ALLOCATION MECHANISMS FOR HDB FLATS: AN OPTION PRICING APPROACH

Abstract

The oversupply and downward shifts in demands for new flats has lead to the suspension of Registration for Flat (RFS). In its place is a new allocation mechanism, Build-to-Order (BTO). A potential flat buyer who has registered for a HDB flat under RFS possesses a valuable call option. However, the buyer is considered to have written a put option to HDB when he registered for a flat under BTO. Besides providing a comprehensive review for the two flat allocation mechanisms, this study attempts to estimate the values of the various options under the different market conditions. This is carried out by proposing a model, which utilizes the Black-Scholes and binomial-tree option pricing approach. A sensitivity analysis of the various parameters in the model is conducted to measure how the option values will be affected. This helps to determine the effect on the option values in response to changes in the parameters. It is found out that flat applicant would always benefit by registering for flat under RFS as the value of his call option is much higher than what he is required to pay. However, on the other hand, HDB would find it more worthwhile under BTO as flat applicant has written the put option to it.