HDB Dichotomy: Depreciating Lease & Structure but Appreciating Land Value

HDB Dichotomy: Depreciating Lease & Structure but Appreciating Land Value

The Online Citizen·2023-05-30 19:06

Below is an open letter written by Jeff Ho to the Senior Minister of State for the Ministry of National Development, Sim Ann and copied to Minister of National Development Desmond Lee, Mr Pritam Singh and Mr Leong Mun Wai.

Dear Ms Sim,

I refer to today’s article, “Sim Ann invites NCMP Leong Mun Wai to file motion to fully debate BTO pricing in Parliament; PSP accepts” | The Straits Times, 21 December 2022

For the upcoming debate to be meaningful, given that land cost makes up the bulk of HDB Build-To-Order (BTO) flat, it would be honourable for the government to be transparent to the citizens not only on how these flats are priced, and if subsequently compulsorily acquired by the government (eg Selective En bloc Redevelopment Scheme (SERS)?) before the 99-year leases are up, but also how they are to be compensated equitably.

This has major implications for citizens entering the market now or in the future (our children and their children) given the prevailing runaway property prices which will be exacerbated with unfettered entry of millions of rich “foreign talents” and/or Permanent Residents from countries with billions of citizens like China and India – limited supply of land for housing vs overwhelming (unlimited?) demand (private/public housing prices have shown to be positively correlated in Singapore over the years).

While we understand that the structure of the flat (ie the construction cost portion) is depreciating over time, history has shown that land cost (now accounting for the bulk of the flat price) is an appreciating asset (over the long term) in land-scarce Singapore.

For the year in 2022, assuming HDB land cost charged to lessees @ *60% of flat price = $360,000 for 99 years leasehold. And if we assume a flat size of 1000 sq ft, prevailing land cost in 2022 is therefore valued at $360 psf for the 99 years lease. ($360 x 1000 x 99/99 = $360,000 for the full duration of the 99-years lease).

If SERS happens in 50 years (ie year 2072), and assuming land valuation goes up 4x to a prevailing market $1440 psf (@ $360 x 4), then land cost compensation should be $1440 x 1000 x 49/99 (49 years of lease remaining), ie $712,727. (Theoretically, the government of the day can then recycle the acquired land into the next new 99-year lease at the then prevailing market value.).

(Note: a rough back of envelope estimate: if land appreciates four times but is left with half of the remaining lease, compensation value = 4 x 0.5 = twice the original value, so in the above example, $360,000 x 2 = $720,000).

Is this more equitable and transparent for the land cost component of the HDB pricing since land cost now makes up some 60 per cent of the total cost of the flat?

Regards

*”When HDB flats were first sold, the land cost was negligible as a proportion of the total selling price. In the mid to late ’80s, it was about a third. Today, it accounts for almost 60 per cent, according to data recently released by the government.

Thus, a young couple buying a S$600,000 BTO today will be contributing (land cost of) S$360,000 ..”

https://www.theonlinecitizen.com/2022/12/20/hdbs-contribution-to-reserves-to-safeguard-singaporeans-or-glcs-mncs/

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