18 February 2010

HDB Flats And Permanent Residents

Is the number of permanent residents too small to significantly impact the prices of HDB resale flats?

In the 12 months to June 2009, the number of permanent residents increased by 55,000, compared to the roughly 30,500 in each of the preceding four years.  Assuming the percentage of new permanent residents buying HDB resale flats remained unchanged, the volume of permanent-resident demand would have increased correspondingly.

As the demand and the supply of HDB resale flats are quite inelastic (i.e., low responsiveness to changes in price), it would not be surprising if permanent residents were an important factor behind the 31 per cent increase in HDB resale transactions last year (applying a six-month shift to the time series), and the 7.4 per cent increase in HDB's resale price index.  URA's price index for non-landed private residential property fell 15.4 per cent over the same period.

Also, permanent residents comprised 14 per cent of the resident population, but accounted for 20 per cent of HDB resale transactions.

Some unhappiness in this matter may stem from the thinking that permanent residents should not have the same rights or privileges as citizens in accessing scarce or valuable resources such as HDB resale flats, places in the top schools and the universities etc.

Transactions by permanent residents are differentiated from, and are not seen as being commingled with, transactions by citizens.  Transactions by permanent residents exist at the margin, whereas transactions by citizens form the core or base demand.  Thus, transactions by permanent residents disturb the price that would have prevailed otherwise.

While potential buyers look with dismay at rising valuations, many if not most of those who have bought HDB flats to live in view these rising valuations with scant interest.  Paper gains are nice but are irrelevant if they not realised.  Eventually, valuations will fall as the lease runs out. In the meantime, higher valuations lead to higher annual values and higher property tax and possibly smaller “hong baos” at budget time.