Mah Bow Tan explanation on BTO system

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#1
[/u]Housing supply: Allocating scarce resources
by Mah Bow Tan 05:55 AM Oct 01, 2010The property market has a history of repeating itself. I guess that is why they call it the property cycle. There is a huge clamour for flats today, and we can't seem to build flats fast enough to satisfy demand. Yet, when I became Minister for National Development in 1999, one of my first challenges was to deal with an overhang of more than 31,000 unsold flats.

Almost every year, until 2006, Members of Parliament expressed their concerns in Parliament about the unsold stock, and asked what steps the Housing and Development Board (HDB) was taking to clear it. The Auditor-General's Office, too, urged the HDB to reduce its unsold stock, highlighting the high cost of holding vacant flats. The HDB had to come up with all sorts of ways to clear the flats - converting five-room and executive flats into smaller two- and three-room ones, organising roadshows, implementing walk-in selection of the ready flats, and engaging managing agents to rent out unsold flats temporarily.

One may argue that the Singapore of today is very different. But the huge oversupply experience not so long ago taught us many valuable lessons - that oversupply is as bad as undersupply, and that we need to manage the building programme carefully, including allocating new flats in a fair, cost-effective and efficient way.

There are essentially three ways to allocate a scarce resource like housing: By price (that is, highest bidder gets it), by queue (that is, first-come first-served), or by ballot (that is, draw lots). Allocating by price is basically the way resale flats are bought and sold in the free market. The buyer who offers the highest price gets the flat.

While this is most efficient, the drawback is that prices can be volatile and the lower income may lose out. So, for new flats, the HDB has adopted either a queue system or ballot system.



QUEUE SYSTEM

In the past, the HDB allocated flats on a first-come first-served basis. The HDB built flats assuming that everyone in the queue was a serious buyer who would book a flat eventually when his turn came. This was a reasonable assumption in earlier years, as there was a great housing shortage. The resale market was relatively undeveloped and the HDB was the predominant source of housing.

However, as we progressed from a nation of home-seekers to home-owners, the situation changed. Demand became more volatile. Many, even those with existing roofs over their heads, could now easily join or exit the queue. At the height of the property boom in the mid-90s, there were as many as 150,000 buyers in the queue, and the wait for a flat was as long as seven years. However, when the Asian Financial Crisis struck in 1997, the queue vanished, literally overnight. The HDB ended up with 31,000 unsold flats, which took more than five years to clear.

Because of the unintended oversupply, home buyers could walk in to buy ready flats in the early 2000s. However, home owners paid a heavy price, with flat prices staying depressed. Some who bought flats just before the crisis ended up with negative equity and even lost their homes and hard-earned savings. The many unsold flats represented a waste of taxpayers' money. The holding cost incurred was money that could have been spent on healthcare, education, or other areas.



BUILD-TO-ORDER (BTO) SYSTEM

In 2002, the HDB switched to the BTO system to better respond to demand that was becoming more sentiment-driven. Under this system, buyers ballot for the chance to select a flat. Certain groups, such as first-timers and those applying to live near their parents, are given extra tickets in the ballot to increase their chances of getting a flat. Ninety-nine per cent of the flat supply is set aside for first-timers. Buyers have to pay a downpayment to secure a booking. Each booking represents a committed buyer. The HDB proceeds to build when the majority of flats are booked. Flats are ready for occupation within three years of booking. Next year, this will be reduced to two-and-a-half years for a typical project. Couples who wish to shorten the waiting time further can apply under the Fiance-Fiancee scheme.

With better matching of supply and demand, the BTO system prevents a major supply overhang. It also allows the HDB to retain a small rolling buffer of a few thousand balance flats, which minimises holding cost to taxpayers. When demand is high, as it is now, the number of BTO projects is stepped up. Today, over nine in 10 first-timers get to select new flats within three tries.

Nonetheless, there may be a small number who are unlucky in balloting exercises. I understand their frustration. I have therefore asked the HDB to look into increasing the chances further for those with multiple unsuccessful applications.

However, many of the cases I see are not as "unlucky" as they claim to be. Recently, a Mr Ng wrote to me saying that he had balloted unsuccessfully more than six times. "Unlucky couples like me will never ever have a chance to purchase a flat under the BTO system", he said. When I asked the HDB to check, I was told that Mr Ng had in fact been given four chances to select a flat but did not do so. When this was highlighted to him, Mr Ng acknowledged that he had not selected "due to unavailability of suitable units". When I probed further, the HDB told me that on most occasions, there were many units available for him to choose from.

While Mr Ng has every right not to select and wait for his ideal flat, I hope he understands that the HDB cannot accede to his appeal to be given priority in future BTO exercises. Indeed, to be fair to those who genuinely need a flat, the HDB has since 2008 removed for one year, the first-timer status of those who have rejected two chances to book a flat.



BALANCING DIFFERENT INTERESTS

Each method of allocating flats has its pros and cons, and may be right for different circumstances. No one system will please everybody. The BTO system is by no means perfect but it is the most appropriate system for the moment, balancing the need for fairness, prudence and efficiency. We will continue to monitor and tweak it as we go along.

We remain committed to our mission of supplying enough flats, of good quality and at affordable prices, as quickly as possible to home buyers. But, we must do so in a way that does not create problems of oversupply for home owners and taxpayers down the road. We must remember the lessons of the past even as we address the housing needs of today.



The writer is the Minister for National Development.
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#2
MBT is the biggest money-burner for singaporeans/PRs who lives in singapore and wants their own hdb flats...

HDB flats is living in as a home.

If want invest property, pls go to privates ones! Big Grin
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#3
Pricing flats according to their value by Mah Bow Tan 05:55 AM Oct 29, 2010

The prices of HDB flats are always a subject of much public interest. In my conversations with young couples, a common question I hear is: "Why are HDB flats so expensive? Prices today seem much higher than what our parents paid in the 1970s and 1980s!"

I can understand these concerns, especially from those looking to buy their first homes. Yes, flat prices have increased over the years. But, in this article, I will explain why this has happened and, more importantly, why rising flat prices, if supported by economic fundamentals, is in the overall interest of everyone - homeowners and homebuyers.



PROVIDING A HOME AND ASSET

Home ownership versus rental: Governing is about making choices and tradeoffs. Which policy will bring greater benefit to the people? What are the implications and costs to taxpayers? In public housing, governments have to make a fundamental choice between home ownership and rental. Most countries have chosen the rental model. Tenants pay subsidised rents, but own nothing.

Singapore decided early on to promote home ownership. We subsidise public housing so that each family can own, rather than rent, its home. The flat becomes a store of value that can appreciate over time as the country develops. We are the only country in the world that has made affordable home ownership a major pillar of its public housing policy.



Resale at market versus cost - Unlocking value: Having chosen home ownership, we must then allow the true value of the flats to be recognised and realised.

Again, we have a choice: Do we require the flat to be sold back to HDB at a fixed price, or do we allow it to be sold on the open market? We have chosen the latter. We let the market determine prices but keep a close watch to temper excessive exuberance, where necessary.

Today, every HDB flat has an open market value which its owner can realise, after staying in it for a minimum period. The values of HDB flats today reflect Singapore's growth and prosperity since the 1970s and 1980s.

While owners may be happy that the value of their flats has gone up, what about first-time buyers? How do we fulfil our commitment to provide an affordable home for them? We do so in two ways: One, by giving them housing grants to buy resale flats; and two, by building new flats which are sold at subsidised prices - within the reach of various income groups.

Hundreds of millions are spent each year to subsidise first-time buyers. That is why the home ownership rate among young Singaporeans is so high, unlike many other cities in the world.



ENSURING FAIR PRICING OF NEW FLATS

For resale flats, we have allowed the market to determine their prices based on value. How do we set the prices for new flats? Broadly, there are two options: Price according to market value or price according to cost.



Fairness for all buyers: In the early years, HDB adopted a zonal pricing system, where the price of each new flat was fixed according to geographical zones. Pricing largely took into account the cost incurred in building the flats and the same price was charged for a given flat type within the zone, regardless of its actual location and attributes. A flat on the 10th floor was priced exactly the same as one on the second floor. Back then, there was practically no open resale market.

However, as we allowed the resale market to develop in the 1980s, buyers showed that they clearly valued different flats differently, depending on factors like location, view, and design.

They were willing to pay much more for a top-floor flat commanding the best view, compared to a lower-floor one facing the bin centre. HDB could no longer price a top-floor unit the same as one lower down.

To do so would be most unfair to the lower floor buyers. Therefore, HDB started moving towards market-based pricing.

New flats are now priced based on what professional valuers assess similar flats would fetch in the open market, but discounted with a substantial subsidy. This is fairer for two reasons. First, all buyers would get the same public subsidy that they can encash, if the flat were sold in the resale market. Second, buyers would pay for what they get, in terms of location, direction, view, etc.



Fairness across generations: Some have argued that land specifically should not be valued at market levels, since some plots had been compulsorily acquired in the past at low cost.

If we follow this logic, we should price a flat built on reclaimed land in, say, Punggol much higher than a flat in Tanjong Pagar built on land acquired by the state. Surely, this is not fair for the Punggol flat buyer, when the Tanjong Pagar flat clearly has a higher resale value? More importantly, we need to recognise the true market value of land, so that the precious limited land we have is used prudently and optimally. If land is undervalued, we will use up more land now at the expense of future generations.



Affordability to buyers: If market-based pricing is fairer, why do some people argue for cost-based pricing? Perhaps they believe that cost-based pricing means cheaper flats. But this is not true. To ensure affordability, HDB gives extensive subsidies below market value. As a result, market-based prices can be below cost. For example, for Punggol Spectra and Fernvale Crest - two recent Build-To-Order (BTO) projects - the average development cost per flat was $220,000 to $240,000, while the average selling price was $160,000 to $200,000, or $40,000 to $60,000 below cost.

HDB flats are generally priced below their development costs. Over the last three years, the average annual loss on the sale and development of HDB flats was around $600 million. If we include other housing subsidies, such as the Additional Housing Grant and the CPF Housing Grant, HDB's total annual deficit would be about $1 billion.

Housing affordability can be achieved under any pricing system. It all depends on the level of subsidy given. I know some first-timers worry that market-based pricing leaves them entirely at the mercy of market forces. Let me assure them that HDB reviews its subsidies regularly to ensure affordability for first time homebuyers. I will discuss this issue in greater detail in my next article.



RECOGNISING VALUE IN PRICING

Today, we have built a unique public housing system that is based on home ownership. It offers Singaporeans not only shelter but also a store of value. Singaporeans generally understand and are prepared to pay for value. This is why some of the higher-priced, premium HDB flats attract more buyers than the more affordable, standard flats. For example, there were 13 applicants per flat for the Punggol Waterway Terraces, compared to four to seven applicants per flat for standard BTO projects launched there this year.

We must price new HDB flats such that the public subsidies that can be realised on resale are fairly distributed across buyers. As the custodian of public wealth, the Government must also use its resources wisely, including land, regardless of how they were acquired, so that the needs of current and future generations of homebuyers can be met.

Recognising the value of the flat in its pricing is a key part of this.

The writer is the Minister for National Development.
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#4
Mr Mah has written a number of articles providing rational-sounding explanations for the high HDB prices.

I do not see, in the pasted article above, the explanation on why rising flat prices, if supported by economic fundamentals, is in the overall interest of everyone - homeowners and homebuyers.

Anyway, I only believe that for people who are only owning one home, a rising flat price is a curse, not a blessing. Simply put, rising flat price means that you are paying more to live in the flat whenever you purchase a flat.

I am still waiting for him or someone to provide
a) an analysis on how much the lack of supply in resale HDB (caused by the lack of new flats in the early 2000s) has contributed to the increase in HDB prices.
b) an analysis on how much the 3-4 years waiting time for a new HDB has contributed to the increase in HDB prices.

Also, I am still waiting for him to admit his mistakes and let us know where he has gone wrong.

I am guessing that I am waiting in vain.

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#5
MBT admit his mistakes? :O

wait the hdb flat prices crash to zero how? :O
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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