BTO flats priced to ensure affordability; not profit-driven: HDB

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/ EdgeProp Singapore
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December 7, 2022 7:51 PM SGT
HDB says its flat pricing approach is "totally separate and independent" from the BTO projects' development costs (Picture: Samuel Isaac Chua/The Edge Singapore)
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SINGAPORE (EDGEPROP) - Build-To-Order (BTO) flats are priced with affordability in mind, using an approach that is “totally separate and independent” from the development costs, according to a media statement by the Housing Development Board (HDB).
The statement, issued jointly with the Ministry of National Development (MND), highlights that HDB’s pricing approach is unlike private developers. “HDB’s affordability-based flat pricing approach is fundamentally different from private developers’ cost-based pricing approach for private residential developments, which take into account provision for a profit margin," it says. HDB adds that it does not apply a profit margin on costs for BTO projects.
HDB also points out that it incurs development losses from its home ownership programme, in contrast to largely profitable private developers. “This reflects our inherently different pricing principles, as HDB prices flats to ensure affordability while private developers price their flats for profit,” it reiterates.
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According to HDB, the media statement was issued in response to media queries on how BTO flat prices are determined and the development costs incurred by HDB. Nicholas Mak, head of research and consultancy at ERA Realty Network, also sees the statement as an explanation of HDB's position to the public given the robust rise in HDB resale flat prices. Between 3Q2020 to 3Q2022, the HDB resale price index increased by 25.5%. "The last time that HDB resale prices increased at a similar rate was during the property boom of 2010 and 2011," he observes.

Pricing based on housing affordability

To determine housing affordability, HDB takes into consideration resident household incomes, and compares them with the range of flat types and selling prices on offer at every BTO launch, using benchmarks such as the mortgage servicing ratio (MSR).
It notes that in 1H2022, 90% of flat buyers that collected keys to their new flats in non-mature estates had an MSR of 25% or lower, meaning they used 25% or less of their monthly income to service their HDB loan instalment payments, with the remainder serviced by monthly CPF contributions. For flat buyers in matures estates, more than 80% had an MSR of 25% or lower.
ERA's Mak notes that this is in line with a common rule of thumb to have not more than 30% of an individual’s gross monthly income channeled towards a mortgage. “In other words, HDB BTO flats are deemed to be affordable to a large majority of homebuyers,” he remarks. (Find HDB flats for rent or sale with our Singapore HDB directory)
Recognising that every BTO project has its own attributes and locational factors, in pricing new BTO flats, HDB says it first establishes the flats’ market value by doing comparisons with resale flats nearby while also considering individual attributes of the flats.
Subsidies are also applied to the assessed market values to help ensure affordability, with subsidies varying across projects depending on market conditions. When release prices increase, HDB will correspondingly increase market subsidies – which are factored into the selling prices – to keep BTO prices affordable.
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In view of these mechanisms, HDB says its flat pricing approach is “totally separate and independent” from the development costs for BTO projects. “By increasing the subsidy applied in a rising property market, HDB has kept BTO flat prices relatively stable. This was the case even in the past two years where construction costs had increased by almost 30%,” it says.
According to HDB, average BTO selling prices on a psf basis have increased by 22% in mature estates over the last 10 years. For non-mature estates, average psf prices for BTOs have grown 16%. In comparison, the median resident employed household income rose 26% between 2012 to 2021.
Table 1 - EDGEPROP SINGAPORE
Source: HDB, MND
“On top of the subsidy applied, HDB provides housing grants to help targeted demographic groups achieve their home ownership aspirations, and housing grants have also increased several times over the same period,” HDB adds.

Development costs

Given the high subsidies allocated to BTO projects, the projects’ development costs, which include construction and land costs, cannot fully be covered by the selling prices, says HDB.
For its FY2021/2022, HDB registered a record deficit of $4.367 billion, with $3.85 billion attributable to the home ownership programme. The latter ​​stems mainly from the gross loss on flat sales completed (where keys are issued to buyers in the financial year), disbursement of CPF housing grants to eligible resale flat buyers, and expected loss for flats that commenced development in the financial year.
Specifically, HDB’s cost of flat sales completed totalled $5.346 billion, and comprises largely $3.167 billion for land development costs and $2.077 billion for building development costs. The remaining $102 million is attributable to the costs of flats acquired from ex-flat owners.
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In addition, HDB highlights that land used for public housing has lower prices compared to land used for private housing in the same locality. HDB pays fair market value for land used for BTO projects, which is determined independently by the chief valuer.

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