HDB – Shorter loans better?

Leong Sze Hian

I refer to the article “Length of loan is not the issue: Mah Bow Tan” (Today, May 1).

It states that “It is not the length of the loan but the percentage of monthly income repayable to the housing loan that matters. But if people are not happy with the 30-year loan for whatever reason, they can always take a smaller loan.”

The reason why most flat buyers take a 30-year loan, may be because their cash-flows are unable to support a shorter loan, given the sky-rocketing HDB prices.

Even the lowest range of new BTO four-room flats has an average price of about $255,000.

After the minimum down payment of five per cent, the monthly repayment on a 30 year loan is $970.

How many can afford shorter loans?

How many households can afford to pay more than $970, since a shorter loan as the Minister
suggests, would mean $1,099, $1,296 and $1,627, for a  25, 20, and 15 year loan, respectively.

Available Housing Withdrawal Limit

Other than a new flat with a HDB Concessionary Loan, all other HDB flat transactions are subject to the Available Housing Withdrawal Limit (AHWL).

Once the AHWL is reached, CPF can no longer be used to pay for the mortgage.

The AHWL is calculated as the CPF Ordinary (OA) and Special Accounts (SA) must have 50 per cent of the prevailing Minimum Sum (MS), once the total CPF used exceeds the Valuation Limit (original price or valuation, whichever is the lower).

For example, at the current MS of $123,000, once the CPF utilised exceeds $255,000, if the OA and SA is less than $61,500, no further CPF can be used.

So, for a 15 year loan, the AHWL may be hit after just 12 years and 5 months.

For a 20 year loan, it’s after 15 years and 7 months.

Therefore, opting for a shorter loan for new flats on HDB loans, or resale flats on HDB or bank loans, may be a risky move, since most people may not have enough cash to pay when CPF cannot be used.

Highest prices in the world?

These issues may be exacerbated by what are arguably the highest prices as well as the fastest growing public housing prices in the world.

The HDB Resale Price Index (RPI) grew by 11.1,  5.1 and 8.4 per cent per annum, over the last 5, 10, and 20 years, respectively.

This was higher than the Private Property Index (PPI), which grew 10.5, 3.9 and 6.4 per cent over the same periods.

Using the assumption that new flats’ prices were pegged to resale prices under the Market Subsidy Pricing policy, one could discount the four-room average price on a year-to-year basis to derive an estimate of historical prices.

On this basis, a $255,000 four-room average price in 2011, may be around $150,000, $158,000, $133,000 and $50,000, about 5, 10, 15 and 20 years ago.

Are there any countries in the world that have public housing prices that increase faster than private property?

After all, isn’t the primary objective of public housing to provide affordable housing to ordinary and particularly lower-income Singaporeans?

As an indicator of affordability, how much did median households income increase during these periods?

For example, median household income only increased by – 1 and 5 per cent for 2009 and 2010, against a 8 and 14 per cent increase in HDB prices, respectively.

Prices = Profits = Ministers’ pay?

Since in a sense, the HDB controls the supply and pricing of HDB flats, how much profits have been made over the years, under its Market Subsidy Pricing policy?

Also, to what extent has this contributed to GDP growth, and correspondingly Ministers’ remuneration which have a GDP growth component, and maybe a performance bonus too?