Monday, May 2, 2011

An attempt to peg the HDB flat prices to Singaporean's median income

I keep hearing that pegging the HDB flat prices to Singaporean's median income will cause the property values to plunge so I attempted to do a simple peg and I had some very interesting results.

Based on the 2010 population survey for residents (meaning Singaporeans and PRs), the median household (meaning the total income for your household) annual gross income for HDB flats are as follows:
  • 1 & 2-room: $14,400
  • 3-room: $40,812
  • 4-room or larger: $70,200

Assuming based on best practices, one should not spend more than 30% of their income and should finish paying for their loans in 20 years, the maximum values of the HDB flats will be as follows:
  • 1 & 2-room: $86,400
  • 3-room: $244,872
  • 4-room or larger: $421,200

Let's say I further assume that the 80, 90 and 100 percentile for the 4-room or larger flats equals to the 4-room, 5-room and executive flats respectively, the maximum values will break down as follows:
  • 4-room: $336,960
  • 5-room: $379,080
  • Executive: $421,200

The numbers will of course vary depending on various factors like location and the actual size of the flats, but the maximum value of the HDB flat should not exceed the above maximum values. Is there a big discrepency? Not that I can see.

So what's the big hoo-ha over pegging median income of Singaporeans to HDB prices? I don't see any problems at all.

In fact, I will further add that in future, all statistics should differentiate between Singaporeans and permanent residents. Don't tell me that a first world government cannot differentiate between Singaporeans and permanent residents. These maximum values of HDB flats should only apply to Singaporeans, and not to permanent residents. Meaning permanent residents who wish to purchase HDB flats should pay the market rate. Any subsidies should only be given to Singaporeans. Arrangements could be made to refund the difference if these PRs become Singaporeans.

Therefore, let's say that there is any discrepency betwee the"cost of construction" and the prices of the pegged HDB flats, the subsidy will come from the PRs paying for the HDB flats and the sale of the land by the government. If we're spending the subsidies on true Singaporeans, I don't see why it should be called a raid on our reserves.

After all, based on our GE figures, there are only 2.3 million Singaporeans eligible to get a flat (a simplistic figure based on the age criteria), an increase of only 140,000 Singaporeans compared to the previous election 5 years ago.


Justina said...

Your figures does not take into account interest payable. If you were to pay off a flat in 20 years taking interest into account, the flat price will be lower.

If the median household income for a 1&2 room = $14,400
30% = $360/mth
Interest = 2.6% pa
Loan amount (90%) = $67000
Flat price (Loan amount + 10% deposit) = $74,400

2-room = $74,400
3-room = $211,000
4-room = $364,000

Comparing just 2 room flat prices. Currently, resale 2-room flats are selling between $228k - $255k. That's 3.4 times the proposed 2-room flat prices. It will definitely affect current flat prices when these lower cost flats were allowed to enter the resale market.

I propose that a separate classification of flats be created, which is delinked from the market, and that will not enter the current market. Sales of such flats will be in a market of its own.

chantc said...

The attempt is to peg to the median income. I did not that interest rates into account because
(1) interest rates fluctuate too much depending on where you get your loan
(2) there are some who do not wish to get loan
(3) the government may run into budget deficits when the interest rates stay in elevated levels for a sustained period of time.

Considering that most of the flats in Singapore are HDB, it is not feasible to de-link HDB flats from the market from the economics perspective because if everyone goes for HDB flats, private developers will have less incentives to build and develop land.

To de-link HDB from the market may be possible in the textbook but not implementable in the real life. The government can say it is delinked but the private developers take the value based on the property surrounding the land. If the value is too low, no property developers will buy the land to develop. It has to make business sense.

We cannot forget that after all, businesses where workers are hired, need to make a profit because that's how salaries are being paid.

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