Ho Ching: Buying an HDB flat akin to paying same rent without inflation in advance for decades

The amount one needs to pay for housing can be held constant over long periods of time.

Belmont Lay | December 14, 2022, 08:59 PM

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Housing & Development Board flats have been in the news lately as the public is talking about their affordability and function over time.

Ho Ching, chairman of Temasek Trust, has since joined the conversation as she weighed in on the topic in a lengthy Facebook post on Dec. 13.

Her thesis on how HDB flats ought to be valued, very broadly, covers at least three aspects: Why land in Singapore is a resource for the people and how it is tied to the reserves, how land is valued tangibly and intangibly, and why the land that public housing sits on can continue to appreciate in value over time as a leasehold asset to the benefit of leaseholders.

She also characterised the purchase of a HDB flat as akin to making a lump sum payment commitment of rent that does not match future inflation to keep the cost of housing low and stable for flat dwellers.

Her post ended with what HDB as an agency can consider doing moving forward in building towns and communities for future generations.

Here is her thesis, which can change the texture of the conversation, summarised.

1. Land as a resource tied to reserves

Calling land a "common heritage", Ho wrote that it "must be sold at fair market value and the proceeds locked up as past reserves", with the government of the day allowed to spend and invest the proceeds for the future of Singapore and Singaporeans.

Reserves can also then be used to fund land reclamation.

Ho elaborated on this process: "So reclaimed land will also go into the past reserves in the form of land, regardless of its reclamation cost."

Understood in layman's terms, the land is backed by reserves and the reserves are backed by the land.

Reserves ensure the future of Singapore because the country has no natural resources.

2. How land is valued

In Singapore's instance, land value has appreciated over the years owing to its use and constant injection of investment to maintain its value, which ultimately, shows that value is tied to function.

In other words, the price of land is inexorably intertwined with what gets done with it.

And there are aspects to judge how well land is utilised and whether the country has the wherewithal to back it up.

Tangible investments include infrastructure building, while the manifestation of measurable but intangible aspects of the country include a "fair and objective justice and legal system", among other things.

Ho wrote: "Land value really reflects the expected returns over time, and such expected returns is a function of its use."

"Such land continues to be valuable", Ho added, because "there is a huge trust dividend including in property rights and continued investment".

3. Why land in Singapore can continue to appreciate in value

Viewed as a dynamic asset, land can also lose its value if it is utilised poorly.

Ho explained that land "becomes worthless when Singapore is run poorly" and it becomes "a junk bond country", given that "land value will fall sharply as people lose hope and investors flee with jobs".

If Singapore is run well, she wrote, and if it "continues to invest in its infrastructure, people, peace, stability and security, then the land value appreciates".

Land value "indirectly captures the indirect investments" that the Singapore government and the people have put into the country and its land.

All of these outcomes are the products of "sustainable investment over the long term".

Ho wrote, by way of example: "For instance, if Sg does not plan to invest in coastal defences against rising sea levels from global warming and the slow but inexorable climate crisis, the land value across one third of the low lying areas of Sg will soon lose their value, and become stranded assets which no one would or could invest in."

Think of HDB flat price as paying rent in advance

In the latter half of her post, Ho characterised the lump sum purchase of a HDB flat as a way to put a cap on monthly rental for an extended period of time, usually decades into the future.

Such a frame of understanding could change the perception of housing given its emphasis on the leasehold status of the asset.

According to Ho, to gauge affordability, housing should cost no more than five times of one's basic annual salary.

She provided examples of lump sum housing prices as the aggregate of bite-sized monthly rental repayments.

For example, a S$360,000 three-room flat with 60 years lease left is like paying S$500 monthly rental over 720 months, Ho wrote.

Similarly, a new S$356,400 HDB flat with 99 years lease would cost S$300 monthly rental for 99 years in today’s dollars over 1,188 months, she added.

"Today’s dollar means we haven’t factored in inflation," Ho explained.

"Paying $500 today is different from paying $500 in 50 or 99 years’ time."

She wrote that those who are headed towards retirement are likely to be earning less, and can then tap on their house to unlock its residual value, such as by selling it to downgrade to a smaller unit.

HDB can rethink HDB housing

Ho ended her post by thinking out loud if HDB can rethink public housing to accommodate growing multi-generational families and building thriving communities instead of just buildings to house people.

Ho wrote:

Can HDB think in terms of larger flat sizes to support the needs of young but growing families, just as they have done flexi+ schemes for older folks with empty nest who want to monetise the asset wealth.

Communities should be a living thriving organism.

Apart from a one point in time view of the amenities for young families moving into a new town, can we think of amenities which will adapt as the young families grow and age, and to plan in works every 15 and 30 years, to infill with more young families, and new young families spawned by the existing families who have grown and aged?

You can read Ho's full post here.

Top photos via Temasek & Unsplash