Prime HDB flats: Accept the lottery effect

Plans to build public housing at the Greater Southern Waterfront has thrown up thorny questions

Sep 21, 2021

THE Singapore government does not want housing in prime locations to be restricted only to the affluent. It seeks to avoid having racially and socioeconomically segregated neighbourhoods, which would weaken social cohesion and community bonds.

At the Greater Southern Waterfront, the government plans to build public housing. This laudable initiative has thrown up thorny questions.

Should subsidies for buyers of prime build-to-order (BTO) HDB flats, which will likely be priced higher, be raised so that the less well-off can afford to subscribe for such flats? Should conditions governing the resale of prime HDB flats be tightened?

The fundamental question is whether a HDB flat should serve as both a home and an investment that provides returns through rental income and/or capital gains.

A high level of home ownership can be achieved by helping locals buy their HDB homes from the government.

Currently, subject to various conditions, HDB flats can be resold to Singaporeans and permanent residents at prices determined on the basis of a willing buyer and a willing seller.

Policy changes can curb the investment aspect of HDB flats and rein in rising resale prices - for example, allow HDB flats to be resold only to the HDB with pricing based on purchase price adjusted for inflation and depreciation of the land lease; and disallow owners from renting out their units.

HDB flats owners, who are hoping for a good profit from the resale market or to rent out their flats, may cry foul should the policy change on this. After all, the HDB flat is likely to be a key part of the wealth of many families and an important asset to help fund retirement needs.

Crucially, a strong case can be made for HDB flats to be both a home and an investment instrument.

In many places, homes are unique in being a big ticket consumption item that is concurrently an investment item.

Consumption comes via enjoying the space, layout, location and amenities of an abode. Investment returns via capital gains can be driven by infrastructure upgrades in the neighbourhood, growing wealth in the country, low interest rates, and rising demand for homes.

Fair and equitable

Singapore aspires to give its people better job opportunities by transforming the economy and attracting high-value add activities to be carried out here.

Between 2010 and 2020, median monthly household income from work among resident employed households grew from S$6,342 in 2010 to S$9,189 in 2020 or at a compound annual growth rate of 3.7 per cent.

Singapore has drawn established and promising businesses in various sectors, including high growth ones, to set up shop here. Jobs created have kept citizens at home and lured talents from abroad to our shores. Some foreigners have invested in property here.

Being a global city that is attractive for live, work and play will underpin rising home prices over the long term. Enabling HDB owners to profit from asset appreciation alongside the smaller segment of private property owners appears fair and equitable.

Social cohesion will be hurt if only the generally wealthier and higher income segment, who can afford to buy private property, benefit from rising home prices due to Singapore's growing prosperity and competitiveness.

Over the last 10 years, the HDB Resale Price Index rose 12.3 per cent between Q2 2011 and Q2 2021. Gains vary across flats types and towns.

Over the same period, median prices of HDB resale flat purchases of five-room flats in Bishan and Jurong West rose 21 per cent and 11 per cent respectively. Such comparison is impacted by specific characteristics of the units transacted.

In August, 26 HDB resale flats sold for at least S$1 million, the highest monthly number of million-dollar flats sold on record.

Waterfront view

Even if the rationale for a HDB flat to be an investment asset is clear, some argue for more restrictions in the resale market to apply for flats in prime locations.

Many may apply for a HDB BTO flat in the Greater Southern Waterfront, not just because they want to live in an attractive location, but also because they hope to make fat profits in the resale market.

Are there merits to suggestions on the resale of prime HDB flats, such as increasing the minimum occupation period of a BTO flat beyond five years and restricting the pool of resale buyers to only those who meet the eligibility criteria to buy BTO flats?

Some owners of prime HDB flats may want to sell as soon as the flat hits the five-year minimum occupation period to realise a profit. But others may want to sell for reasons such as moving overseas to pursue work or business opportunities, facing financial difficulties, moving into private housing, or shifting to be near parents or a school.

To severely restrict the flexibility of divesting a HDB flat can thus have adverse consequences.

Currently, while an income ceiling of S$14,000 per month applies to couples when buying BTO flats, there is no income ceiling for buying resale flats.

The wealthier, be they highincome earners or downgraders from private homes, are better able to buy choice HDB resale flats, such as the million-dollar units.

But, privileges of citizenship and permanent residency, such as being eligible to buy a HDB resale flat, should not be lightly tampered with.

It testifies to the quality of the product and the standard of management of the estates that some well-off residents opt to buy HDB resale flats, albeit prime units.

Capitalist systems skew rewards heavily to those who succeed. Getting into the right sector or the right company can reap good pay-offs. Unequal distribution of income can result from the ideology of meritocracy.

There can also be an unequal distribution of wealth. Gains from asset appreciation may accrue to those who bought property a long time back or at the right time in a cycle. Some become wealthy from inheritances.

Luck of the draw

Inequality in Singapore, like in many countries, needs to be managed as it can hurt social cohesion and the economy.

Fighting inequality and boosting social cohesion needs the help of a host of policies - this includes public housing policy.

In allocating prime HDB flats, which have the potential for large capital gains, it may be best to let luck decide who gets these units in the primary market.

There will undoubtedly be some who envy the lucky ones cashing in hefty profits in the resale market.

Meanwhile, living in a Singapore that is positioned as a global city and a major business hub - and one that is increasingly attractive to the wealthy - can stir up feelings of inadequacy when confronted with some of the spending power visible in the city.

There are fancy yachts, homes, cars, meals, collections, and parties. The list goes on. More movies will likely get made on this.

There will be such irrationalities of how wealth can be generated. Yet, for Singapore to turn its back on being a vibrant city and a major business hub is to deny many of the chance to make a good living too.

Ultimately, building a nation with opportunities for many, strong social safety nets, good wages and good working conditions, should underpin social cohesion.

So, build HDB flats in prime areas, near landmarks and in high-end private residential enclaves. But that means not losing sight of doing this in lockstep - putting every effort into improving the living environment of less prime areas, to raise the standards across every HDB estate.