Development charge has little effect on prices

Letter from Teh Sook Lan

Senior Assistant Director, Strategic Planning Division, Ministry of National Development

WE THANK Mr Conrad Raj for his comments in “The inexplicable rise in development charges” (Sept 12).

He asked why the Government had revised the development charge (DC) upward if it wants to maximise land usage and make residential property more affordable.

The DC is a tax levied only when the developer submits a development application that enhances the land value, such as through a change in zoning to a higher value use or an increase in gross plot ratio.

Seventy per cent of the estimated value enhancement goes to the Government to help upgrade the infrastructure, such as road works and utilities, to support the new development.

The developer retains 30 per cent or more of the value enhancement, as the DC rates typically lag the market value of the land.

We support more intensive land use, where feasible, but the Government cannot be expected to bear the full cost of land intensification while the developer derives all the benefits.

At present, the DC is not payable for most new housing developments here, including the large pipeline supply of private housing that is made available via the Government Land Sales Programme. As such, it does not slow down residential developments or have a significant impact on property prices.

It is arguable whether lower DC rates would have moderated [Or INFLATED] property prices or simply allowed developers to achieve better margins.

We thank Mr Raj for the opportunity to explain the purpose of the DC.

Buy landed pty in Tibet,  the land might get flattened by earthquake.

All these aborted deals leave me wondering whether the caveats filed for these purchases have added more spice than usual to the price index for landed homes.

It will certainly explain the Q3 anomaly.

The same reasoning can be applied to semi-detached and terrace houses.

However, here, the budgets of owner occupiers are constrained by their wealth and household incomes.

You will know when this segment becomes highly speculative. It is when the dirty tricks come out. There is big money to be made and fair play is the least concern of many housing agents.

The complaints have been piling up and I am hearing of many of them. I expect the newly-formed Council for Estate Agencies (CEA) to be really busy.

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Re:  The Aborted deals

If many deals are aborted, why didint the authority step in much earlier to prevent such  speculations?? or, having the buyer and seller interaogated.

Assuming the new population agreed to squeeze into residential units 10 people at a time, we would need a supply of 19,100 units each year in 2006 to 2008. But the additional stock count was only 5,935. So naturally, rentals and capital values spiked.

SUPPLY OUTLOOK

We need to look at the planning for physical supply and not merely the real estate market based on launches and pre-sales.

Some schools of thought favour the idea that, in land-scarce Singapore, property investors merely care about capital gains, not the steady rental income stream. For me, I stress the importance of long-term returns from real estate and therefore, I keep a close eye on physical supply and asset utilisation.

A property has real value only when it is well-used. Most hard, capital-intensive assets are like that: Ships, aeroplanes, machinery, satellites, ports, highways, and so on. If you leaned towards feng shui, you would also believe that the higher the human traffic and goods flow (especially for industrial, retail and commercial properties), the better the property.

An over-supply of completed residential properties, with insufficient end-users and poor utilisation, would naturally lead to price weakness.

Conversely, insufficient supply or too-rapid a population or demand growth will lead to sky-rocketing prices — similar to the situation in 2007. This would not go down well with our central planners.

Despite being a top-notch economy, Singapore does not like to price itself out of the market. So, we can expect more supply to quench the fire of rising prices.

Since the middle of 2009, public housing demand has been robust and prices have moved up sharply. From Table 2, we see that HDB launches of BTOs were ramped up significantly last year.

According to the HDB: “The ramp-up of flat supply is part of a series of additional measures to reinforce the Government’s commitment to provide affordable and adequate public housing supply for first-timer households.” If demand remains strong, the HDB may launch up to 22,000 BTO flats and release land for 7,000 DBSS units this year. That’s a potential 29,000 HDB units. That’s huge.

However, the numbers do not indicate when the physical supply will be completed. The HDB supplies new flats based on various demand factors, such as new households formed from marriages, number of resale transactions, etc. To satisfy the strong demand and in order to shorten the waiting time for first-time buyers, Mr Mah Bow Tan, the Minister for National Development, has announced that the HDB will endeavour to complete construction within two-and-a-half years, shorter than the previous average of three years, for all BTOs starting from September last year.

Based on the above information, public housing supply is estimated to be as shown in Table 3:

If we net out the number of HDB units that may be demolished for estate renewal, the supply looks comfortable, especially since most of the BTO flats have found owners before construction began.

However, if we look at the

If you recall from Table 1 above, the 15-year average annual supply is about 22,000 units of HDB and private housing.

The recent record high Government Land Sales programme and the ramp up of HDB supply may lead to a supply of over 30,000 units in 2013 and 43,000 units in 2014.

The last time so many residential units were completed was during the period of 1998 to 2000, when an average 44,000 units were completed per year. That was a supply level that was challenging to absorb as new family formations through marriages tracked at around 25,000 per year and the population increased at 70,000 per year. And not all newly-weds purchase homes or move out of their parents’ nests, while new population may come in the form of students or contract workers who occupy dormitories rather than residential units.

That period of over-supply led to a long period of indigestion from 2002 to 2005, when prices stagnated on the back of an economy hit by Sars and external turbulence. Vacancies of private residential units hovered above 8 per cent for most of 2002 to 2005, much higher than the 5 to 6 per cent of 2009-2010.total supply of residential units (both HDB and private) as shown in Table 4, the numbers become somewhat scary.

WHAT MIGHT BE THE LEVERS TO PULL?

Should the Urban Redevelopment Authority’s projections of residential completions be accurate and HDB supply remains high, we must brace ourselves for a deluge in 2013 and 2014. We are now in 2011, so that gives us over a year to prepare.

There are, however, a few ways that may mitigate the over-supply threat:

• Speeding up estate renewal programmes

By 2015, there will be more than 200,000 flats that will be over 30 years old. Old flats could be torn down sooner. Current tenants will be given notice to move out into other HDB flats. However, HDB’s pace of renewal programmes is not entirely clear to market watchers, so I would not be able to take a stab here.

• Slowing down construction

The HDB can choose to slow down the supply of new flats.

In the case of BTOs, the process of applications, queueing, balloting, selection, etc, and then contracting the construction companies to build are within the control of HDB. If physical supply is high and vacancies increase, the completion of construction could be delayed for the market to take up some slack.

• Embracing more foreigners

The demand side of the equation could be jacked up by welcoming more foreigners to our shores. This is especially so if the economic growth in the next five years can hold up at 5 per cent or higher, ensuring that jobs growth will be robust.

If executed well, an increase in housing demand produces the best outcome for the whole market.

It remains to be seen if the large supply can be supported by demand.

It is critical for stakeholders to make informed decisions, thinking through a comprehensive set of real estate data such as housing demolitions, population growth policies, public and private housing TOPs, etc, to the extent that such information is available.

The writer is the founder of real estate agency International Property Advisor (IPA), which provides services to high-net-worth individuals.

*IPA’s estimates

#Based on URA ’s Q3 ’10 report

2014   22,536

*IPA’s estimates

*Should demand remain strong, the HDB may release as many as 22,000 BTO units and DB SS land sales for 7,000 units.

It is critical for stakeholders to make informed decisions, thinking through a comprehensive set of real estate data such as housing demolitions, population growth policies, public and private housing TOPs, etc.

It was a week before last Christmas when we celebrated the Housing and Development Board’s (HDB) completion of 1 million flats.

THE SCOURGE OF SARS

The economy dipped in 2001 after the dotcom crash, which was followed by 911, Gulf War II, the Bali bomb blast, and then Sars.

The blip during the Sars crisis was the worst:

A recession with a population exodus of 61,000 in 2003, during which there was an accumulated excess of residential units.

By March 2004, HDB announced it would stop building five-room flats because it had 10,000 units that were waiting to be taken up. At that time, three-bedroom private apartments could easily be had at $500,000 and there was little demand from a population that shrank by 61,000.

The over-supply, apparent since 2001, brought on a revamp of the HDB and the introduction of the Build-To-Order (BTO) scheme. HDB flats will be constructed only when there are enough buyers, allowing the board to adjust supply based on demand from applicants.

In 2002, the registration for flats system was suspended and till today, the BTO scheme remains the main mode of HDB’s sales. The Design, Build and Sell Scheme (DBSS) was introduced in 2005 for private sector developers to participate in public housing projects. This scheme contributes about 10 per cent of total new HDB supply.

The period of 2004 to 2005 was one of slow growth as there was excess supply which had to be absorbed by new demand from the population growth before equilibrium could be reached.

Government Land Sales slowed down, leading to the next squeeze.

MARKET RECOVERS AMID EN-BLOC FEVER

From 2006 to 2008, real estate prices recovered on a combination of factors, including:

(a) rapid population growth on the back of strong jobs creation;

(b) rosy economic outlook spurred by the promise of the integrated resorts; (c) developers replenishing freehold land bank through en bloc transactions and (d) small number of project starts in 2003 to 2005 leading to low completion numbers in 2006 to 2008.

This is an awesome achievement.

With 1 million flats averaging about 1,000 sq ft each, the HDB has within 50 years completed and handed over a billion sq ft of residential space. A billion sq ft. One, followed by nine zeros. That is more square footage than the aboveground portion of the Great Wall of China, which spans 6,500km.

Now, the actual number of HDB flats that exist today is just below 900,000. [Surpassed 1 million in 2010 ?]

According to the HDB’s annual report, as of March 31, 2010, there were 890,212 flats under management. More than 100,000 flats have been demolished since the ’70s, many of them rental flats. Older estates, such as Brickworks and Queenstown, have been upgraded.

Over the years, small individual estates have also been amalgamated into towns such as Bukit Merah Town, Clementi New Town, etc, under various estates renewal programmes, such as Selective En bloc Redevelopment Scheme (Sers).

The completion of an average of 20,000 flats per year in the HDB’s 50-year history was in tandem with the growth of Singapore’s population.

In the last 15 years, from 1995 to 2010, population growth (Singaporean citizens and permanent residents) averaged 50,000 per year, accommodated by the growth of public (additional 13,950 flats a year) and private housing (8,593 units a year). This is an average of one apartment for every two to three Singapore citizens and PRs. If we included nonresidents

(Work Permit and Employment Pass holders, for example), then this is an average of one new HDB or private home for every four new people added to the “headcount” in Singapore.

Table 1 shows the actual supply of physical units versus population growth.

The 15-year data looks balanced.

However, within the 15 years, there were several tumultuous periods. Early on, a long queue of up to five years for HDB flats formed due to a perception of supply shortage and rising prices. Executive Condominiums were introduced.

The massive construction boom around 1995, with fuel added by en-bloc deals, led to a massive increase of 44,000 residential units per year in the period spanning 1998 to 2000. This is net additional physical supply;

that is, demolitions from en-bloc deals have reduced the total count.

Revisiting housing supply

Based on URA and HDB projections, there could be a deluge of homes in 2013 and 2014

Ku Swee Yong

property@mediacorp.com.sg

Table 1

Population (‘000) Annual difference (‘000) Private residences HDB residences

Year Total S’pore

residents

Nonresidents

Total S’pore

residents

Nonresidents

Available

units*

Annual

difference

Available

units*

Annual

difference

1995  3,524.5 3013.5 511.0 - - - 125,438 - 680,963 -

1996  3670.7 3,068.1 602.6 146.2 54.6 91.6 145,085 19,647 705,771 24,808

1997  3,796.0 3,123.4 672.6 125.3 55.3 70.0 154,484 9,399 731,975 26,204

1998  3,927.2 3,180.0 747.2 131.2 56.6 74.6 166,958 12,474 763,661 31,686

1999  3,958.7 3,229.7 729.0 31.5 49.7 -18.2 179,294 12,336 795,821 32,160

2000   4,027.9 3,273.4 754.5 69.2 43.7 25.5 190,190 10,896 828,148 32,327

2001  4,138.0 3,325.9 812.1 110.1 52.5 57.6 194,984 4,794 849,422 21,274

2002  4,176.0 3,382.9 793.1 38.0 57.0 -19.0 201,776 6,792 862,198 12,776

2003  4,114.8 3,366.9 747.9 -61.2 -16.0 -45.2 207,857 6,081 868,774 6,576

2004  4,166.7 3,413.3 753.4 51.9 46.4 5.5 216,787 8,930 875,887 7,113

2005  4,265.8 3,467.8 797.9 99.1 54.5 44.5 225,432 8,645 879,566 3,679

2006  4,401.4 3,525.9 875.5 135.6 58.1 77.6 230,752 5,320 879,092 -474

2007  4,588.6 3,583.1 1,005.5 187.2 57.2 130.0 233,143 2,391 878,813 -279

2008  4,839.4 3,642.7 1,196.7 250.8 59.6 191.2 237,664 4,521 885,140 6,327

2009  4,987.6 3,733.9 1,235.7 148.2 91.2 57.0 245,864 8,200 883,896 -1,244

2010  5,076.7 3,771.7 1,305.0 89.1 37.8 51.3 254,334 8,470 890,212 6,316

Ave per annum growth from ’96 & ’10 103.5 50.5 52.9 8,593 13,950

Ave per annum growth from ’01 & ’10 104.9 49.8 55.1 6,414 6,206

Ave per annum growth from ’06 & ’10 162.2 60.8 101.4 5,780 2,129

Ave annual growth in peak years ’06 - ’08

*includes rental flats managed by HDB191.2 58.3 132.9 4,077 1,858

*based on URA quarterly reports for Q2 of each year



http://imcms2.mediacorp.sg/CMSFileserver/documents/006/PDF/20110107/0701PPP052.pdfSources : Dep artme nt of Statistics , URA , HDB , IPA

Colin Tan

property@mediacorp.com.sg

When the real estate figures for the private housing market for Q3 2010 were released in late October, the landed sector pulled off a huge surprise by going against the market trend.

The writer is Head, Research & Consultancy at Chesterton Suntec International.

Instead of slowing down like the rest of the market as it absorbed the impact of the most recent set of cooling measures, prices rose at an accelerated pace.

The rate of price increase for high-rise apartments and condominiums slowed from 5 per cent in Q2 to 1.6 per cent in Q3, while that of landed homes rose from 6.2 per cent in Q2 to 7.7 per cent in Q3.

The usual reasons were trotted out.

The supply remains limited while buyers of landed homes are not hindered by affordability concerns and are therefore better able to cope with price increases.

Personally, I think this is a common marketing ploy of real estate agents to get buyers to pay higher prices. Anyone who has been following the market for many years will know that prices of all properties, when faced with the same set of measures or regulations, will behave in the same way — meaning, they follow the same trend, if not the magnitude, of the impact.

Since the release of the Q3 statistics, there have been a lot more news reports and articles than usual extolling the appeal of landed homes, especially good class bungalows (GCB). Limited supply is the most common reason given to support the strong growth potential of GCBs.

But given the high cost of GCBs, how big really is the market for such properties?

Buying one is already such a big commitment; maintaining it thereafter is another. The demand for such properties is inelastic. Whether prices rise or fall, real owner-occupier demand remains more or less the same.

How often do we hear of tycoons and CEOs owning and living in two or even three GCBs at the same time?

All this means that the surge in demand must come mainly from investors.

Rapid price growth in this segment can come about only when investors sell to other investors.

This brings me to the other commonly cited factor: Affordability.

For owner-occupiers, this is not likely to be a concern.

For investors, who tend to fully leverage their cash resources, affordability is definitely a concern, especially if they already have a number of properties on their hands. They carefully weigh the risks against the potential capital gain before investing.

Is landed property among the safest buys?

For one, when prices of this segment shoot up too rapidly, it is difficult to get valuations to match the purchase price. A large proportion may then have to be paid in cash.

As real demand is inelastic, what happens to the last investor holding the property?

Yes, you’ve guessed it — he walks away from the deal with a substantial loss.

It was therefore not a real surprise that the buyer of the $36 million bungalow in Sentosa Cove walked away from the deal. I hear another similar over-the-top purchase on the island met with the same fate. My sources tell me there are also similar aborted deals on the main island. I personally know of one case.

All these aborted deals leave me wondering whether the caveats filed for these purchases have added more spice than usual to the price index for landed homes.

It will certainly explain the Q3 anomaly.

The same reasoning can be applied to semi-detached and terrace houses.

However, here, the budgets of owner occupiers are constrained by their wealth and household incomes.

You will know when this segment becomes highly speculative. It is when the dirty tricks come out. There is big money to be made and fair play is the least concern of many housing agents.

The complaints have been piling up and I am hearing of many of them. I expect the newly-formed Council for Estate Agencies (CEA) to be really busy.

Finally, the flash estimates for 4Q 2010 have indicated that price growth of private homes has slowed to reasonable levels. Most of us have been wondering whether another set of cooling measures is imminent.

If rapid growth is the main concern of the authorities, I do not expect another set any time soon.

Yes, you’ve guessed it — he walks away from the deal with a substantial loss.