HDB ‘lottery’ conundrum: analysts weigh in on ways to mitigate it

Some BTO flats in Boon Tiong and the Dawson area (above) have been sold for a 60-70 per cent gain, when their MOP ended this year. BT FILE PHOTO

The Business Times, 3 Dec 2020, Thu

WHEN certain HDB flats in the Dawson and Boon Tiong area completed their five-year minimum occupation period (MOP) this year, some owners unloaded them on the resale market for a startling 60-70 per cent gain.

Of course, not all HDB flats can fetch that kind of profits, but such deals, among other factors, are raising concerns about the affordability of resale public housing units in prime locations.

The subject was brought into focus this week when National Development Minister Desmond Lee acknowledged the “lottery effect” of HDB flats in prime areas, which may result in a “likely windfall” for those who sell government-subsidised build-to-order (BTO) flats on the resale market.

In the interview with Lianhe Zaobao, Mr Lee added: “We do not want to have estates that are gentrified and that only the wealthy can afford to live (in). We want to have a good mix.”

To achieve that, besides introducing diverse housing, Mr Lee noted that flat prices must also be kept affordable for the first sale by HDB, and also in subsequent resales. “We may need a series of other measures to ensure that if resale is permitted for these flats, that they remain affordable for generations to come,” he said, without specifying the measures.

“People will of course pay what they believe the market can bear in order to get these very good flats and very good locations. So, some of these measures would have to cover all these fronts.”

Property analysts that The Business Times (BT) spoke to suggested that some measures which could be considered are a shorter lease, longer MOP, sell-back to HDB, and taxes or levies. But there are no simple answers, they added, as any measure would have wide implications, with over 90 per cent of Singapore homeowners owning an HDB flat. In addition, the HDB resale market could also affect the private property market and have other socio-economic implications.

Wong Siew Ying, PropNex’s head of research and content, noted that securing a BTO unit in a prized location is mostly down to chance due to the balloting system, and raises the question of whether it is equitable when some owners reap a sizeable profit upon reselling.

For such units, Ms Wong believes a combination of a shorter lease, say 70 years, and a longer MOP of eight to 10 years, could potentially alleviate the lottery effect. There are several merits to this, with a shorter lease helping to keep BTO prices more affordable. “Subsequently, those looking to buy these flats on the resale market after the extended MOP would likely be more circumspect about paying a huge sum, given the limited capital upside due to the shorter remaining lease.”

Besides increasing the MOP and shortening the lease to 50 from 99 years for instance, Tricia Song, head of research for Singapore at Colliers International, said other solutions include imposing an income ceiling requirement for the resale buyer, enforcing a price ceiling, or even all of the above.

But Ms Song notes that these measures are not ideal in a free market. None of them are perfect and will probably involve more administrative manpower, she added. “There will be a lot of key questions… where do you cut off, or what is the definition of a prime location? Will the measures just be applicable to the Greater Southern Waterfront (GSW) or to other areas as well?” Though development of the GSW is some time away, it was cited by Minister Lee as one example of a prime HDB site.

While the government may put in place curbs or eligibility criteria on who can buy these resale flats, such rulings may not fully deter cash-rich buyers, or those with strong financial support from affluent parents, said OrangeTee & Tie’s head of research and consultancy Christine Sun.

She pointed out that another possible way is to mandate that owners sell back these prime flats to HDB. “In this way, there may be some form of ‘control’ over the resale prices and capital gains,” Ms Sun added.

Agreeing with this, Nicholas Mak, ERA Realty’s head of research and consultancy, said that a “capital gains tax” may also be imposed on the profit from selling such HDB flats.

Sumit Agarwal, professor of finance, economics and real estate at the NUS Business School, said that while such a tax may discourage people from flipping properties in the short term, it may not be effective in the long run. “What people don’t realise is that upgrading is not cheap,” Prof Agarwal noted. He pointed out that as prices of HDB flats increase, so too will the prices of private properties. As such, those who upgrade may find themselves in the same amount of debt or more.

Colliers’ Ms Song also argues against a capital gains tax. If there is such a tax, then it will also have to apply to private properties, she said.

According to her, there is already a resale levy which maintains a fair allocation of public housing subsidies between first-time and second-time buyers, and she suggests that the resale levy for prime HDB flats may instead be increased.

Evan Chung, head of KF Property Network (KFPN), told BT the implementation of a resale levy or a similar iteration is more likely than a capital gains tax. This would shift the focus back to HDB flats serving their purpose as a primary home, Mr Chung said, adding that another possible measure could be a tiered levy tied to the resale of prime flats, with higher levies for shorter years of ownership prior to the resale.

John Tan, senior associate of banking, finance and property at Withers KhattarWong, said that the absence of a capital gains tax is one of the key attractions of Singapore as a wealth capital, and has “greatly contributed to the underlying value of Singapore properties as an investment class”.

Such a tax exists in many developed countries, including in wealth capitals such as London and New York, Mr Tan explained. Nonetheless, a new regime would need to be carefully looked at and designed, as it has the potential to turn away investors if their gains will be largely eroded by tax. “This may also give rise to an increase in sophisticated wealth and succession planning… as parties are incentivised to explore tax-efficient holding structures to avoid hefty taxes payable when assets pass between generations,” added Mr Tan.

While analysts recognise the existence of the lottery effect, they seem to have mixed reactions on whether this should be a cause for concern.

Colliers’ Ms Song said the so-called “lottery winners” constitute a “very small number” and that the spillover effect on the private housing market is not significant. HDB flats which sold for at least S$1 million made up just 0.3 per cent of total resale transactions this year. As at August, there were 38 of such flats sold out of 14,400 resale transactions.

On the other hand, Christine Li, head of research for Singapore and South-east Asia at Cushman & Wakefield, is of the view that instituting measures to curb this effect are necessary to bridge the inequality gap.

The lottery effect has always been the issue surrounding premium flats – whether they are the Design, Build and Sell Scheme (DBSS) flats, or flats in sought-after locations such as Dawson, Bishan or the central business district fringe (The Pinnacle@Duxton), Ms Li said.

The problem with this is that the profile of buyers will be geared towards the higher income households. Given that these flats tend to fetch higher capital gains compared to those in the far-flung areas, this could exacerbate the income gap and inhibit social mobility, she noted.

One of the more extreme examples of such gains was given by KFPN’s Mr Chung, who noted that some BTO flats in Boon Tiong and the Dawson area have been sold for a 60-70 per cent gain, when their MOP ended this year.

Overall, the strong primary and resale numbers in August and September have been attributed to the pent-up demand from the “circuit-breaker” period and the bumper crop of HDB flats that reached MOPs recently, he said. This spillover effect into the private housing market is likely to continue, as 50,000 flats may be crossing their MOP in 2020-2021, which is in stark contrast to the estimated 9,000 flats that reached MOP in 2013-14.

The private housing market has come to rely on HDB upgraders to support the demand for mass-market condominiums. But this market does not depend on the lottery effect, Mr Mak said – it just needs the majority of owners of the larger HDB flats to make profits when they sell their flats. He added that if the government restricts the rise in the value of HDB flats, it could also affect the “unwritten social contract” between the people and the government.