THE MARKET MECHANISM IN PUBLIC HOUSING: HDB'S DIFFERENTIAL PRICING POLICY

Abstract

With 90% of the households eligible and over 85% already in public housing, the Housing and Development Board is virtually the monopolistic provider of housing for the nation. Given such a monopoly, the market mechanism ceases to apply. As an example, prices of flats are fixed with reference to the general state of the economy and the level of affordability. Hence, the overall market for public housing is distorted leading to a potentially serious misallocation of resources and inability to respond to changing demands. In view of this, HDB revamped the entire housing policy in mid 1986 to incorporate market features into the public housing market. Among the first schemes to be implemented is the "Differential Pricing Policy". This pricing scheme is worked out to reflect in HDB flats the same factors that influence prices in the private sector. As a start, five locational characteristics have been identified by the Board: three premium-paying and two discount-paying factors. The purpose of this research paper is to study the issue of market pricing of HDB flats in the context of the overall new policy to let market forces rule. The study shows that there are good positive responses for the two premium factors of good view and proximity to Town Centre. However, the factor proximity to MRT station may not be what potential purchasers are looking for. Other premium-paying factors which could be included are physical factors like extra space, design and flats without a common corridor. On the whole, buyers are willing to pay more than the token minimal two per cent increase per premium factor. A theoretical framework of public housing pricing is also presented whereby it is shown that the merits of letting the market do the regulation are greater than the demerits. It is concluded that as long as prices are kept affordable within the reach of buyers and subsidies given, the policy will not lead to a more optimal allocation of resources.