296 to $4,850[1] – an increase of 111%. Over the same period, resale flat prices increased by 342%.[2] The affordability of HDB flats has certainly deteriorated very significantly over the past 19 years. It now takes a median income household more than double the time to pay for the flat.

Next, we consider the suitability of the debt-service-ratio (DSR) as a measure of affordability for national planning purposes. There are several shortcomings, the most serious being a pre-qualified sample - the DSR is calculated based on existing home owners. These are people who can afford to buy the flat. Those who cannot afford to buy a HDB flat would not have bought one and hence would not be captured by the DSR. The loan application process would also have weeded out those whose DSR would exceed the “30-35 per cent international benchmark for affordable expenditure on housing.” Under such circumstances, it would be quite difficult for an examination of the DSR to turn out with an “unaffordable” rating, no matter what the price level. For example, if good-class bungalow owners use only 15% of their income to service their mortgages, can we conclude that good-class bungalows are very affordable?

The DSR is a reasonable measure to assess if a particular person/family can afford to buy a particular property, but to use that as a gauge of affordability for the general population leaves much to be desired.

While it is true that increasing subsidies for HDB flats require some reallocation of resources, it is interesting to note that the first 3 options that occurred to the Minister for National Development are: (1) cut education budget; (2) cut healthcare budget; and (3) increase taxes. The Reform Party is happy to offer some other options for consideration: (1) cut defence budget; (2) reduce the payments made by HDB to SLA for the purchase of land to build HDB flats – to the best of our knowledge, these payments go eventually into the reserves which is not used to fund any public sector services or projects; and (3) cut ministerial salaries.

Apart from increasing subsidies, prices of HDB flats can be managed by

(1) a better management of the supply:

a) Adjusting the supply based on factors like number of marriages and immigration
b) Setting an acceptable band for resale prices relative to median income (for example, 50 times the median income plus/minus 20%), then increase supply if prices go above the band and decrease supply if prices go below. This is similar to the way MAS manages the Singapore dollar exchange rates.
c) Cutting down the waiting time for new flats by building in advance, not Built-To-Order
d) Manage any temporary excess/unsold new flats by renting them out

(2) Mortgage regulations that take into account specific factors in Singapore like the existence/non-existence of a pensions system or social safety nets. This is to pre-empt situations like retirees with no/little savings despite our CPF system because all their CPF savings went to pay for their flat.

In addition to a prudent but active management of HDB flat prices, affordability can also be enhanced by targeting specific trouble spots like upfront payment for first-time home buyers. This can be done by adjusting the allocation of subsidies.

If elected to government, the Reform Party, being keenly aware of the limitations of relying solely on a few quantifiable measurements, will strengthen our decision making process by listening more intently to the voices of the people, and qualifying our national policies accordingly.

[1] Department of Statistics – Top-line Indicators
[2] Resale price index 1990(4Q)-34.1, 2009(4Q)-150.8, source: HDB


  1. "reduce the payments made by HDB to SLA for the purchase of land to build HDB flats"

    The current BTO system prices flats according to resale comparable. If BTO were made very much cheaper than current resale market prices as a result of cheap land, the resale market will crash wouldnt it?

  2. I came across this FB post by MBT that HDB makes a $1billion loss a year - that's right, $1B from selling the flats below cost. Could you apply your insights to his comments? http://www.facebook.com/mahbowtan.tampinesgrc/posts/198783410160344