Many have said the 30 per cent cut in new Housing and Development Board (HDB) flat prices that National Development Minister Khaw Boon Wan pledged recently will be tough to achieve without serious repercussions on the housing market.
This is because it is very difficult to reconcile the divergent interests of existing owners with those of new buyers. Existing owners want the highest values, while new buyers naturally want prices to be as low as possible.
Reconciliation may seem near-impossible, but the challenge is not insurmountable.
Mr Khaw has listed some possible measures, such as shortening the lease of the flat, extending the minimum occupation period or requiring the new flats to be sold back to the HDB.
The simplest measure to administer with minimal market impact is the shortening of the lease term of new flats. Reducing the number of years of the lease by 30 per cent will allow prices to come down by a similar percentage. However, this does not mean flats are cheaper — the price per year of lease remains the same.
Some say this will take away demand from the resale market, leading to prices falling in this segment. Not necessarily: If price is the critical factor, everyone would have applied for new flats because the prices are much lower. Often, prospective buyers weigh the costs with the benefits and decide on that which gives the best value.
In fact, the reverse may happen. Shortening the lease of new flats may drive up the demand for existing flats with longer leases, which means the latter will command a premium.
The other adjustment the market has to make is for financiers to sort out how they will handle what is essentially the same class of property, age-wise and lease-wise.
A drawback of this measure is that it does not preclude prices from rising again if there is a future mismatch of demand and supply. Do we then shorten the lease by another 30 per cent?
Requiring all future buyers to sell their flats back only to the HDB is one path I think the board prefers not to take. It is a big administrative hassle. The in-house valuation team has to be expanded to come up with “fair” buy-back prices and handle the appeals from owners who consider their flats to be worth more than the price tag placed on them.
And how will the HDB handle unpopular units? More often than not, incoming buyers will not pay the price bought back for. Will the HDB then take the loss?
With the exception of centrally located flats or the choicest of flats with easy accessibility or great views, extending the minimum occupation period by more than the current five years may introduce rigidity in the upgrading process and restrict choice. Condemning buyers to lengthy occupation periods with no escape clause can only result in unhappiness and frustration for those who want to move on.
Individually, the measures appear less than satisfactory in terms of effectiveness, efficiency and choice, but a combination coupled with other measures may do the trick.
One possible combination is to treat the 30-per-cent price cut as the Government’s “co-investment” in the flat. The minimum occupation period is kept at five years, but any capital gains for flats sold in the sixth year is shared 70:30, with 30 per cent going back to the Government.
The share drops by 6 per cent with each subsequent year. Capital gains need not be shared after the 10th year. This way, the flat owner is not forced to stay any longer than he or she wishes to. This will also help spread out the number of maturing flats entering the resale market and provide support to resale prices.
As a matter of principle, those who bought flats since the de-link with resale flat prices should be allowed to convert to the new scheme if they wish to do so. To preserve a sense of fairness for those who bought prior to the de-link, they can be offered concessionary housing loan rates, e.g. very low or no interest, for the first two to three years.
Finally, even if the selected combination were to result in some price correction for existing owners, it is not a question of life or death as some make it out to be. Most owners do not want to see a sharp fall in the value of their flats, but if you ask around, they are not totally against a “fair” adjustment.
The HDB resale price index shows that those who bought flats more than five years ago have more than doubled their investments.
In fact, some see the current market value of their flats as bordering on the ridiculous. Many prefer to see a return to “saner” prices. Intuitively, they know it is for the good of all. Most HDB home owners are not greedy investors. They do not reflect on how wealthy they have become at the end of each day.
You can understand why. The majority of existing owners have children of their own. For these owners, their immediate concern is for lower new flat prices so their children do not end up working their entire lives to pay for their homes.
By Colin Tan – head of research and Consultancy at Chesterton Suntec International
Source : Today – 22 Mar 2013