Why would the government lose money in sale of HDB flats?

Why would the government lose money in sale of HDB flats?

The Housing Development Board (HDB) reported on Mon (22 Oct) that it had incurred an overall deficit of $1.7 billion in the last FY.

In 2013, then National Development Minister Khaw Boon Wan explained that HDB actually has to pay the government for land to build HDB flats. He said the price of land is tied to acquisition costs, reclamation and the building of infrastructure around it.

“You need to acquire a piece of land; you need to reclaim a piece of land. All those costs money to taxpayers and we are just trustees of taxpayers and those costs are to be accounted for. And even when you have got that land prepared, land is only valuable when we invest in infrastructure, roads, MRT… And all those costs billions of dollars,” he said.

“Every year, hundreds of millions of dollars of losses were incurred by the HDB and that’s why MOF (Ministry of Finance) has to give the HDB an annual grant, otherwise the HDB will be in the red. It cannot be forever in the red, because there’s no way it can make money. Because every unit that we sell, we lose money, HDB loses money. The accounting for the HDB is deficit accounting. So if you incur a S$300-million loss, there is a grant of S$300 million that covers it. That is how we operate the HDB.”

“Let us not perpetuate this talk about HDB is making money out of building houses because if it was so simple, life would be straightforward, but that’s not the case,” he added. “The cost of building HDB flats includes the cost of land, design, construction, financing and other project-related costs. It varies from project to project and year to year.”

Govt as a whole does make money from HDB sales

HDB itself may be losing money but in actual fact, the government as a whole does make money. Let’s look at a specific example.

In Feb this year, HDB launched Tampines GreenDew comprised of four 15-storey residential blocks with 726 units of 3, 4, and 5-room flats. It also launched Tampines GreenFoliage comprised of four blocks with 542 units of 4 and 5-room flats. In total, 1,268 units were offered at Tampines in the Feb launch.

The 1,268 units were priced as follows:

Taking the average price of $219,500 for the 84 3-room flats, $324,500 for the 644 4-room flats and $448,500 for the 540 5-room flats, total revenue to HDB would amount to: $219,500 x 84 + $324,500 x 644 + $448,500 x 540 = $469,606,000.

The construction of the flats was later awarded to 2 companies through open tenders. Tampines GreenDew (726 units) was awarded to Prelim Construction Pte Ltd at $96,500,000 while Tampines GreenFoliage (542 units) was awarded to Ho Lee Construction Pte Ltd at $76,300,000. The construction also includes a multi-storey carpark with roof garden and other precinct structures like linkways, linkbridges, pavilions, trellis and shelters.

Therefore, the total construction cost for the 1,268 Tampines units, together with the associated precinct structures works out to be $172,800,000 or $136,278 per unit on average.

Hence, considering HDB as part of government, the government would have made: $496,606,000 – $172,800,000 = $323,806,000. Of course, this amount would include the infrastructure cost and, supposedly, the land cost too. But the infrastructure cost would only be a fraction of the $323,806,000. To calculate exactly how much the government made would then depend on the actual acquisition cost of the land by the government. Some were state land, to begin with. Others were compulsorily acquired from private entities at very low cost under the Land Acquisition Act many years ago.

For example, Bishan HDB estate was built from cemetery land forcefully acquired by the government at around 1980. The cemetery land originally belonged to Kwong Wai Siew Peck San Theng temple. In the end, the government only paid a compensation of $4.95 million to the temple for the 121-hectare (13,024,319 sqf) of cemetery land or about $0.38 psf.

So, with a low land cost incurred by the govt to begin with and later the govt marking up the land for sale at the current market price to the public, why would the government make losses in sale of HDB flats?

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