Mah: Housing supply: Allocating scarce resources

October 1, 2010 

The property market has a history of repeating itself. I guess that is why they call it the property cycle. There is a huge clamour for flats today, and we can’t seem to build flats fast enough to satisfy demand. Yet, when I became Minister for National Development in 1999, one of my first challenges was to deal with an overhang of more than 31,000 unsold flats.

Almost every year, until 2006, Members of Parliament expressed their concerns in Parliament about the unsold stock, and asked what steps the Housing and Development Board (HDB) was taking to clear it. The Auditor-General’s Office, too, urged the HDB to reduce its unsold stock, highlighting the high cost of holding vacant flats. The HDB had to come up with all sorts of ways to clear the flats – converting five-room and executive flats into smaller two- and three-room ones, organising roadshows, implementing walk-in selection of the ready flats, and engaging managing agents to rent out unsold flats temporarily.

One may argue that the Singapore of today is very different. But the huge oversupply experience not so long ago taught us many valuable lessons – that oversupply is as bad as undersupply, and that we need to manage the building programme carefully, including allocating new flats in a fair, cost-effective and efficient way.

There are essentially three ways to allocate a scarce resource like housing: By price (that is, highest bidder gets it), by queue (that is, first-come first-served), or by ballot (that is, draw lots). Allocating by price is basically the way resale flats are bought and sold in the free market. The buyer who offers the highest price gets the flat.

While this is most efficient, the drawback is that prices can be volatile and the lower income may lose out. So, for new flats, the HDB has adopted either a queue system or ballot system.

QUEUE SYSTEM

In the past, the HDB allocated flats on a first-come first-served basis. The HDB built flats assuming that everyone in the queue was a serious buyer who would book a flat eventually when his turn came. This was a reasonable assumption in earlier years, as there was a great housing shortage. The resale market was relatively undeveloped and the HDB was the predominant source of housing.

However, as we progressed from a nation of home-seekers to home-owners, the situation changed. Demand became more volatile. Many, even those with existing roofs over their heads, could now easily join or exit the queue. At the height of the property boom in the mid-90s, there were as many as 150,000 buyers in the queue, and the wait for a flat was as long as seven years. However, when the Asian Financial Crisis struck in 1997, the queue vanished, literally overnight. The HDB ended up with 31,000 unsold flats, which took more than five years to clear.

Because of the unintended oversupply, home buyers could walk in to buy ready flats in the early 2000s. However, home owners paid a heavy price, with flat prices staying depressed. Some who bought flats just before the crisis ended up with negative equity and even lost their homes and hard-earned savings. The many unsold flats represented a waste of taxpayers’ money. The holding cost incurred was money that could have been spent on healthcare, education, or other areas.

BUILD-TO-ORDER (BTO) SYSTEM

In 2002, the HDB switched to the BTO system to better respond to demand that was becoming more sentiment-driven. Under this system, buyers ballot for the chance to select a flat. Certain groups, such as first-timers and those applying to live near their parents, are given extra tickets in the ballot to increase their chances of getting a flat. Ninety-nine per cent of the flat supply is set aside for first-timers. Buyers have to pay a downpayment to secure a booking. Each booking represents a committed buyer. The HDB proceeds to build when the majority of flats are booked. Flats are ready for occupation within three years of booking. Next year, this will be reduced to two-and-a-half years for a typical project. Couples who wish to shorten the waiting time further can apply under the Fiance-Fiancee scheme.

With better matching of supply and demand, the BTO system prevents a major supply overhang. It also allows the HDB to retain a small rolling buffer of a few thousand balance flats, which minimises holding cost to taxpayers. When demand is high, as it is now, the number of BTO projects is stepped up. Today, over nine in 10 first-timers get to select new flats within three tries.

Nonetheless, there may be a small number who are unlucky in balloting exercises. I understand their frustration. I have therefore asked the HDB to look into increasing the chances further for those with multiple unsuccessful applications.

However, many of the cases I see are not as “unlucky” as they claim to be. Recently, a Mr Ng wrote to me saying that he had balloted unsuccessfully more than six times. “Unlucky couples like me will never ever have a chance to purchase a flat under the BTO system”, he said. When I asked the HDB to check, I was told that Mr Ng had in fact been given four chances to select a flat but did not do so. When this was highlighted to him, Mr Ng acknowledged that he had not selected “due to unavailability of suitable units”. When I probed further, the HDB told me that on most occasions, there were many units available for him to choose from.

While Mr Ng has every right not to select and wait for his ideal flat, I hope he understands that the HDB cannot accede to his appeal to be given priority in future BTO exercises. Indeed, to be fair to those who genuinely need a flat, the HDB has since 2008 removed for one year, the first-timer status of those who have rejected two chances to book a flat.

BALANCING DIFFERENT INTERESTS

Each method of allocating flats has its pros and cons, and may be right for different circumstances. No one system will please everybody. The BTO system is by no means perfect but it is the most appropriate system for the moment, balancing the need for fairness, prudence and efficiency. We will continue to monitor and tweak it as we go along.

We remain committed to our mission of supplying enough flats, of good quality and at affordable prices, as quickly as possible to home buyers. But, we must do so in a way that does not create problems of oversupply for home owners and taxpayers down the road. We must remember the lessons of the past even as we address the housing needs of today.

By Mah Bow Tan, Minister for National Development.