Build-to-order scheme needs revamping

Posted: May 26, 2011 in Policy
Tags: , , ,

The appointment of former health minister Khaw Boon Wan to the national development ministry has raised hopes of positive changes to public housing policies in Singapore.

The Build-to-Order scheme of the Housing Development Board, commonly known as the BTO, is in serious need of a revamp because this policy has contributed significantly to rising prices of HDB flats in Singapore.

The BTO scheme was conceived on the reasonable justification of building only when there is actual demand. Previously, when the HDB built new flats based on projected demand, economic crises occurred, depressing demand for HDB flats and left the HDB with large numbers of completed flats without buyers. Maintenance of completed, empty flats incurs costs, and the BTO scheme certainly will avert such a situation in future.

Just as the policy of projecting demand fell flat in bust times, the BTO scheme that operates on actual demand has fallen flat in boom times. With demand for HDB flats surging since 2007, the BTO scheme has contributed to rising prices because HDB did not have the necessary stock of flats to meet immediate demand. If the HDB could meet the surging demand quickly by flooding the market with supply of new flats, resale housing prices would not have risen so rapidly.

The chief drawback of the BTO scheme is that the scheme requires a certain level of interest to be met before construction begins. Even if HDB offers BTO projects, those are not real supplies until the level of interest is sufficient to allow the scheme to proceed to the next stage. If there is insufficient interest in the BTO, the applicants are turned back to the resale market if they have an urgent need for housing, which means easing of demand in the resale market through BTO projects are not guaranteed. The ability of the BTO scheme to blunt flat prices is limited compared to HDB having an actual stock of flats.

Another problem of the BTO scheme is not so much on price, but the length of time it takes for flats to be built. It will take approximately three years for a BTO project to be completed. Singaporean couples are marrying later, and if they have to wait three years to get their own pod, spend another few years enjoying couple bliss in a home they can call their own, by the time the couple contemplates kids, there’s not that much time left. Of course, there’s always the resale market but unless prices in the resale market are deemed affordable, many would have no choice but to go for a BTO flat.

That the BTO scheme requires certain levels of interest can also impact a young Singaporean couple’s plan to start a family. Repeatedly unsuccessful BTO attempts could easily add on a year or two of waiting to the time needed to get a new flat. The BTO scheme could depress the future fertility rates.

There are significant costs involved in adopting a policy projecting demand, especially when projections are in excess of demand, but there are also significant costs of responding only when there is demand, as the evident from the rapidly rising prices of public housing over the last few years. It’s clearly difficult for the HDB to have its cake and eat it at the same time, but hindsight has demonstrated that the previous policy of projecting demand is the lesser evil.

Editor’s Addedum:

Minister for National Development Khaw Boon Wan has reaffirmed the main points of this entry with his own blog entry posted one day after this entry was published.

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