The HDB Lottery?
[This post was written on 21 June, but was accidentally deleted. It is reproduced here but some comments were lost].
How much does a good unblocked view in a good location add to the value of a property? A lot apparently. As every one probably knows by now, a flat in Tiong Bahru has just been sold for $720K, way above valuation, and double of what the owner paid 7 years ago. It came on the back of another headline catching sale of $672K, another HDB flat in the same area. As noted in the news article, the profit of $350K alone is enough to get the owner a flat in many other estates. The two sales have put those point blocks in Tiong Bahru in the spotlight.
Interestingly, I once visited a friend who lived in one of those blocks. Unfortunately, he did not have an unblocked view. In fact, situated on a lower floor and facing the busy Tiong Bahru Road, I found his flat rather too hot and noisy. The air certainly wasn't that fresh with so many double decker buses running a few floors below. I do not suppose it will fetch nearly the same price in the open market.New HDB flats in mature estates like Tiong Bahru, Toa Payoh, Bukit Merah have always been in high demand. They are much nearer to the city, near to all the amenities and the happenings in town. Here is a situation that the economist in me finds rather curious.
In a normal market, when demand outstrips supply, one would expect the price to move upwards to restore the equilibrium. But when HDB sells its flats, that is apparently not the case. Demand for flats in mature estates often outstrips supply. Rather than adjusting the list price upwards, balloting is usually carried out to determine which lucky applicants get to buy those flats.
That is not even the end of the role of Lady Luck. The lucky ones who are drawn to choose first have the chance of snapping up choice units - high floors, unblocked views, away from afternoon sun. Though HDB charges more for higher floors, the difference between the list price is far smaller than the difference in open market prices. For flats on the same floor, there is hardly any difference between superior facing (say view of city skyline) and so-so facing (say facing another block).
Effectively, the flat selection process becomes a "double-lottery". Those who are balloted to buy and choose first effectively become double winners - getting a choice unit in a choice estate. They pay more certainly, but not nearly as much as the premium the open market places on their flats. Those who did not win the ballot will have to settle for units in Jurong West (facing industrial estates), Punggol (facing the nice sungei) or Sembawang (facing Johor) where I used to live. There is often little potential for capital gains. After counting for interest and renovation cost, I just about broke even when I sold my flat last year. A friend of mine used to joke that Sembawang was the place where even the birds did not want to lay eggs. Oh well, at the very least, a flat in Sembawang is not even worth the $350K capital gain that lucky person enjoyed (you can verify from HDB website).
But it really begs the question, why doesn't HDB operate like a normal firm and use prices to equilibrate demand and supply rather than to depend on Lady Luck? In other words, have sharper price differences between the high floors (particularly those with great views) and low floors, and also between mature and outlying estates? In short, those who desire the great views and convenience, and who are able to afford, should be made to pay for it. By charging those choice units more means that the flat buyers will have to fork out more, thereby reducing the lottery gain (one could also see it as reducing consumer surplus) when they sell in the open market in a few years' time.
Now at this point, some of you will recognise that hey - that sounds like a monopoly exercising market power and practising price discrimination. One could interpret it that way for a simple understanding though it is not strictly so since flats on different floors are clearly not the same. However, since HDB is the only supplier of those blocks with those great views, it most definitely has pricing power to charge each unit as high as the reservation price - the maximum amount a potential flat buyer is willing to pay. This of course is price discrimination.
The word "discrimination" is slightly unfortunate here since it sometimes gives the wrong impression of the actual impact of a monopolist. Practicing price discrimination needs not be a bad thing from the economic point of view so long as it is done for benign reasons. It can even increase total welfare for the country. How so? By extracting the surplus from those who value the great views and convenience (who are paying higher price), HDB can then provide a transfer to those who can less afford to pay, that is, using the extra revenue to reduce the price of other flats to below their cost to help the poorer consumers. This cross subsidy might allow more or better flats to be built for those with less ability to pay, or be used to provide public goods like disabled access, linkways, gardens etc which because of the free-riding problem are usually under-provided. Of course, the subsidised flats will not come with a great view.
So which is a better way - charging willing and able first-time buyers top dollar for the view and convenience in order to cross-subsidise the financially less able buyers, or using a ballot system to decide who walks away with a windfall. It is interesting food for thought, isn't it?
[This post was written on 21 June, but was accidentally deleted. It is reproduced here but some comments were lost].
How much does a good unblocked view in a good location add to the value of a property? A lot apparently. As every one probably knows by now, a flat in Tiong Bahru has just been sold for $720K, way above valuation, and double of what the owner paid 7 years ago. It came on the back of another headline catching sale of $672K, another HDB flat in the same area. As noted in the news article, the profit of $350K alone is enough to get the owner a flat in many other estates. The two sales have put those point blocks in Tiong Bahru in the spotlight.
Interestingly, I once visited a friend who lived in one of those blocks. Unfortunately, he did not have an unblocked view. In fact, situated on a lower floor and facing the busy Tiong Bahru Road, I found his flat rather too hot and noisy. The air certainly wasn't that fresh with so many double decker buses running a few floors below. I do not suppose it will fetch nearly the same price in the open market.New HDB flats in mature estates like Tiong Bahru, Toa Payoh, Bukit Merah have always been in high demand. They are much nearer to the city, near to all the amenities and the happenings in town. Here is a situation that the economist in me finds rather curious.
In a normal market, when demand outstrips supply, one would expect the price to move upwards to restore the equilibrium. But when HDB sells its flats, that is apparently not the case. Demand for flats in mature estates often outstrips supply. Rather than adjusting the list price upwards, balloting is usually carried out to determine which lucky applicants get to buy those flats.
That is not even the end of the role of Lady Luck. The lucky ones who are drawn to choose first have the chance of snapping up choice units - high floors, unblocked views, away from afternoon sun. Though HDB charges more for higher floors, the difference between the list price is far smaller than the difference in open market prices. For flats on the same floor, there is hardly any difference between superior facing (say view of city skyline) and so-so facing (say facing another block).
Effectively, the flat selection process becomes a "double-lottery". Those who are balloted to buy and choose first effectively become double winners - getting a choice unit in a choice estate. They pay more certainly, but not nearly as much as the premium the open market places on their flats. Those who did not win the ballot will have to settle for units in Jurong West (facing industrial estates), Punggol (facing the nice sungei) or Sembawang (facing Johor) where I used to live. There is often little potential for capital gains. After counting for interest and renovation cost, I just about broke even when I sold my flat last year. A friend of mine used to joke that Sembawang was the place where even the birds did not want to lay eggs. Oh well, at the very least, a flat in Sembawang is not even worth the $350K capital gain that lucky person enjoyed (you can verify from HDB website).
But it really begs the question, why doesn't HDB operate like a normal firm and use prices to equilibrate demand and supply rather than to depend on Lady Luck? In other words, have sharper price differences between the high floors (particularly those with great views) and low floors, and also between mature and outlying estates? In short, those who desire the great views and convenience, and who are able to afford, should be made to pay for it. By charging those choice units more means that the flat buyers will have to fork out more, thereby reducing the lottery gain (one could also see it as reducing consumer surplus) when they sell in the open market in a few years' time.
Now at this point, some of you will recognise that hey - that sounds like a monopoly exercising market power and practising price discrimination. One could interpret it that way for a simple understanding though it is not strictly so since flats on different floors are clearly not the same. However, since HDB is the only supplier of those blocks with those great views, it most definitely has pricing power to charge each unit as high as the reservation price - the maximum amount a potential flat buyer is willing to pay. This of course is price discrimination.
The word "discrimination" is slightly unfortunate here since it sometimes gives the wrong impression of the actual impact of a monopolist. Practicing price discrimination needs not be a bad thing from the economic point of view so long as it is done for benign reasons. It can even increase total welfare for the country. How so? By extracting the surplus from those who value the great views and convenience (who are paying higher price), HDB can then provide a transfer to those who can less afford to pay, that is, using the extra revenue to reduce the price of other flats to below their cost to help the poorer consumers. This cross subsidy might allow more or better flats to be built for those with less ability to pay, or be used to provide public goods like disabled access, linkways, gardens etc which because of the free-riding problem are usually under-provided. Of course, the subsidised flats will not come with a great view.
So which is a better way - charging willing and able first-time buyers top dollar for the view and convenience in order to cross-subsidise the financially less able buyers, or using a ballot system to decide who walks away with a windfall. It is interesting food for thought, isn't it?
posted by Bart JP at
3:37 am
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