The Government is seeking views on how to price and allocate new public housing flats in prime areas, in a way that stays true to the values of accessibility, inclusivity and diversity in public housing.
As Second Minister for National Development Indranee Rajah wrote in a commentary, "Striking a balance in building HDB flats in prime locations", on June 10 in The Straits Times, such flats would cost more than many other Housing Board flats to build given their expensive prime locations. Such flats are likely to fetch higher gains when sold on the open market after the minimum occupation period (MOP) of five years, giving these owners windfall gains. Are there ways to claw back those subsidies or gains?
To keep such high-priced flats accessible and diverse, "a different public housing model will be needed for new HDB flats injected in prime locations in future".
The current consultation exercise ends in end-June. It can be accessed at the Reach website.
Many commentators have focused on plans for the Greater Southern Waterfront (GSW) - a 30km stretch of coastline to be redeveloped after the port moves from Tanjong Pagar to Jurong. The first phase is around Pasir Panjang Power District, Keppel Club and Mount Faber and includes plans for 9,000 homes, including HDB flats.
But the proposed "new housing model" is sought not just for GSW flats, but also for other new flats on "recycled" land in the city centre. These potentially make up a very large pool of flats.
The first HDB flats were built in the 1960s, in city centre areas such as Queenstown, Chinatown, Tiong Bahru, Redhill, Rochor and MacPherson. When the HDB was set up to build flats for the masses in 1960, about one quarter of Singapore's 1.6 million population was "squeezed into decrepit shophouses in the central city area" between Crawford Road in the north and Outram Road in the south. Another quarter lived in "dismal shacks on the city fringe", according to HDB in its publication First Decade In Public Housing, HDB, 1960-1969.
The newly elected People's Action Party (PAP) Government had an ambitious plan to build a new city centre. This required slums to be torn down and residents moved to new homes.
Enter the HDB. From 1961 to 1965, it built 52,748 flats, mostly within and around the city centre, for the residents whose homes were torn down. As a comparison, the HDB's precursor, the Singapore Improvement Trust, had built 23,019 units in 32 years.
Lessons from 60 years of public housing
That bit of history is pertinent for the next phase of public housing.
In looking ahead at what might work, we have to look back at lessons learnt from six decades of managing HDB estates through the life cycle of the flats, and through the life cycle of couples who marry, have children and age in place.
Intergenerational equity
The first generation of HDB flat owners paid low prices for their flats, which were priced to their affordability. Early planners estimated that workers could afford to pay about $20 a month for their homes, so flats were built to be rented or bought on loan on that sum.
As the country grew and flat prices rose along with GDP growth, early home owners enjoyed huge capital returns on their flats. Such gains were considered equitable when first-time flat owners were poor, relative to later generations of flat owners.
But such a generational distinction no longer holds true today. Today's first-time flat buyers are well-educated couples with good incomes. It is fairer to ensure that first-time flat owners pay prices and receive subsidies commensurate with their means.
The HDB used to have fixed prices for flats, which were loosely grouped into urban, suburban or new town districts in the 1970s; and then subdivided into six areas in the 1980s (central core, inner urban, outer urban, inner suburban, outer suburban and new town). Within these categories, the flats were priced the same, regardless of floor height, facing or other attributes.
A standard three-room flat in the urban area cost $14,500 in 1971; and $7,800 in a new town. The location premium was about 1.9.
A flat built in 1971 that would have cost $14,500 in the urban area, was sold for $288,000 in April this year (Block 8 Jalan Bukit Ho Swee). That is nearly 20 times what was paid 50 years ago.
Unlike the impoverished slum dwellers who moved into the first prime-location HDB flats, today's buyers of prime flats are young couples with good incomes able to afford the high-priced Build-To-Order (BTO) flats.
The monthly income ceiling of $14,000 for BTO flats puts young couples above the 70th percentile of household income - not very rich, but certainly not poor. Those earning less would settle for HDB flats in outlying areas. In Woodlands, for example, a four-room starts from $275,000, just under half of the Telok Blangah flat.
What does this mean for HDB flat pricing?
I think it is time to accept that the HDB provides a range of tiered public housing that caters to different income groups and household types, and adjust subsidies to meet those profiles.
This requires subsidies to be tiered. In short, it's time to consider means-testing housing subsidies.
Right now, a slew of generous housing grants tilts the balance to help lower-income households afford homes, but the majority of HDB flat applicants receive bulk subsidies that do not differ by income.
Just as healthcare subsidies vary according to your income even if you use the same healthcare, so HDB subsidies for the same type of flat can vary according to income.
Such a means-tested tiered system of HDB subsidies is more equitable than the current system, which helps high-earning young couples to buy a valuable flat they can later make huge capital gains from - tax-free; while denying the struggling single parent enough subsidies for a decent home for her children.
Pricing HDB flats right at the onset, and tiering subsidies to fit household incomes, reduces inequity across generations. Underpricing flats or over-providing subsidies just lets today's flat owners benefit at the expense of tomorrow's young couples.
Decaying lease and the life cycle of flats and families
The issue of how much HDB flats may depreciate in value as they near the end of their 99-year lease has drawn much attention in recent years.
One outcome is that a growing number of Singaporeans are becoming more leery of buying older flats, even if these are in conveniently located mature estates. Huttons Research found a narrowing price gap between mature estates which tend to be older and newer non-mature estates. Other analysts have warned that flat prices will slide when flats hit 65 and 70 years old, when financing restrictions kick in.
So while the value of new HDB flats will go up initially, especially after the five-year MOP as more categories of people can own resale HDB flats, prices will invariably fall as the flats age into the decades, and get closer to the lease expiry.
When is the tipping point reached, when rising prices start to plateau and then slide? Is it in Year 30, 40, 50, 60? Home buyers will make their own calculations.
Many Singaporeans are coming to realise the hard truth of HDB flats: They are not meant for capital appreciation in the long term. They are meant to be homes for the long term.
Too much talk about asset enhancement and capital gains is negative for a sense of community, as HDB estates become places people can't wait to upgrade out of, rather than as homes to raise families and sink roots in.
In the coming years, as new HDB flats are launched in prime areas with fresh 99-year leases, I hope the narrative shifts from HDB flats as capital assets, to HDB flats as homes for a family's life cycle, where children grow up, and the couple ages.
Seeing HDB flats this way suggests the need for multiple flat types within a precinct, and within a block. Flexible layouts should become common, so families can tweak their internal spaces for their needs.
This also suggests the need for multiple ownership options - a couple buying a four-room flat to start a family may move to a smaller studio flat with a shorter lease within the same block, or same precinct, keeping their social ties, and ageing gracefully in place.
Flexible ownership models can allow the HDB, as the master lease holder, to rent out or sell units with shorter leases, all within the same block to meet demand.
As HDB blocks near the tail end of their lease, the HDB can start buying back units from flat owners and converting them to rental units. A more versatile rental market can be created, offering young couples homes at near-market rates before their BTO flats are ready, or catering to those who sold their flats and need to wait before they can buy new ones. While home ownership should remain a core tenet of 2020s Singapore, the co-living and sharing economy trends mean greater acceptance of renting as a living option. The HDB should be flexible in adopting rental models to meet families' needs.
The possibilities are many. What is needed is a good hard look at what no longer works (seeing HDB flats as capital assets for the long term), and looking at emerging needs and how to meet them better.
Encourage owner occupation, discourage speculation
To encourage people to live in HDB flats long-term, the incentive structure has to make sense for homestayers. This means reducing the incentive for people to flip HDB flats once the MOP is up.
For a start, extend the MOP before a flat can be rented out from five years, back to at least 10 years.
The HDB allowed flat dwellers to rent out rooms in the 1970s when there was a housing shortage. Renting out of whole flats was permitted only in 2003 for owners who have lived in them for at least 10 years. The rules were tweaked over the years and current ones require an MOP of five years before renting out an HDB flat.
To discourage hoarding of HDB flats for rental yield, the MOP for renting out of new flats and resale flats bought with government grants should be extended to at least 10 years.
Next, cap resale market gains.
When the HDB was started, people could sell their flats only back to the HDB, at prices depreciated from their selling price. In 1971, they were allowed to sell them on the open market to other buyers - but tough financing constraints for buyers kept prices down. When prices rose in a booming property market in the late 1970s, profit margins from resale flats went up. To cap such margins, in 1982, the Government introduced levies to be paid on sale proceeds of first HDB flats: of 10, 15, 20, 25 and 30 per cent respectively for three-, four- and five- room, and executive and HUDC flats.
Then came the 1984-1985 recession. In 1985, in a bid to boost the property market, the rules were tweaked. The levies were scrapped and people were allowed to keep all profits from the resale of HDB flats. They had to pay a levy only if they wanted a so-called "second bite of the cherry" - sell the first flat, pocket the proceeds, apply for a second subsidised flat. This levy did not apply if buyers went on to buy private property or another resale flat.
By the 1990s, an active resale market had developed and Central Provident Fund and bank loans sprang up to finance such purchases. Asset enhancement was the goal for many flat dwellers.
Today, HDB flats can be sold for over $1 million. As at June 14 this year, at least 389 resale flats have been sold for at least $1 million since 2012, and 87 in the first five months of this year.
Such windfall gains that go to those who could afford high-priced BTO flats in the first place make a mockery of subsidised public housing. Subsidies should go to those who need them, not those best placed to milk more from the system.
It is time to introduce some levy or tax on gains from the sale of subsidised HDB flats. A levy, either flat or tiered by flat type as done in 1982, is one way. Others suggest a more complex system based on a levy on prices above median resale prices by location.
I have a simpler suggestion: Treat gains from selling subsidised HDB flats (all new flats and resale flats bought with government grants) as income and subject them to income tax.
Why not such a tax on private property gains too? Because private property owners don't get government subsidies to buy their units.
Why treat them like income and not impose a levy? Because the income tax system has progressivity built into it, while a flat levy is not progressive. Suppose a 10 per cent levy is imposed. For sales proceeds of $100,000, the flat owner earning $3,000 a month pays the same $10,000 levy as one earning $30,000.
But if treated as income, the low-income owner potentially pays zero tax on the proceeds, if his total income falls below the income tax threshold. The owner earning $30,000 has to pay a much higher marginal rate of tax on his HDB proceeds, as his high income already puts him into a higher tax bracket. The tax on HDB sales proceeds may be prohibitive enough to turn some away from taking up housing subsidies they don't need.
All sales gains from subsidised HDB flats should be taxed like this, not just those in prime locations. They hit hardest the high-income who enjoy the highest sales proceeds, while leaving untouched those who make modest gains and who are low-income earners - precisely the equitable effect sought.
As more city-centre HDB housing gets rejuvenated, it is more than building blocks we need to refresh. We need, as Ms Indranee put it, a new public housing model.
This should include new ways to give out and claw back housing subsidies. We also need to talk about what is equitable across generations, especially when we have public housing sold on a fixed lease term. Finally, we need to settle on one side of the perennial balance beam: to treat the HDB flat more as a home than as an asset.
The above are just some ideas on how we might tweak our public housing model. As ageing estates in the city centre are sold with fresh leases, there is a once-in-a-generation opportunity to update our financing and policy model for public housing. We should be bolder in our thinking to meet future needs and not under-deliver.
The Government is seeking views on how to price and allocate new public housing flats in prime areas, in a way that stays true to the values of accessibility, inclusivity and diversity in public housing.
As Second Minister for National Development Indranee Rajah wrote in a commentary, "Striking a balance in building HDB flats in prime locations", on June 10 in The Straits Times, such flats would cost more than many other Housing Board flats to build given their expensive prime locations. Such flats are likely to fetch higher gains when sold on the open market after the minimum occupation period (MOP) of five years, giving these owners windfall gains. Are there ways to claw back those subsidies or gains?
To keep such high-priced flats accessible and diverse, "a different public housing model will be needed for new HDB flats injected in prime locations in future".
The current consultation exercise ends in end-June. It can be accessed at the Reach website.
Many commentators have focused on plans for the Greater Southern Waterfront (GSW) - a 30km stretch of coastline to be redeveloped after the port moves from Tanjong Pagar to Jurong. The first phase is around Pasir Panjang Power District, Keppel Club and Mount Faber and includes plans for 9,000 homes, including HDB flats.
But the proposed "new housing model" is sought not just for GSW flats, but also for other new flats on "recycled" land in the city centre. These potentially make up a very large pool of flats.
The first HDB flats were built in the 1960s, in city centre areas such as Queenstown, Chinatown, Tiong Bahru, Redhill, Rochor and MacPherson. When the HDB was set up to build flats for the masses in 1960, about one quarter of Singapore's 1.6 million population was "squeezed into decrepit shophouses in the central city area" between Crawford Road in the north and Outram Road in the south. Another quarter lived in "dismal shacks on the city fringe", according to HDB in its publication First Decade In Public Housing, HDB, 1960-1969.
The newly elected People's Action Party (PAP) Government had an ambitious plan to build a new city centre. This required slums to be torn down and residents moved to new homes.
Enter the HDB. From 1961 to 1965, it built 52,748 flats, mostly within and around the city centre, for the residents whose homes were torn down. As a comparison, the HDB's precursor, the Singapore Improvement Trust, had built 23,019 units in 32 years.
Lessons from 60 years of public housing
That bit of history is pertinent for the next phase of public housing.
In looking ahead at what might work, we have to look back at lessons learnt from six decades of managing HDB estates through the life cycle of the flats, and through the life cycle of couples who marry, have children and age in place.
Intergenerational equity
The first generation of HDB flat owners paid low prices for their flats, which were priced to their affordability. Early planners estimated that workers could afford to pay about $20 a month for their homes, so flats were built to be rented or bought on loan on that sum.
As the country grew and flat prices rose along with GDP growth, early home owners enjoyed huge capital returns on their flats. Such gains were considered equitable when first-time flat owners were poor, relative to later generations of flat owners.
But such a generational distinction no longer holds true today. Today's first-time flat buyers are well-educated couples with good incomes. It is fairer to ensure that first-time flat owners pay prices and receive subsidies commensurate with their means.
The HDB used to have fixed prices for flats, which were loosely grouped into urban, suburban or new town districts in the 1970s; and then subdivided into six areas in the 1980s (central core, inner urban, outer urban, inner suburban, outer suburban and new town). Within these categories, the flats were priced the same, regardless of floor height, facing or other attributes.
A standard three-room flat in the urban area cost $14,500 in 1971; and $7,800 in a new town. The location premium was about 1.9.
A flat built in 1971 that would have cost $14,500 in the urban area, was sold for $288,000 in April this year (Block 8 Jalan Bukit Ho Swee). That is nearly 20 times what was paid 50 years ago.
Unlike the impoverished slum dwellers who moved into the first prime-location HDB flats, today's buyers of prime flats are young couples with good incomes able to afford the high-priced Build-To-Order (BTO) flats.
The monthly income ceiling of $14,000 for BTO flats puts young couples above the 70th percentile of household income - not very rich, but certainly not poor. Those earning less would settle for HDB flats in outlying areas. In Woodlands, for example, a four-room starts from $275,000, just under half of the Telok Blangah flat.
What does this mean for HDB flat pricing?
I think it is time to accept that the HDB provides a range of tiered public housing that caters to different income groups and household types, and adjust subsidies to meet those profiles.
This requires subsidies to be tiered. In short, it's time to consider means-testing housing subsidies.
Right now, a slew of generous housing grants tilts the balance to help lower-income households afford homes, but the majority of HDB flat applicants receive bulk subsidies that do not differ by income.
Just as healthcare subsidies vary according to your income even if you use the same healthcare, so HDB subsidies for the same type of flat can vary according to income.
Such a means-tested tiered system of HDB subsidies is more equitable than the current system, which helps high-earning young couples to buy a valuable flat they can later make huge capital gains from - tax-free; while denying the struggling single parent enough subsidies for a decent home for her children.
Pricing HDB flats right at the onset, and tiering subsidies to fit household incomes, reduces inequity across generations. Underpricing flats or over-providing subsidies just lets today's flat owners benefit at the expense of tomorrow's young couples.
Decaying lease and the life cycle of flats and families
The issue of how much HDB flats may depreciate in value as they near the end of their 99-year lease has drawn much attention in recent years.
One outcome is that a growing number of Singaporeans are becoming more leery of buying older flats, even if these are in conveniently located mature estates. Huttons Research found a narrowing price gap between mature estates which tend to be older and newer non-mature estates. Other analysts have warned that flat prices will slide when flats hit 65 and 70 years old, when financing restrictions kick in.
So while the value of new HDB flats will go up initially, especially after the five-year MOP as more categories of people can own resale HDB flats, prices will invariably fall as the flats age into the decades, and get closer to the lease expiry.
When is the tipping point reached, when rising prices start to plateau and then slide? Is it in Year 30, 40, 50, 60? Home buyers will make their own calculations.
Many Singaporeans are coming to realise the hard truth of HDB flats: They are not meant for capital appreciation in the long term. They are meant to be homes for the long term.
Too much talk about asset enhancement and capital gains is negative for a sense of community, as HDB estates become places people can't wait to upgrade out of, rather than as homes to raise families and sink roots in.
In the coming years, as new HDB flats are launched in prime areas with fresh 99-year leases, I hope the narrative shifts from HDB flats as capital assets, to HDB flats as homes for a family's life cycle, where children grow up, and the couple ages.
Seeing HDB flats this way suggests the need for multiple flat types within a precinct, and within a block. Flexible layouts should become common, so families can tweak their internal spaces for their needs.
This also suggests the need for multiple ownership options - a couple buying a four-room flat to start a family may move to a smaller studio flat with a shorter lease within the same block, or same precinct, keeping their social ties, and ageing gracefully in place.
Flexible ownership models can allow the HDB, as the master lease holder, to rent out or sell units with shorter leases, all within the same block to meet demand.
As HDB blocks near the tail end of their lease, the HDB can start buying back units from flat owners and converting them to rental units. A more versatile rental market can be created, offering young couples homes at near-market rates before their BTO flats are ready, or catering to those who sold their flats and need to wait before they can buy new ones. While home ownership should remain a core tenet of 2020s Singapore, the co-living and sharing economy trends mean greater acceptance of renting as a living option. The HDB should be flexible in adopting rental models to meet families' needs.
The possibilities are many. What is needed is a good hard look at what no longer works (seeing HDB flats as capital assets for the long term), and looking at emerging needs and how to meet them better.
Encourage owner occupation, discourage speculation
To encourage people to live in HDB flats long-term, the incentive structure has to make sense for homestayers. This means reducing the incentive for people to flip HDB flats once the MOP is up.
For a start, extend the MOP before a flat can be rented out from five years, back to at least 10 years.
The HDB allowed flat dwellers to rent out rooms in the 1970s when there was a housing shortage. Renting out of whole flats was permitted only in 2003 for owners who have lived in them for at least 10 years. The rules were tweaked over the years and current ones require an MOP of five years before renting out an HDB flat.
To discourage hoarding of HDB flats for rental yield, the MOP for renting out of new flats and resale flats bought with government grants should be extended to at least 10 years.
Next, cap resale market gains.
When the HDB was started, people could sell their flats only back to the HDB, at prices depreciated from their selling price. In 1971, they were allowed to sell them on the open market to other buyers - but tough financing constraints for buyers kept prices down. When prices rose in a booming property market in the late 1970s, profit margins from resale flats went up. To cap such margins, in 1982, the Government introduced levies to be paid on sale proceeds of first HDB flats: of 10, 15, 20, 25 and 30 per cent respectively for three-, four- and five- room, and executive and HUDC flats.
Then came the 1984-1985 recession. In 1985, in a bid to boost the property market, the rules were tweaked. The levies were scrapped and people were allowed to keep all profits from the resale of HDB flats. They had to pay a levy only if they wanted a so-called "second bite of the cherry" - sell the first flat, pocket the proceeds, apply for a second subsidised flat. This levy did not apply if buyers went on to buy private property or another resale flat.
By the 1990s, an active resale market had developed and Central Provident Fund and bank loans sprang up to finance such purchases. Asset enhancement was the goal for many flat dwellers.
Today, HDB flats can be sold for over $1 million. As at June 14 this year, at least 389 resale flats have been sold for at least $1 million since 2012, and 87 in the first five months of this year.
Such windfall gains that go to those who could afford high-priced BTO flats in the first place make a mockery of subsidised public housing. Subsidies should go to those who need them, not those best placed to milk more from the system.
It is time to introduce some levy or tax on gains from the sale of subsidised HDB flats. A levy, either flat or tiered by flat type as done in 1982, is one way. Others suggest a more complex system based on a levy on prices above median resale prices by location.
I have a simpler suggestion: Treat gains from selling subsidised HDB flats (all new flats and resale flats bought with government grants) as income and subject them to income tax.
Why not such a tax on private property gains too? Because private property owners don't get government subsidies to buy their units.
Why treat them like income and not impose a levy? Because the income tax system has progressivity built into it, while a flat levy is not progressive. Suppose a 10 per cent levy is imposed. For sales proceeds of $100,000, the flat owner earning $3,000 a month pays the same $10,000 levy as one earning $30,000.
But if treated as income, the low-income owner potentially pays zero tax on the proceeds, if his total income falls below the income tax threshold. The owner earning $30,000 has to pay a much higher marginal rate of tax on his HDB proceeds, as his high income already puts him into a higher tax bracket. The tax on HDB sales proceeds may be prohibitive enough to turn some away from taking up housing subsidies they don't need.
All sales gains from subsidised HDB flats should be taxed like this, not just those in prime locations. They hit hardest the high-income who enjoy the highest sales proceeds, while leaving untouched those who make modest gains and who are low-income earners - precisely the equitable effect sought.
As more city-centre HDB housing gets rejuvenated, it is more than building blocks we need to refresh. We need, as Ms Indranee put it, a new public housing model.
This should include new ways to give out and claw back housing subsidies. We also need to talk about what is equitable across generations, especially when we have public housing sold on a fixed lease term. Finally, we need to settle on one side of the perennial balance beam: to treat the HDB flat more as a home than as an asset.
The above are just some ideas on how we might tweak our public housing model. As ageing estates in the city centre are sold with fresh leases, there is a once-in-a-generation opportunity to update our financing and policy model for public housing. We should be bolder in our thinking to meet future needs and not under-deliver.