HDB land cost issue still vexes

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#1
Interesting....

Apr 26, 2011
commentary
HDB land cost issue still vexes

Thirty years on, confusion still reigns on how HDB land is valued
By Jessica Cheam

THE heated debate between the Workers' Party (WP) and the People's Action Party (PAP) on prices of new Housing Board (HDB) flats is one that goes back 30 years.

In the early 1980s, opposition leader Chiam See Tong claimed that HDB was making a profit on the sale of its new flats. Then National Development Minister Teh Cheang Wan challenged him: Build four blocks of HDB flats yourself and see if HDB is making a profit. Mr Chiam did not take up the challenge eventually, saying some conditions were not met.

This time round, the debate began when the WP manifesto released on April 9 suggested lowering new HDB flat prices by pegging them to median incomes.

National Development Minister Mah Bow Tan pointed out that new flats are already very affordable, with eight in 10 couples able to service their home loans with less than 25 per cent of their salaries - in effect, their Central Provident Fund (CPF) contributions. He warned that lowering new flat prices will depress the value of nearly one million completed HDB flats. It would also mean HDB paying lower prices for land to build its flats, which he pointed out would amount to an 'illegal raid' on the reserves.

Amidst the war of words, it is easy to miss the real issue, which is about how the Government prices HDB flats.

Some opposition parties and Singaporeans want the Government to price HDB flats according to what the National Solidarity Party (NSP) calls a 'cost-plus' basis: peg the price of a new flat to the cost of building it, with a slight mark-up.

As with all property projects, land and construction make up the bulk of costs for HDB flats. Other associated architectural and marketing costs account for about 10 per cent of total cost.

What do we know of these costs?

HDB last month awarded a contractor $102.9 million to build 741 standard flats in Bukit Panjang, including amenities like a multistorey carpark, commercial facilities and a precinct pavilion. That is $139,000 in construction cost per flat.

What about land to build the flats?

It is hard to know how much a plot of land for a HDB precinct costs, unless the Chief Valuer discloses it.

But an estimate can be worked out, based on the price of a new average four-roomer of about $275,000. Assume construction cost of $139,000. Assume other costs take up another $30,000 or just over 10 per cent. The residual land cost would then be around $106,000, nearly 40 per cent of the total price of a new HDB flat. This is a very rough estimate based on many assumptions. But it helps us understand the stakes involved.

Knowing what goes into the cost of new flats, the next question is: how do you lower costs?

Construction costs are already competitive, as they are determined by tenders. There is also a limit as to how much professional and other costs can be cut.

Why not lower land prices then? After all, according to WP chief Low Thia Khiang, the Government can simply charge HDB a lower land cost - it's just 'a question of taking your money from the left pocket and putting in the right pocket'.

This argument sounds reasonable, but in fact it is not so simple in Singapore.

Before 1985, HDB acquired and paid for its own land to develop. In 1985, HDB made a major change to its accounting system which resulted in the board returning all undeveloped land it was holding to the Singapore Land Authority (SLA), which manages all state land. HDB then started its practice of buying state land at market rates, which continues today. The rationale given was that it made transparent the value of government subsidies for public housing.

How does SLA then determine how much HDB should pay to build new flats? Why not use a cost-plus model?

In 1988, Mr S. Dhanabalan, then National Development Minister, explained why not. Pricing HDB flats according to its land cost - or how much the Government paid to acquire the land - was 'absurd' as what the flat buyer pays will 'depend on the luck of the draw'.

Indeed, Minister Mentor Lee Kuan Yew revealed yesterday that the Government had bought up all vacant land at rock bottom prices in 1965, after Singapore separated from Malaysia, when investors feared the new state would not survive. The Government did so to pursue its vision of Singapore becoming a property-owning democracy.

Mr Dhanabalan explained then why pricing by land cost was absurd: If a flat was built on former government land, the flat buyer would pay virtually zero land cost. If it was on land acquired from private owners or on reclaimed land, the buyer would pay much more. Prices of new HDB flats would fluctuate widely and from area to area and from year to year.

The same logic applies today.

As it is not practical to value land based on the cost of acquiring it, the Chief Valuer, like other private sector valuers here and in other countries, uses two time-tested methods.

First, he looks at successful tender prices of state land located within HDB estates sold to the private sector. These prices serve as benchmarks, and values are adjusted depending on location, plot size, land tenure and market conditions, among other things. This is called market-based pricing.

Next, he uses the residual method. He starts out by looking at the resale prices of flats in the vicinity. He works out the expected selling prices of flats to be built on a certain plot, and works backwards to deduct the various costs of building them, such as construction, financing and professional fees. He factors in a reasonable profit margin for the developers' risk. The figure left is called the residual value for the land.

So if the Chief Valuer estimates a plot of land for an HDB precinct at $100 million, HDB pays that amount to the SLA. Land revenue goes into the reserves for future needs. Each year, HDB's revenue from selling new flats is not enough to cover all its costs, and its home ownership programme incurs an annual deficit of about $1 billion which is covered by the Government.

If HDB is offered the land at a discount so it can lower the flats' selling price, it may pay, say, $50 million for a plot valued at $100 million. That translates to $50 million less in the reserves, which may be seen as 'raiding' the reserves.

To sum up: If land cost is reduced, new HDB flats can indeed be cheaper. Young couples and new flat-owners would benefit. But there is a cost to others. Land revenue from sale of government land for public housing will fall. There will also be an impact on prices of completed flats.

The WP and NSP think Singaporeans want this, but the PAP does not agree.

But one thing is sure: the price of HDB flats is one issue that will not go away easily, even after this election.

jcheam@sph.com.sg

My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
(26-04-2011, 06:13 AM)Musicwhiz Wrote: Mr Dhanabalan explained then why pricing by land cost was absurd: If a flat was built on former government land, the flat buyer would pay virtually zero land cost. If it was on land acquired from private owners or on reclaimed land, the buyer would pay much more. Prices of new HDB flats would fluctuate widely and from area to area and from year to year.

i have not heard of public housing that is not built on government land. nor have i heard of government acquiring private land to develop public housing. neither do i think this will happen in the foreseeable future. the current SERS programme replaces old flats with higher density ones, allowing public housing to be redeveloped within the confines of government land. even in the rare and unlikely ocassion that it does acquire a private land, is it too much for the reserves to be drawn down to foot the bill? i don't understand why the state is so unwilling to spend. what are the reserves for, if not for the eventual benefit of citizens? or is it for select individuals to pursue power and vainity?

this argument is too filmsy and appears to be aimed at complicating and therefore, sidestepping the issue.
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#3
Which brings to mind with all this hard saving and belt tightening, what are the exact earnings and losses of government "investment" arms? Perhaps the real earnings after facToring inflation can be used to offset the costs?
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#4
Reading through the article, it does seems that the HDB flat prices are volatile in that they are based on what is happening in the market. In long economy growth periods, when prices shoot up like they have now, citizens who want to own a flat and do not belong to the high income would suffer however citizen & PR who do earn a high income would be able to afford it and even use it as a form of investment.

This was clearly demonstrated in the past couple of years, people who bought and sold their flats and made a handsome profit and at the same time increase the price if the flats.

There are so many other issues with this, such as citizens buying flats they cannot afford and end up losing them later due to the inability to pay for them.

The common response to that is buy something affordable, but what is affordable? that is so subjective as we don't take into considerations things like job cuts, salary reductions, illness etc....

People start throwing numbers such as 24% of salary etc..... but what if a person is no longer able to earn that salary any more.....then would the person be still be able to pay on the 24% ?

The policy is not based on looking at how to secure a home for the citizen and the person does not have to worry about housing when things happen beyond their control, but more so like a business .

Empathy is what is missing in the policies and the views.....

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#5
Actually that's where income protection insurances comes into play....

But at this day and age its more of what you want than what is affordable. You want people to have more kids when the best they can afford is a 3 "room" flat? Don't think people my generation are willing to compromise our standard of living to have more kids.
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#6
What rubbish is this? I have nothing but i force u to pay me 100mil because it is worth 100mil now. The reserve did not lose any money in the first place...
The thing about karma, It always comes around and bite you when you least expected.
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#7
(26-04-2011, 12:21 PM)WolfT Wrote: What rubbish is this? I have nothing but i force u to pay me 100mil because it is worth 100mil now. The reserve did not lose any money in the first place...

They need to top up the losses from Temasek and GIC la...

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#8
(26-04-2011, 12:21 PM)WolfT Wrote: What rubbish is this? I have nothing but i force u to pay me 100mil because it is worth 100mil now. The reserve did not lose any money in the first place...

Theoretically, the government is acting on behalf of all the citizens. So, by pricing the land correctly, the government will not benefit a small group of citizens at the expense of all the citizens.
The land and reserve belongs to every citizen and it is the responsibility of the government to do its due diligence.
Think Pinnacle Duxton, if the land price is taken out of the equation, the owners are in for a windfall(anyway, currently they are still in for a windfall at a smaller amount...)

There is nothing wrong with the policy. However, the execution of the policy is less than desired currently.

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#9
(26-04-2011, 09:48 AM)flinger Wrote: Empathy is what is missing in the policies and the views.....

You said it perfectly! I think we have to many MPs who are high in IQ but rather low in EQ.
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#10
(26-04-2011, 01:00 PM)yeokiwi Wrote:
(26-04-2011, 12:21 PM)WolfT Wrote: What rubbish is this? I have nothing but i force u to pay me 100mil because it is worth 100mil now. The reserve did not lose any money in the first place...

Theoretically, the government is acting on behalf of all the citizens. So, by pricing the land correctly, the government will not benefit a small group of citizens at the expense of all the citizens.
The land and reserve belongs to every citizen and it is the responsibility of the government to do its due diligence.
Think Pinnacle Duxton, if the land price is taken out of the equation, the owners are in for a windfall(anyway, currently they are still in for a windfall at a smaller amount...)

There is nothing wrong with the policy. However, the execution of the policy is less than desired currently.

indeed, it should be the government's aim to act on behalf of all citizen, presumably for the benefit of all of them. if the land were to be sold to private buyers, i will agree that it should not be sold cheaper than its market value. but since we're talking about land for public consumption -- and everybody is able to participate because it is a designated public good -- why can't the land be priced lower for everyone who is a buyer of public housing? nobody will be shortchanged in the process.

a fixed discount to the market price of land for public housing can be used so that the people who buy flats in sengkang will not be shortchanged if he didn't manage to buy one at duxton.

there is also the question of whether valuation policy is sensible. the current valuation policy allows valuation and prices to chase each other endlessly, exposing public housing land prices to private market forces, and vice versa. if this isn't the case and they didn't change the policy during the 80s, we wouldn't have this problem of 'affordable housing' today.
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