The Emotions and Economic Arguments of HDB Pricing

HDB pricing is an emotional issue - the true level of subsidy has been a subject of endless debate. Lucky Tan, ever the reactionary, has already come up with some clever arguments. If you have not already seen it, there is also a long essay circulating around the internet which devotes a long tirade against HDB pricing policy. From the economic perspective, many of the arguments thrown up are in fact scandalously off the mark. Without prejudice or fear, I hope this post can set some concepts straight.

(a) Ownership of an asset

Its not in dispute that many Singaporeans families are still in fact servicing their mortgage. That said, the idea that you do not own the property (or you have become a serf) just because it is under some mortgage is completely false.

What is ownership? Ownership is a right (an option) that gives residual control to the holder of this right. This control has an economic value. My property cost $200k, say 100 per cent mortgaged. Should the value of the property rise to $250k, I can sell it for a $50k profits. Even though the property is 100 per cent mortgaged to the bank, it does not make the decisions concerning the asset unless I default. It also does not participate in any upside gain. Singaporeans freely buy and sell their HDB assets (within regulations of course) - sometimes at losses when the market is down, but mostly with profits which go towards upgrading to private property. This is the essence of ownership that distinguishes it from tenancy.

(b) HDB is charging monopolist prices

This is a clever argument. The fact that HDB flats constitute 80-90 per cent of the market seems to provide some credence to this argument. But consider the evidence.

The accepted economic wisdom is that a monopolist will charge higher and sell lesser. If HDB is a profit maximising monopolist (as claimed by some bloggers), it has the incentive to price higher, and choose not to serve the poorer segment of the market (say, like Kwek Leng Beng if he could). HDB in fact sells a lot and serves the entire market. It is a rather silly monopolist if it were one. Second, though HDB is a large builder, it is in fact not a large seller when one looks at the available pool of sellers in the open market. Third, many buyers of HDB flats are in fact PRs, who presumably could have bought properties in other countries if HDB flats are not value for money due to monopolist pricing.

While it cannot be dismissed outright, the body of evidence therefore does not lend much support to the monopolist pricing argument.

(c) Land cost matters

Why does St Regis sell for $3000 psf while a suburban condo sells for $500 psf? Undeniably, St Regis is more luxurious but does the cost of building alone account for the price difference? Intuitively, the answer is no. The same quality condo in Sembawang cannot sell for the same amount as one in Orchard Road. Location matters. And for the same reason, it is entirely superfluous to compare the prices of houses in Johor Bahru and Singapore. Even if they cost the same to build, they will sell for very different prices in the market.

(d) Only relative price matters - most important

Many Singaporeans have used the back of envelope calculation and convinced themselves that they are not in fact receiving a subsidy from HDB. The above mentioned writer documented (based on tendered contractor price) that building cost is $50k per flat. This implied a $150k profit for HDB. This back of envelope calculation, while intuitively appealing, is completely wrong from an economic standpoint. I will explain why.

When one talks about the economy or economic management - particularly about an investment item as big as housing property - one must consider the overall price effect (jargon: general equilibrium and not partial equilibrium). I had earlier written about the importance of relative prices in the GST episode, but understandably, this is one principle that non-economists will find hard to grasp.

Relative prices direct the use of scarce resources. It does not matter if a car is $1000 and a house is $2000, or if a car is $2000 and a house is $4000. You can always reprint or rebase your money in whichever denomination you deem fit. What matter is the relative price between cars and houses - that houses are 2 times as dear as cars - and that resources used will reflect this. This is why HDB should price its flats according to market price incorporating land price - and base its subsidy from the market price benchmark.

Imagine what happens if HDB prices its new flats on building cost only (and not land cost). The price of HDB flats will suddenly be relatively cheaper to any other goods that require production space (commercial activities, industrial production etc). Overnight, HDB housing - even though it uses an enormous amount of precious land - becomes entirely free of land use cost while every other good and service is not. Can you imagine the staggering resource distortion this will cause? Free of land cost, HDB flat will drop to say $50 psf (extending the earlier example of $50k per flat and 1000 square feet). At this price, every one will demand HDB to build them a HDB palace for it is relatively way too cheap compared to other goods and services in the market. There will not be much land for any thing else.

Back of envelope calculations, without considering the overall effect on the economy, is not the way to properly analyse HDB pricing.

Transparency

Having said all that I have said, I do think that some of the issues raised are valid, in particular the need for more transparency with regards to cost, pricing and subsidy. Perhaps things will improve in the future.