How much Household Wealth is Transferred to the State Through Public Housing?
Overall, across the different room sizes, the total wealth transfer (i.e. land cost plus interests excluding resale levy) constitutes about 60% – 70% of the effective BTO prices (i.e. inclusive of interests) after grant. In other words, 60% – 70% of what homeowners pay are pure profit to the state because of the high land cost. While the government bears no risk by fully capturing the gains in land value upfront at the point of BTO, all the risk of owning the apartment as an investment asset is wholly borne instead by homeowners if losses are incurred at the point of resale. The issue with high BTO prices today is therefore not only about affordability, as the Government posits, but more about fairness, financial risk and household resilience.
11 September 2019
Selling price of a new HDB apartment is usually thought of to be comprised of two major components: construction costs and land costs. Construction costs, based on competitive open tenders, are indisputable. Land costs, on the other hand, are set at market prices less an undisclosed discount which the government regards as a subsidy though the exact amount is not disclosed.
The Full Costs of Homeownership: Interests & Resale Levy
In reality, however, BTO prices do not reflect the full cost of homeownership. In particular, the official BTO prices omit interest payments which work out to be a substantial amount because of the high loan amount needed and the long loan term. Perplexingly many homeowners do not factor in interest payment as part of the total purchasing costs because it is hidden in the seemingly affordable monthly mortgage payments.
Take for example a homeowner who buys a four-room flat costing $562,000 in May 2019 in a matured estate. After adding in interest payable to HDB amounting to $181,200, he ends up paying a final total price or effective BTO price (i.e. BTO price plus interests) of $738,200. Furthermore, when he upgrades to his second BTO, he pays another $40,000 to HDB as resale levy. His total cost is therefore $778 200 for a house priced at $562,000 at the point of BTO. The omissions of interests and resale levy mean that any potential capital gain from the resale of a HDB apartment may be overstated while the full costs of homeownership, and hence also financial risk, are substantially understated.
The high interest payment is also another reason why the current pricing approach is inequitable to homeowners. Even if the land dividend should go fully to the State and kept as reserves, for the homeowners to borrow money from the State to pay that high land costs to the State and in the process further incur substantial interest payments again to the State exacerbates the inequity. Moreover, the loan is in effect merely a paper entry between government agencies. The interest payment is pure profit for the State.
How Much Household Wealth is Transferred to the State
Using again the example of the four-room flat costing $562,000 in 2019, a homeowner would have to pay $281,000 for construction, $281,000 for land (i.e. assuming conservatively that land cost is 50% of BTO prices), and another $181,200 for interests over a 25-year loan period.
Wealth Transfer from Households to the State (3-Rm to 5-Rm)
* The price of the 5-Room apartment in matured estate is extracted from the November 2018 BTO sales launch. All other prices are from May 2019 BTO sales launch.
** Extracted from https://services2.hdb.gov.sg/webapp/BB29MTHLY/BB29SMTHLY
Of the final total price (inclusive of interests) of $738,000, the State stands to make a ‘profit’ of $462,000 or 63% in the forms of land costs and interests. Moreover, if the homeowner chooses to sell and buy a second BTO flat, he will have to fork out another $40,000 as resale levy which again adds to the profit for the State. In effect, the resale levy means that the grant given to homeowners at the point of BTO sale is returned to the government at the point of resale.
Overall, across the different room sizes, the total wealth transfer (TWT i.e. land cost plus interests excluding resale levy) constitutes about 60% – 70% of the effective BTO prices (i.e. inclusive of interests) after grant. In other words, 60% – 70% of what homeowners pay are pure profit to the state because of the high land cost.
That is assuming that land cost is conservatively estimated to be 50% of the BTO price. If it turns out to be even more than the 50% assumed, then the TWT from the households to the State will be even higher. And if a homeowner purchases two BTO apartments during his lifetime, the loss of wealth to the State will be even more.
[About Land Cost] According to DTZ, the average cost of land sold in government tenders more than doubled in the five years between 2008 and the first half of 2013, from $310 per sq ft of gross floor area to $656 per sq ft. In other words, land costs grew at an average compound rate of 18.2% a year compared to the 9.1% for HDB resale prices and 5.2% for private property prices. Land prices had also risen faster than salaries. From 2008 to 2012, income rose at a compound annual rate of 5.3% for the average household and 6.2% for the top 10% of earners. For private residential project, land now makes up about three-fifths of development cost on average, up from two-fifths in 2008, according to DTZ.
Notably, the total wealth transfer for 3-room flat is lower at $132,600 or $312,900 depending on location and excluding the resale levy. Considering the low income for these households, however, even $132,600 is hugely significant at the expense of their retirement funding.
Moreover, all the above calculations have not taken into consideration any interests (i.e. the opportunity costs to the households) that the CPF savings could have earned if not paid out to the Government.
Finally, the high total costs of homeownership also leave little room for capital gain, even before the aforementioned opportunity cost is factored in. In the event of a prolonged depressed market conditions, homeowners may even suffer losses. HDB resale prices, for example, were depressed for 13 years between 1996 and 2009 before prices recovered to their 1996 high.
Excessive Wealth Transfer Leading to Weakening of Household Resilience
In short, two of the most successful welfare programmes – public housing and CPF – started by the 1G government have been fundamentally changed by the 2G and 3G governments.
To allow land dividend to be extracted by the State, genuinely affordable public housing has been re-positioned as an investment asset that generates no passive income and is worth nothing at the end of the lease, while the CPF savings meant for retirement are now re-purposed to pay for an overpriced leasehold flat misrepresented as an ‘asset’.
While the government bears no risk by fully capturing the gains in land value upfront at the point of BTO, all the risk of owning the apartment as an investment asset is wholly borne instead by homeowners if losses are incurred at the point of resale.
The issue with high BTO prices today is therefore not only about affordability, as the Government posits, but more about fairness, household resilience, and retirement funding.
High mortgage payments and long loan term of 25 - 30 years, on the other hand, have left many increasingly vulnerable to changing fortunes as they grow older and their earning power wanes. When the policy of high housing prices was adopted, the assumption was that wages would continue to rise with experience and skills as workers grow older. This assumption is no longer valid. The long-term trend of rising uncertainties with regards to jobs and income suggests that high mortgage commitments may drive default rates up in the future especially when they become older. That future risk cannot be mitigated by a small amount of grants (which the homeowners return to the Government in effect as resale levy) to enhance affordability today.
Already, the number of households in arrears of their mortgage payments has been on the rise over the years. In 2002, for example, 21,800 out of 540 000 households or 4.0% of the households had problem paying. The rates of default and repossession rose even when the economy was booming. From 2002 to 2006, for example, 360 households surrendered their flats after defaulting on their mortgage loan repayments. In 2008, when the recession began to hit, 32,000 or 7.7% of all flat owners servicing their HDB home loans were in default. By January 2009, at the height of the Global Financial Crisis, that number grew to 33,000 out of 420,000 households or 7.9% of the households.
HDB homeownership rate among resident households has been declining steadily over the past decade from the high of 92.0% in 2000 to 88.0% in 2011. Another telling figure is the number of households living in rental flats. In the aftermath of the 2009 global financial crisis, 33,000 households faced difficulty meeting mortgage obligations. By 2012, that number was reduced to 18,000 but demand for rental housing for lower income also rose correspondingly. Many of the 18,000 cases had given up their flat and switched to rental housing. As of July 2013, there were about 45,600 households living in HDB rental units. By 2015, that number was estimated to have hit 57,000.
Notably, many of these financially-strapped households bought their flats when prices were relatively lower. Going forward, given that many homeowners bought their flats at even higher prices in recent years, the HDB mortgage default rate is likely to be higher in future economic crises.
Finally, because of the wealth transfer, CPF savings meant for retirement have been seriously drained. Singapore has one of the highest per capita incomes and saving rates in the world. Yet, paradoxically, many are increasingly concerned over not having enough CPF savings to fund their retirement. One contributing factor, no doubt, is the unequal income distribution which leaves the wage earners at the lower rungs with little to save for retirement. Their plight, however, is compounded by the housing ‘investment’ which constitutes the biggest drain on their CPF savings. Any talk of returning public housing to “basic” must therefore involve looking at not just affordability but also its impacts on retirement funding.
In short, while the nebulous future capital gain from HDB flats as investment asset has become increasingly questionable on one hand, the future ability of households to service the housing loan is becoming less certain on the other. Many youths today are barely surviving at the margin in a burgeoning gig economy with works that do not even pay CPF. Straddling young households with an oversized housing loan, therefore, does not seem to be a particularly prudent way to start them off their life-long journey especially when past assumptions of ever rising resale value, rising income and job security are no longer valid. Moreover, in times of mounting uncertainties, it is the State, not the households, that should assume more risks.
The current public housing pricing policy is simply short-sighted, rent-seeking, inequitable and unsustainable.
PREVIOUS: 02 Extracting Land Dividend Through Public Housing
NEXT: 04 Extracting Land Dividend from Retail, Commercial and Industrial Properties through the REITs
 The maximum term for HDB housing loans was 30 years until 2013 when it was lowered to 25 years in August 2013. See http://www.straitstimes.com/singapore/new-hdb-measures-target-mortgage-servicing-ratio-and-maximum-loan-tenure
 See Fiona Chan. (2013). “Land costs outpaced rise in home prices.” 10 September 2013. STProperty.
 While it is true that the reduction of loan term loan to 25 years has helped homeowners to pay less interests, the shorter repayment period and the still rising BTO prices simply translate into higher monthly mortgage payments. Moreover, it is also no consolidation to those homeowners who had purchased their apartments before 2013.
 Double check: http://www.singstat.gov.sg/stats/charts/hhld.html#hhld