A new pricing formula for HDB flats

I will be stating what is obvious to most people - the Government is able to control the prices of public housing in Singapore.

As private housing (i.e. landed properties and condominiums) is very high relative to the income level, most people have to depend on public housing built by the Housing and Development Board (HDB), by buying a new flat directly from the HDB or from an existing owner on the resale market.

The HDB now uses the resale price on the market to set the prices for new flats. In turn, these prices will determine the prices on the resale market. This seems to be an incestious situation.

A market works well only if there is elastic supply, elastic demand and market competition. In the case of public housing, the supply is virtually in the hands of a monopoly, i.e. the HDB. The demand is also not elastic, as each person has to find a place to live in and is allowed to own only one HDB flat. In the resale market, the seller has to find another place to live in, before he can sell his HDB flat on the market. Hence, the demand cannot drop, even if the prices are too high.

By controlling the supply of new flats, HDB is able to control the prices in the resale market, and indirectly the prices of new flats.

There is also a large element of speculation. If the market perceive that HDB is restricting supply, the speculators (e.g. people renting flats) will buy the flats in the resale market and cause a panic that prices are rising. This causes prices to rise.

If we recognize that the resale market is not a true market (and is affected by supply control and speculation), it is better to adopt a different policy to price the new flats. I suggest that it should be priced relative to average national income - a benchmark price is computed on this principle and the actual price is adjusted to reflect relativities due to location, distance to MRT station  size of flat and standard of construction.

HDB should release a large supply of new flats (still under construction or ready for occupation) to be selected by the people on the waiting list, based on these pre-determined prices. If there are several buyers vying for the same flat, the flat can be allocated by a ballot - which can be efficiently managed using IT technology. The unsuccessful applicants will automatically be considered for the next flat of their choice.

The flats determined by HDB will be much higher than the cost of land and construction and will give a profit margin which is revenue to the state. It will stabilize the prices of new flats to be more reflective of the true market (rather than prices that are affected by speculation and lack of information). In turn, the market for resale flats will follow the prices of the new flats, on a relative basis.

As housing has become a large part of the cost of living in Singapore, it is time for the Government to review the pricing for HDB flats, and to find a better system that reflects the  true market and keeps the prices in line with the ability of the people, based on their income levels, to afford them. We may return to the good days of Singapore a few decades ago.

Tan Kin Lian