Pricing the risk of a HDB flat

[Secretariat]

Chapter 1

When HDB was established in 1960, its mission was to alleviate the acute housing situation facing our country post-independence. HDB role was the landlord of public housing, providing low affordable rental units to the mass.

This business model more or less remained intact, until the 1980s, with the liberalization of CPF and the introuduction of Asset Enhancement Scheme, HDB then effectively relinquished its power to set the rental rate for public housing units to the flat owners (of course, except for those flats taken back for SERS or otherwise).

In relinquishing its power (in rental rate), an investment element was introduced in a public HDB flat. Before exploring further this investment element, let's look at the situations before and after in simplistic way:

Before, HDB carried all the financial burden of funding the construction of HDB flats, and collect rents. A pure landlord situation.

After, the HDB flat-buyers carried all the financial burden of funding the construction of the HDB flats. HDB retains the title of the units they are buying.

In the next chapter, we look into the investment element of a HDB flat.

[carbuncle]

New article series! yay

when is next chapter?

[Secretariat]

Chapter 2

No flat-buyer was willing to fund the construction cost of a flat for the landlord, unless the risk he carried by doing so was adequately compensated. And indeed he found it in (as in any investment instrument),

- the opportunity for capital appreciation,
- the mortgage being lower (or compensating) the rental amount he would have paid.

And more in fact, in Singapore context,

- the ability to redeploy his savings in CPF, which before remained untouchable until retirement age. The situation was more obvious for a buyer who paid for his flat fully using cash & mostly CPF, and then collect rental.

In the 1980s, most buyers seized the opportunity offered and bought HDB flats with zeal. After all, HDB flats were relatively inexpensive then and buyers also had substantial CPF savings sitting.

So, it was a win-win arrangement.

- HDB relinquished the power of setting the rental rate, but no longer have to bear the cost of constructing its flat,
- Buyers given a new nvestment instrument for his CPF savings.

In the next chapter, let's look at the pricing of a HDB flat and the valuation method today.

[carbuncle]

SUPER LIKE

[Secretariat]

Chapter 3

In a normal market, the pricing of a house (be it a private condo, landed or public flat), is willing-seller willing-seller basis. When the buying is to be funded by financing, the valuation of the house comes in. Valuation is primarily based on the recent transactions of similar dwellings in the area, and the condition of the house itself, age etc.

Of course, the seller may choose to obtain valuation of his house to establish an offer.

In the case of a HDB flat, lets just look at the existing method (there is not much information that can be gathered from the web regarding other older methods, so forumers may share their insights).

Solely for illustration, and the figures below are fictitious:

For a 3-rooms HDB flat

During upturn of pricing
Q1 2011 - 200,000 val 20,000 cov
Q2 2011 - 220,000 val 30,000 cov
Q3 2011 - 250,000 val 30,000 cov
Q4 2011 - 280,000 val 40,000 cov .... and so on it goes.

Conversely during downturn of pricing
Q1 2012 - 320,000 val 40,000 cov
Q2 2012 - 360,000 val 20,000 cov
Q3 2012 - 380,000 val 10,000 cov
Q4 2012 - 390,000 val 10,000 cov

So, there we have a valuation method quite unlike for the other non-HDB houses. It is questionable if this valuation method is equitable, or sustainable.

HDB flats are on 99-years lease. In the next chapter, let's explore the characteristics of the age of HDB flats viz-a-viz pricing.

[leesg123]

Your research thesis is it? Well done!

[Secretariat]

Chapter 4

HDB remains the title-holder of the unit bought by a buyer, whether through direct purchase or via resale market.

As any landlord (responsible one la...), HDB has the responsibility to maintain the overall public housing estate, especially for aging estates closing in to the end of 99-years lease. This is where SERS comes in.

But SERS has another unstated mssion for HDB, which is to eliminate the valuation decay expected of any expiring 99-years leasehold property. Nonetheless, one HDB flat will have a different age when compared with the other. Whether the age difference is accounted in the existing valuation method is not known. Afterall, the existing value of a resale flat is not established by HDB.

But it should be quite clear that buyers do not care about the age of flats. SERS provided the notion that they will be taken care of. In the 1980s 1990s, when the composite age of HDB flats was younger, and when flats were relatively inexpensive, this notion would have been sensible.

Today, when looking at existing valuations, it will be fair to say that most buyers do carry a mortgage when buying flats. And more so will be in the future.

CPF has a restriction limiting the financing of a property to not more than 30-years of remaining lease. Let's look at the age profile of the existing HDB flats.

More than 42-years old (1960 - 1970) 117,225 units
32-years to 42-years old (1971 - 1980) 241,343 units
22-years to 31-years old (1981 - 1990) 309,007 units
12-years to 21-years old (1991 - 2000) 256,913 units
Less than 12-years old (2001 - 2012) 81,454 units

(Gross figures reflecting units constructed in their cohorts. Net units standing are lower due SERS program)

So, if a buyer requiring a 30-years financing today, the HDB flat he is buying cannot have lease that ran through 39 years. I leave it to the forum to discuss the possible implications of the aging HDB stock.

In the next chapter, let's explore what it means to the majority of HDB flat-owners who enjoyed substantial equity because of the spiraling valuations.

[anythingwhatever]

Good Articles, like!

[Secretariat]

Your research thesis is it? Well done!

Bo la...tcss only mah.

Any mistakes please point out. :D

[Arcachon]

The other side of the coin.

There was this island with no natural resource and a group of uneducated people. There was this man who went to the west and found that he can do something. He has no money and nothing on the ground he can use and he has a group of uneducated people. He start by getting MNC to employ them and make them save 25% of their pay and the MNC pay 25% called CPF. With CPF he start his master plan. He also educated them and house them with their own money. Years later this man learn the art of money making and start to create money out of nothing which only God can do. Those uneducated people children become educated and some become financially educated also learn the art of money making. Today this financially educated people instead of working for MNC start to create money out of nothing.

It just a game.

[Secretariat]

Chapter 5

The spiraling HDB valuation has to be thrilling to anyone who own a flat, until one realizes that more than 80% of Singapore population live in HDB.

Why?

When one invests in an instrument, any instrument so to speak, for the instrument to make money, almost all the time the instrument has been mispriced. In order words, the downside risk of the investment is far lower than the upside risk. As more and more people discover the mispricing, the instrument value increases and this in turn gathers momentum, generating a rally.

This has to happen to make money - other people are willing to pay a higher price than one did.

When the situation is that 80% of the population are in the HDB market, either as owners or tenants, than there should be less and less new people participating.

(We will have an insight into the % of owners vs % of tenants in HDB, as the figures should be known in today parliament's enquiry)

Then what possibly caused the rally in HDB flat price? More likely than not, it is due to the upgrading musical-chair game being played.

Increasing population, HDB under construction of new flats, new households, cheap financing, upgraders within HDB etc are all explored widely, in the press, in the forums etc.

But the trigger should be the fool-proof valuation method, which ensures very minimal downside risk for buyers.

What do HDB owners do with the increased equity?

Well, as they said, an equity remains a paper-gain until realized. This means disposal of the flat, and with the new wealth, one can:

- buy another bigger HDB flat; that is, a HDB upgrade,
- buy another smaller HDB flat; that is, a HDB downgrade,
- buy another HDB flat of same sized; that is, a flip,
- exit the HDB sector, and buy a private property; that is, an exit

There are other things one can do with the new wealth, but let's just explore these 4 scenarios (otherwise, a book is the result).

Taken together all those discussed in earlier chapters, arguably the most sensible approach is to exit. For an upgrader, there is no new wealth generated to speak of. For a downgrader, an equity is partially realized. A flip only makes sense if it resulted in a newer (therefore longer, unexpired lease) or a location with better amenity.

In the share market, if more than 80% of the population have already bought the same share, say Capitaland, then the rally of Capitalnd price should be coming to an end sooner rather than later.

Be very conscious of when the music is going to stop.

[chestnut]

Will you be touching on the supply demand portion of the hdb?

1. How many marriages per yr (about 25K) and the number of HDB flats built or going to be built?

2. Number of PRs buying from the resale? or are they allowed to buy direct from HDB (really clueless today)?

The above is to me is the equation imbalance over the past few years.

Oh, BTW kudos to you on the report.

[Secretariat]

Will you be touching on the supply demand portion of the hdb?

1. How many marriages per yr (about 25K) and the number of HDB flats built or going to be built?

2. Number of PRs buying from the resale? or are they allowed to buy direct from HDB (really clueless today)?

The above is to me is the equation imbalance over the past few years.

Oh, BTW kudos to you on the report.

Bo liao, end of report or until study more data.

I am pretty much an outsider when it comes to HDB, by the way. Anything incorrect then paiseh la...:D

[chestnut]

Bo liao, end of report or until study more data.

I am pretty much an outsider when it comes to HDB, by the way. Anything incorrect then paiseh la...:D

Bro, solid la. Let me contribute a bit based on memory :

1. hdb was based on cost +

2. hdb built then took orders.

3. hdb overbuilt and overstock in Punggol.

4. Took a long time to clear

5. hdb did market value with discount. Totally diff from no 1.

6. hdb did BTO to ensure no overstock.

7. Marriages of 25K but built was way less then that.

8. Now trying to push out more flats. But u have to do your own calculations for equation balance to determine undersupply, balance or oversupply.

Certain time dates are off. Based purely on memory.