Thursday, June 23, 2011

The moral hazard of DBSS

I don't really know much about the Housing and Development Board or its various schemes. In particular, I have not been following the recent controversy surrounding the Design, Build and Sell Scheme: a scheme that HDB says "involves the private sector in the development of public housing so as to bring about greater innovation in the building and design of flats and offer more housing choices to flat buyers".

The closest I got to purchasing a flat from HDB was with my ex-girlfriend. In that exercise, other than providing my personal particulars to her, I never really got round to bothering much with other details.

Quite frankly, this nonchalant attitude on my part is deliberate.

Firstly, I think the HDB, under the leadership of its previous minister, has lost sight of its public housing priorities. Many have written about this so I won't add to their caucus.

Secondly, I have always felt, as an ethnic minority in Singapore, one is better off buying flats directly from the private sector. At least, it helps one avoid the adverse risk of racial quotas in the estate.

Thirdly, I find it unpalatable that the government makes singles, who cannot afford private housing, wait until the age of 35 to purchase a HDB flat.

I accept I am in the minority on this one. There are many others, who still care enough about Singapore's public housing policies to follow it closely and criticise it. One such friend, who is presently a grassroots leader and has, in the not so distant past, served as a council member of a Community Development Council offers his views below.

I had encouraged him to identify himself but, for reasons best known to himself, he prefers to remain anonymous and has chosen the moniker 'Great Expectations' for attribution purposes.

Dharmendra Yadav


It was early in the morning of 17 June, around 6.30am, when I opened the Straits Times, for my usual morning dose of news, I read the infamous $880,000 price tag for the priciest 5-room DBSS flat in Tampines. I could literally hear in my head the reaction it may cause. Not surprisingly, over the last few days, the feedback has been negative, to the extent that even Minister Khaw Boon Wan had to comment with a blog post.

It is almost incredible to think that a profit motivated developer, whose main charter is to maximise returns for its shareholders, would set a low price for altruistic reasons such as “affordable” housing. The developer argues that the property is located at a premium location, in a matured estate with full amenities.

And the recent reduction in the price is unsurprising; with the public outcry and to add to that nothing less than the Minister’s comment: “But netizens are not powerless. If buyers find a price too high, they can walk away. Neither am I. On my part, I am ramping up more BTO launches and pricing them appropriately. I am currently preparing the next BTO launch.”

It is only rational for the developer to reduce the price because buyers now have the opportunity to choose alternative property. Further, with the expected increase in supply, it might be better for them to offload as much units as possible, albeit at a lower profit. This will enable them to avoid a situation where they need to hold onto unsold units, which of course becomes an opportunity cost to them. The developer to me is behaving like nothing more than a sensible economic agent, if I may borrow economics to explain what is happening.

But economics also teaches us this term called the moral hazard problem. An easy way to understand moral hazard is to look at how insurance affects the way we behave. Let's suppose you bought insurance on your car for theft. That means, if your car is stolen, you will be paid in full for the amount you paid for your car. What then is the likelihood of you taking and paying for extra protection against theft, such as buying an expensive car alarm system? Probably low. So, because of this insurance, you now have less incentive to behave in a responsible way to prevent a theft. Moral hazard problems occur when one party has less information about how the other party is likely to behave once the other party is insured against risk. I believe we have a moral hazard problem in the DBSS scheme.

In the case of a DBSS flat, HDB has no control over pricing because pricing decisions are left to the developer. As a developer then, there is no incentive to price the flat affordably. Why should they? They are profit maximising. However, for HDB, they have the public’s interest to account for. I looked up HDB’s vision and mission, and one in particular stands out: “We provide affordable homes of quality and value”. (emphasis added)

To make the homes affordable, they need to rely on the “good intentions” of the developer to ensure that prices are set at an affordable level. Unless HDB can read the intentions and motives of the developer, this is one mission in which they will surely fail.

Great Expectations

Please consider the environment - do you really need to print this?
Do leave a comment as it will make a difference.


The said...

Spot on Great Expectations.

I think the whole fiasco is due to the wrong expectations of the government/HDB. When the tender for the land was awarded, the expectation from the government agency is that it is for public housing - hence the relatively low price of around $280psf.

However, by using private developer for public housing, and not setting price ceiling, it is setting itself up for just such an outcome.

Private developers are, by definition, motivated by profit maximization.

So, now the the private developer has the best of both world - low "public housing" land cost, and high private housing prices.

For private housing, the construction cost is about $150-$200 psf. For public housing, it should be much lower, say, around $100 to $150psf. So, we can see that the developer is making huge profits.

The DBSS should be abolished. It goes against everything that HDB stand for, or used to stand for in the past.

If the design is private, if the constructing is private and setting of selling price is private, what do you call such housing? Public housing?

There is only one solution to this fiasco - abolish the DBSS immediately. Otherwise it will live up to its name of becoming a Damned Blood Sucking Scheme.

Anonymous said...

If we take your start point that DBSS is private sector development of PUBLIC housing, the "overpricing" in question (regardless of whether fact or perceived) is a guaranteed outcome. "Moral hazard" implies altruistic behaviour by the developer is the norm. There is no moral hazard here.

As for the illustration, to say "if your car is stolen, you will be paid in full for the amount you paid for your car" is another non-moral hazard. Just ask your own insurer. They don't even state insured quantum anymore!

Kojakbt said...

Great write-up. Can I get your permission to publish this article on other sites? :)


Anonymous said...

Let me suggest another type of 'hazard' - the corrupt sort. In my books, it is impossible for the HDB to come up with such a scheme without collusion involved. The CPIB should step in to interview the whole lot - HDB and developer!

Anonymous said...


You're going to put up this article in Temasek Review, right?

Like any respectable person, Dharmendra will never allow his name to be soiled by associating with that extremist and xenophobic site.

Nevertheless, I won't be surprised if this article is eventually put up there without any permission.

Anonymous said...

"The CPIB should step in to interview the whole lot..."

There is no nepotism, cronyism or any kind or corruption - only meritorious people are involved and if they are making too much, a salary review committee will be set up or the asking price will be reduced, as the case may be. The Singapore system is the best and it will get better with Tony Tan as President.