Are HDB flat owners paying more for their flats than its actual value of land and cost of construction?

Are HDB flat owners paying more for their flats than its actual value of land and cost of construction?

Former Temasek Holdings CEO, Ho Ching, in her latest rant on Friday, wrote about how flats developed by the Housing Development Board (HDB), in many ways, are better than private flats.

She cited the benefits that HDB flats buyers get, such as subsidies from the Singapore government, the infrastructure investments like coastal protection or MRT lines, hospitals and schools, or the Singapore Armed Forces, submarines, police or teachers.

However, other than not having to utilise the subsidies for public housing by the private property owners, don’t they, too, enjoy the other public services mentioned by Mdm Ho?

In any case, Mdm Ho’s comments got me thinking, are we sure that HDB flat buyers are getting them better than those buying private properties under the current system of pricing?

Are they really getting value for money paid for their 99-year leasehold, as Mdm Ho puts it?

Thankfully, as a result of the Non-constituency Member of Parliament, Mr Leong Mun Wai’s constant badgering for details from the Government, we now have specific data for a recent HDB project in Ang Mo Kio for the purpose of consideration.

In response to Mr Leong’s parliamentary question on the net loss by HDB for the Central Weave Build-To-Order (BTO) project at Ang Mo Kio, Mr Desmond Lee, Minister of National Development, shared that HDB will incur an estimated development loss of about $250 million or about S$270 million if the CPF housing grants to eligible buyers are considered.

As for the cost of land paid by HDB to the Singapore Land Authority (SLA) for the BTO project, Mr Lee said the estimated land cost for the project is about S$500 million. The cost is determined independently by the Chief Valuer, using market valuation principles, said Mr Desmond Lee.

The Minister explains that HDB does not price new flats based on cost but establishes their market value by considering the prices of comparable resale flats nearby as well as the individual attributes of the flats and prevailing market conditions.

To derive the selling prices, HDB applies a significant subsidy to the assessed market values to ensure that new flats are affordable to those buying their first home, said Mr Desmond Lee.

And, of course, HDB cannot price the flats based on the development cost.

Because contrary to private property owners in a strata title, all the land and facilities within the estate belong to them.

For example, in the case of HDB’s new form of BTO projects, HDB flat owners are still being charged by HDB for parking in the estate’s multi-storey carpark which is covered under the development costs and land costs.

Also, the HDB flat owners cannot restrict the public from using the facilities, nor can they charge the public for the use like condominiums do.

The same goes for the use of the hard court, BBQ pits and other facilities, which are supposedly covered under the BTO project development cost.

However, when it comes to the cost component of land, it becomes unclear on the government’s position.

While Mr Desmond Lee states pricing for BTO flats is not based on costs, Senior Minister of State for National Development, Sim Ann seems to take a different position.

Ms Sim recently made a Facebook post to rebut the point made by Non-constituency Member of Parliament Leong Mun Wai about the removal of land costs from HDB flats.

She wrote, “I am glad Mr Leong concedes that BTO pricing should account for such location differences. We are in agreement here. But at the same time, Mr Leong also suggests taking land costs out of the picture and recovering only construction costs. We cannot do that if we accept that land values in fact vary across locations.”

She adds, “Mr Leong’s response would be that the Government can charge HDB less for the land. By this he means that we should draw more from our Reserves, though he has avoided saying this explicitly. We have explained a number of times that state land forms part of the nation’s Reserves. If HDB does not pay back into the Reserves the fair market value of the land, we would in effect be running down the value of our Reserves, to the detriment of current and future generations.”

So what I get from Ms Sim’s Facebook post is that the land costs that HDB pays to the Singapore Land Authority for its BTO projects are factored into the pricing of BTO flats.

She does not deny the point made by Mr Leong about land costs being factored into the cost of BTO flats and instead censured him for proposing its removal.

Now putting aside whether land costs should be removed from the prices of BTO flats, should we then consider the question of how much of the land costs should BTO flat buyers be paying?

Suppose we were to refer to the layout of the Central Weave BTO project. We could assume that the development cost of S$250 million is meant to cover the building of the flats, as well as the cost of planting the trees, building the multi-storey carpark, shelters, pavilion, fitness station, the hard court and etc.

As to the S$500 million land costs, if you refer to the actual land take-up of the flats in the Central Weave project, you will probably find that the land that the units sit on, including the common corridors, hardly seems to take up 30 per cent of the estate.

Assuming the flats take up 30 per cent of the total land area of the project, the land cost for the land that the BTO flats occupy is about S$150 million.
There are 21 to 32 storeys in the Central Weave BTO project, so the land costs of S$150 million will have to be further divided by at least 21 times (number of floors) to get the average land cost of a BTO flat in this project.

For the sake of illustration, we can simply take about S$150 million divided by 892 units by 21 floors which gives us an average of S$7,972 for each unit. Also, note that it ought to be lower for those flats that are 32 stories high.

Therefore, even if we were to take the entirety of the S$250 million development cost for the BTO flats and with the addition of the land cost taken up by a BTO unit, the average cost per HDB unit should be around S$270,000.

At the same time, buyers of this BTO project are expected to pay up to S$676,000 for a four-room flat and even S$842,000 for a 3Gen unit.

Buyers made to pay for construction and land not owned by them?

So with this illustration and consideration, we are greeted with a question.

Is HDB selling buyers its HDB flats at prices that are way above the cost involved in building them, or is HDB making buyers pay for the additional cost of building facilities and land that they do not own and then reducing the final price by “subsidising” the buyer with grants?

We have to remind ourselves that in the case of strata title, the owners own everything in that development, including the land on which the multi-storey apartments and facilities sit.

Therefore, when a developer wants to buy over their flats, it has to pay for the entire estate land and not just their unit space.

Whereas in the case of an HDB flat owner, only the flat can be sold, whereas the land on which the facilities sit still belongs to the government.

As seen in the case involving the Selective En bloc Redevelopment Scheme (SERS) at Ang Mo Kio Ave 3, the Government appears to be buying back the flats at their individual level without paying for the land surrounding the estate.

Of course, it might be the case where the flats at AMK Ave 3 did not factor in land costs into their pricing under the 1G PAP government but the issue about the government not needing to pay for development outside of the flat owners’ units is more than enough reason not to charge them using the development cost as a basis.

Going back to Mdm Ho’s example of how HDB flat “owners” are better off than private property owners.

We would probably, on the contrary, consider HDB owners as being worse off since private property owners also have access to the public facilities that Mdm Ho cited, which are initially funded fully or partially by their purchase of HDB flats.

Mdm Ho also ignores the fact that the HDB flat becomes worthless at the end of the 99-year lease, whereas historically, every private condo has had its lease extended before the expiry.

That being said, citizens still have to buy public housing as most cannot afford private housing. Rental from the open market is also out of the question, given how expensive it has grown to be today.

To say that the citizens could and are still applying for the flats, and therefore affordable, is kind of missing the point, as it is a basic need that everyone has to meet regardless of the financial burden involved.

One should instead ask if it is justifiable for citizens to be paying off their public housing at the price that HDB is charging them and having to spend years to save up for the downpayment and then decades to pay off the housing loan.

And perhaps that is also why Minister Indranee Rajah told Mr Pritam Singh that it is not helpful or meaningful for HDB to disclose the cost for each BTO project. Because if we have the data as revealed in the case of Central Weave, we might find some troubling figures from the breakdown.

If HDB insists on pricing its public housing in the manner it has been doing for the past couple of years, then the BTO projects ought to be given strata title to their estate so as to allow the buyers to hold collective ownership over the actual value of the development and land to add value for them.

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