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There are many arguments for or against a HDB flat as an asset class. We shall list down the various benefits and shortfalls of HDB as an asset class in this research.
Technically anything that retains a monetary value, either appreciating or diminishing, is called an asset.
Let us first take a look at the charter of HDB so as to understand the characteristic of this asset class.
“Mission
We provide affordable homes of quality and value.
We create vibrant and sustainable towns.
We promote the building of active and cohesive communities.
We inspire and enable all staff to give of their best.”
(HDB, http://www.hdb.gov.sg/fi10/fi10320p....n?OpenDocument)
HDB started off as a government housing program to alleviate severe shortage in housing. Therefore it is more of a social program when it started off. So it should be more concerned about providing shelter.
The HDB flats of yester years are based on the cost of construction maybe with some land cost added into the equation. Therefore these flats cost only several thousands of dollars in the late 1960s (around $5000 to $9000). At that time, factory workers earned around $200 a month (citations required), or $2400 a year. A flat is equal to about 2 times to less than 4 times of a factory worker’s annual salary.
Today, HDB houses 82% (Singstat, http://www.singstat.gov.sg/pubn/pape...10-pg25-29.pdf) of Singapore’s Citizens plus Permanent residents which numbers 3.11m. Singapore’s Total Citizen + residents stands at 3.77m (as at June 2010).
Singapore’s citizens stand at 3.23m as at 2010. (Singstat, http://www.singstat.gov.sg/stats/keyind.html#keyind)
HDB Subsidy and Regulations
HDB is a public housing program with a social charter. It is to provide affordable housing initially. As Singapore witness rapid progress from a third world country to a 1st world country (economically), HDB has gradually changed it’s stance. Prices of HDB flats soon soared. The prices today is no longer using the Cost plus model, i.e. using the cost as a base adding some margin as selling price. Today’s HDB pricing model is based on the Resale flat prices in the open market less off a market subsidy of typically $30,000 to $40,000 for new HDB flats. The grant is $20,000 for Singapore citizen and PR mixed household (HDB, http://www.hdb.gov.sg/fi10/fi10321p....y?OpenDocument)
There are many policies and regulations governing HDB housing. This makes it much more cumbersome than any other classes of property asset classes either for selling, for buying as well as for leasing it out. There are also restrictions on minimum use (i.e. Minimum Occupation Period “MOP”) of between 1 to 3 years for resale flats and 5 years for new flats. Therefore, if you are able to bear with HDB rules and still manage to lease it out without breaking any rules, the yield can be higher than private properties. However, these rules changes without notice, and failure to comply can mean that HDB can forfeit your HDB flat.
EVOLUTION OF HDB AWAY FROM ITS SOCIAL CHARTER
HDB has also evolved away from its social charter of providing good quality affordable housing. It’s new pricing formula where a new flat is often pegged to a small discount compared to resale flat prices means that, any shortage in new HDB flat supply will lead to people being forced to buy in the open re-sale market. With more people buying in the resale market, the demand rises. From 2006 to 2010, HDB supply planning has been a massive failure where the Ministry of National Development under-supplies the market to the tune of an estimated >100,000 flats (Property Buyer, http://propertybuyer.com.sg/articles...ices-go-crazy/)
based on our rough estimate. Naturally this led to a massive price hike of HDB flats. And subsequently new HDB flats also reflect the rises and raised prices.
The move away from a “COST PLUS” model to a market value model is in fact capitalist in nature and there is nothing social about it.
BETTER QUALITY HDB FLATS COST MORE?
As HDB flats began to have more and more frills, HDB adopted a one size fits all approach. Whether you liked it or not, HDB flats comes with valued added features. These features don’t cost very much to build, but they do nevertheless ends up increasing the selling prices quite a bit. In other words, HDB resembles more and more like a private developer. What these does is, it raises the base cost of land and subsequently prices of all HDB flats, regardless of whether you can afford to have those amenities.
Singapore’s median income per household (per month) is $5704 (Singstat, http://www.singstat.gov.sg/pubn/pape...ple/pp-s17.pdf), while the average income in the 41th to 50th percentile income per household’s working adult is $1,506 (per month).
This means that at current prices in the range of 300,000 onwards, if people were to borrow $240,000 and pay a down payment of $60,000. This would result in a 30 year loan tenor with each monthly installment of $960.82 per month for 30 years. On a new household of 2 person, earning an average income (41st to 50th percentile median), the total household income would be $3,012. As each of them would need to contribute 20% to CPF, their total take home pay would be around $2,400. This $960.82 a month is about 1/3 of all their expenditure although CPF can pay for part of this amount.
What does this mean? It means that even at the 50% percentile point (the cut off point of half the people) many will find it very tough to afford a HDB flat, much less the others who are earning less. And all these frills are good for people who can afford it, but increases the hardship of people who do not need these frills as they still have to grapple with daily cost of living.
DOES UPGRADING INCREASES HDB VALUATION?
HDB flat’s valuation has always been subjected to some debate. All these upgrading projects are not free, home owners of HDB flats have to co-opt to pay for it.
Many older estates which are more than 40 years old such as Tanglin Halt HDB estates have been upgraded. However all these physical upgrades like adding a balcony and an extra room only make these flats more livable. As for the argument that upgrading really increase the value, we believe there will be some net increase in value, but whether there is any value added increase (above and beyond the cost of construction), that we doubt it will be much. The best comparison will only be verified using 2 similar type properties (in the same estate) before Upgrading and after upgrading. Compare the 2 properties again to mark the average selling prices. We believe that the price increase will likely be in-line with construction costs, and not much more. If at all it is much more, it is likely due to the construction time.
Say if it takes 18 months to complete construction, during this time, the base price of all HDB flats in the area also increases, these should be due to overall increase of HDB prices and not due to value added construction. For example, 2 similar properties of similar location, one undergoes upgrading. Before upgrading, both are priced at $300,000. After $50,000 of upgrading, the one after upgrading is priced at $400,000. Does this mean that it has increased much? Let’s see. If the HDB flat without upgrading is priced now at $360,000. What does it say about the upgrading program?
Hence the value added increase (above and beyond mere construction cost) are not necessarily due to upgrading works, but by overall market conditions in the resale market.
What is the purpose of upgrading the building without upgrading the lease?
Let’s call it sprucing up. At the end, it leads to increased consumption, as these increase in values are not realized in most cases.
HDB FLAT IS A HIGHLY REGULATED MARKET
All HDB flats have HDB appointed valuers. These valuers tend to value HDBs in a non-market driven way. In the 1998 and 1999 where there is a financial crisis, HDB prices were trading below valuation.
Illustration: -
A valuation could be $280,000 and the traded price could be $240,000. And these anomalies persists over extended periods of time.
During the HDB price booms in 2007, 2008 and 2010, Cash over valuation have reached levels such as $50,000.
The biggest question we would like to ask is, why are valuers pricing it as such? It could be that they are using a different methodology than the commonly practiced Benchmark method used in valuing private properties.
But persistently the valuations seemed to lag the actual transacted prices again.
So in other words, we can infer that the prices are set by the Singapore government and it is not entirely a free market as we would like to think, otherwise there is no reason that the HDB flats are valued using a different methodology than those of the Private properties.
Technically anything that retains a monetary value, either appreciating or diminishing, is called an asset.
Let us first take a look at the charter of HDB so as to understand the characteristic of this asset class.
“Mission
We provide affordable homes of quality and value.
We create vibrant and sustainable towns.
We promote the building of active and cohesive communities.
We inspire and enable all staff to give of their best.”
(HDB, http://www.hdb.gov.sg/fi10/fi10320p....n?OpenDocument)
HDB started off as a government housing program to alleviate severe shortage in housing. Therefore it is more of a social program when it started off. So it should be more concerned about providing shelter.
The HDB flats of yester years are based on the cost of construction maybe with some land cost added into the equation. Therefore these flats cost only several thousands of dollars in the late 1960s (around $5000 to $9000). At that time, factory workers earned around $200 a month (citations required), or $2400 a year. A flat is equal to about 2 times to less than 4 times of a factory worker’s annual salary.
Today, HDB houses 82% (Singstat, http://www.singstat.gov.sg/pubn/pape...10-pg25-29.pdf) of Singapore’s Citizens plus Permanent residents which numbers 3.11m. Singapore’s Total Citizen + residents stands at 3.77m (as at June 2010).
Singapore’s citizens stand at 3.23m as at 2010. (Singstat, http://www.singstat.gov.sg/stats/keyind.html#keyind)
HDB Subsidy and Regulations
HDB is a public housing program with a social charter. It is to provide affordable housing initially. As Singapore witness rapid progress from a third world country to a 1st world country (economically), HDB has gradually changed it’s stance. Prices of HDB flats soon soared. The prices today is no longer using the Cost plus model, i.e. using the cost as a base adding some margin as selling price. Today’s HDB pricing model is based on the Resale flat prices in the open market less off a market subsidy of typically $30,000 to $40,000 for new HDB flats. The grant is $20,000 for Singapore citizen and PR mixed household (HDB, http://www.hdb.gov.sg/fi10/fi10321p....y?OpenDocument)
There are many policies and regulations governing HDB housing. This makes it much more cumbersome than any other classes of property asset classes either for selling, for buying as well as for leasing it out. There are also restrictions on minimum use (i.e. Minimum Occupation Period “MOP”) of between 1 to 3 years for resale flats and 5 years for new flats. Therefore, if you are able to bear with HDB rules and still manage to lease it out without breaking any rules, the yield can be higher than private properties. However, these rules changes without notice, and failure to comply can mean that HDB can forfeit your HDB flat.
EVOLUTION OF HDB AWAY FROM ITS SOCIAL CHARTER
HDB has also evolved away from its social charter of providing good quality affordable housing. It’s new pricing formula where a new flat is often pegged to a small discount compared to resale flat prices means that, any shortage in new HDB flat supply will lead to people being forced to buy in the open re-sale market. With more people buying in the resale market, the demand rises. From 2006 to 2010, HDB supply planning has been a massive failure where the Ministry of National Development under-supplies the market to the tune of an estimated >100,000 flats (Property Buyer, http://propertybuyer.com.sg/articles...ices-go-crazy/)
based on our rough estimate. Naturally this led to a massive price hike of HDB flats. And subsequently new HDB flats also reflect the rises and raised prices.
The move away from a “COST PLUS” model to a market value model is in fact capitalist in nature and there is nothing social about it.
BETTER QUALITY HDB FLATS COST MORE?
As HDB flats began to have more and more frills, HDB adopted a one size fits all approach. Whether you liked it or not, HDB flats comes with valued added features. These features don’t cost very much to build, but they do nevertheless ends up increasing the selling prices quite a bit. In other words, HDB resembles more and more like a private developer. What these does is, it raises the base cost of land and subsequently prices of all HDB flats, regardless of whether you can afford to have those amenities.
Singapore’s median income per household (per month) is $5704 (Singstat, http://www.singstat.gov.sg/pubn/pape...ple/pp-s17.pdf), while the average income in the 41th to 50th percentile income per household’s working adult is $1,506 (per month).
This means that at current prices in the range of 300,000 onwards, if people were to borrow $240,000 and pay a down payment of $60,000. This would result in a 30 year loan tenor with each monthly installment of $960.82 per month for 30 years. On a new household of 2 person, earning an average income (41st to 50th percentile median), the total household income would be $3,012. As each of them would need to contribute 20% to CPF, their total take home pay would be around $2,400. This $960.82 a month is about 1/3 of all their expenditure although CPF can pay for part of this amount.
What does this mean? It means that even at the 50% percentile point (the cut off point of half the people) many will find it very tough to afford a HDB flat, much less the others who are earning less. And all these frills are good for people who can afford it, but increases the hardship of people who do not need these frills as they still have to grapple with daily cost of living.
DOES UPGRADING INCREASES HDB VALUATION?
HDB flat’s valuation has always been subjected to some debate. All these upgrading projects are not free, home owners of HDB flats have to co-opt to pay for it.
Many older estates which are more than 40 years old such as Tanglin Halt HDB estates have been upgraded. However all these physical upgrades like adding a balcony and an extra room only make these flats more livable. As for the argument that upgrading really increase the value, we believe there will be some net increase in value, but whether there is any value added increase (above and beyond the cost of construction), that we doubt it will be much. The best comparison will only be verified using 2 similar type properties (in the same estate) before Upgrading and after upgrading. Compare the 2 properties again to mark the average selling prices. We believe that the price increase will likely be in-line with construction costs, and not much more. If at all it is much more, it is likely due to the construction time.
Say if it takes 18 months to complete construction, during this time, the base price of all HDB flats in the area also increases, these should be due to overall increase of HDB prices and not due to value added construction. For example, 2 similar properties of similar location, one undergoes upgrading. Before upgrading, both are priced at $300,000. After $50,000 of upgrading, the one after upgrading is priced at $400,000. Does this mean that it has increased much? Let’s see. If the HDB flat without upgrading is priced now at $360,000. What does it say about the upgrading program?
Hence the value added increase (above and beyond mere construction cost) are not necessarily due to upgrading works, but by overall market conditions in the resale market.
What is the purpose of upgrading the building without upgrading the lease?
Let’s call it sprucing up. At the end, it leads to increased consumption, as these increase in values are not realized in most cases.
HDB FLAT IS A HIGHLY REGULATED MARKET
All HDB flats have HDB appointed valuers. These valuers tend to value HDBs in a non-market driven way. In the 1998 and 1999 where there is a financial crisis, HDB prices were trading below valuation.
Illustration: -
A valuation could be $280,000 and the traded price could be $240,000. And these anomalies persists over extended periods of time.
During the HDB price booms in 2007, 2008 and 2010, Cash over valuation have reached levels such as $50,000.
The biggest question we would like to ask is, why are valuers pricing it as such? It could be that they are using a different methodology than the commonly practiced Benchmark method used in valuing private properties.
But persistently the valuations seemed to lag the actual transacted prices again.
So in other words, we can infer that the prices are set by the Singapore government and it is not entirely a free market as we would like to think, otherwise there is no reason that the HDB flats are valued using a different methodology than those of the Private properties.
i.e do renovation, or this and that got to get permission bo
