Monday, March 21, 2011

'Ghost towns' vs fewer homes

WHEN the Committee of Supply sat in Parliament recently, the National Development Ministry was asked if it could have anticipated the surge in demand for Housing Board (HDB) flats that has led to the record-high resale flat prices seen today.


Could HDB and the Immigration and Checkpoints Authority, for example, have been more coordinated in monitoring the influx of foreigners and its impact on housing demand?


The argument is that if HDB had seen it coming, it should have built more flats earlier and eased the current supply crunch.


In answering the question, Minister Mah Bow Tan invoked images of the infamous HDB 'ghost towns'. It was less than a decade ago that a surfeit of completed but unsold flats led to many near-empty HDB blocks in areas like Sembawang, Jurong West and Sengkang.
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In 2005, there were still a staggering number of about 10,000 flats that were languishing in the market unsold.


'Home-owners paid a price for the oversupply then,' said Mr Mah, recalling the concern from citizens about safety, theft and deterioration of the empty flats.


Others griped about the negative effect the overhang of unsold flats was having on home prices.


Now, Singapore seems to have swung from one extreme to the other - from oversupply to undersupply. There is much unhappiness about the latter, but people have forgotten that oversupply is just as bad as undersupply, said Mr Mah.


The Government's challenge, therefore, is to find the 'sweet spot that is not too much, not too little', he added.


It's worth looking at both these statements more closely. Is an oversupply of flats really just as bad as an undersupply? I think many would disagree, for two reasons.


The first is that an oversupply of flats is a hyper-local problem that affects only certain new towns. For those who do not live in them or near them, the problem is out of sight and out of mind.


An undersupply of flats, on the other hand, is very much a national problem that affects all young married couples and others such as upgraders.


Second, an oversupply problem potentially depresses flat prices, but this affects mostly potential sellers, who already have a home.


An undersupplied market, on the other hand, affects buyers who do not yet have a home to call their own and are in urgent need of one to start families.


They also include upgraders who need more space because their children have grown.


The impact is more immediate on a wider spectrum of the population - people who want a home so they can move on with their lives.


This unhappiness could translate into a higher cost, politically, compared with an oversupply situation, for the current Government.


This brings us to the second of Mr Mah's points: that however difficult it may be, it is critical for the Government to find the 'sweet spot' between the two evils.


Logically, this means finding some sort of middle ground between two systems that have been at opposite extremes.


HDB used to have a queueing system where it would build and complete flats before they were sold to buyers in the queue. This exposed HDB to considerable holding risk. If HDB misjudged the demand, or if demand evaporated for some reason, the result would be a big stock of unwanted, empty flats.


After the 1997-98 Asian Financial Crisis and the oversupply situation in the early part of the last decade, HDB switched to the build-to-order (BTO) scheme. Here, the opposite is true and HDB bears minimal risk: It builds a project only if there is a certain number of buyers for the flats.


Perhaps finding that 'sweet spot' requires fine-tuning this supply mechanism to something in-between: that is, HDB could consider permanently maintaining a buffer of completed flats.


This idea had been mooted before by MP Cynthia Phua (Aljunied GRC), who asked if HDB could consider keeping a stock of ready flats for families who are in urgent need of a home.


Mr Mah had pointed out that although HDB does not plan for a buffer, there is in reality a buffer of flats over and above the BTO flats that are available, and they have shorter waiting times.


These available flats are leftovers from other HDB schemes - such as the Selective En-bloc Redevelopment Scheme and surplus BTO flats - which are sold under HDB's sales of balance flats exercise.


In a market like the current one, however, this buffer almost completely disappears. Recent BTO projects have also seen 95 per cent take-up rates, which means that in the coming years, there are unlikely to be many buffer flats.


Looking back, perhaps what the HDB could have done - and what some MPs have mooted before - is build 10-20 per cent extra new flats each year as part of a 'steady state' policy. The flats would be built regardless of whether or not they are bought at launch.


To minimise the risk of 'ghost towns' of empty flats, the HDB could plan it such that these flats are scattered in projects across the island, on plots that are perhaps extensions of established estates like Tampines or Yishun.


By the time the flats are built, the allure of immediate occupation would naturally attract buyers who are reluctant to wait three years for a new flat but who are also unwilling to pay the higher premium associated with resale flats.


If demand is weak, such as in an economic downturn, the HDB will have to hold on to the unsold units, but the holding risk is minimised compared with the old system.


If demand is strong, the HDB will not be left high and dry with nothing in reserve to offer. This buffer may then help alleviate the unhappiness on the ground.


Of course, there are risks associated with building extra flats. The HDB is answerable if thousands of completed flats are unoccupied.


The question turns on whether the public regards new HDB flats more as a necessity or a luxury.


The Government would never be faulted for stockpiling emergency supplies of essential items like rice, for example. If HDB flats are more like necessities, then the risks of undersupply outweigh that of oversupply.


If the experience of the last 10 years is anything to go by, finding that 'sweet spot' between oversupply and undersupply would be well worth HDB's effort.

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