The flexible pricing formula for HDB flats

The clearest picture of what formula was used in HDB pricing was revealed by LKY last Sunday. It was at cost or cost minus. Though it was a general statement, let’s presume that it was construction cost plus a little land cost as the land originally acquired was at minimal cost under the Land Acquisition Act.

So the original formula is likely to be Price = Construction Cost.

Though it was not discussed, it was likely that after a while the Price was slightly adjusted to provide some profits for HDB. Thus the formula would be Price = Construction + profit.

I use a small p for profit as the profit then was really not much to talk about.

Then someone got an awakening. The CPF holders have a lot of money in their savings. They can afford to pay a more for their flats. Then I think the formula was changed to Price = Construction Cost + Profit.

I am now using a bigger P to equate a bigger profit being built into the price.

This went on for a while till someone got another enlightenment, like being struck by a bolt of wisdom, and the formula was changed to Price = Subsidised Market Price. There was no need for the big P any more. It was hidden in the Market Price.

Then more angry noises were heard and the formula was modified and explained in different ways. It was changed to Price = Resale Market Price with Subsidy.

Then more noises and anger. So the factor of Affordability crept in as many claimed that it was getting unaffordable. So the formula was modified to become Price = Resale Market Price with Subsidy subject to 30% of two incomes for 20 years and instantly it became affordable.

As price kept going up, the formula was revised to Price = Resale Market Price with Subsidy subject to 30% of household income for 20 years. More members can now contribute to make the price more affordable.

Again the price went higher and the formula was again revised to become Price = Resale Market Price with Subsidy subject to 30% of household income for 30 years. See, still very affordable. It was all over the media with the Housing Minister having his special pages to drum this affordability idea into daft Sinkies.

But this was not the end. The formula was again revised to become Price = Resale Market Price with Subsidy subject to 30% of household income for 40/45 years. 30 years simply were not sustainable.

This may not be the last change as the price is still going up. It is likely that the formula will be revised again and likely to be Price = Resale Market Price with Subsidy subject to 30% of household income for 60 years or 100 years.

Does anyone realize that the Cost factor has been missing since Price was changed to Subsidised Market Price? Yes, Cost is no longer a factor in the issue of pricing HDB flat prices. The price of future HDB flats will not be determined by Cost but by the 30% of household income and how long they allow the buyer to repay. It also means that the price of HDB flats, regardless of Cost, can keep going up as long as the salary goes up and the repayment period is extended.

This is called flexible pricing, or rubber band pricing, like luxury goods. It can go as high as the seller so wishes as long as it keeps to the 30% benchmark plus plus. The first plus is the household income. The second plus is the number of years for repayment which is inversely proportional to the Price. The longer the number of years taken, the higher can the price go up. The formula can thus be written as Price = Resale Market Price(with market subsidy) Plus Plus.